A 2% lending rate may seem attractive, but it's just the tip of the iceberg. Once you truly understand how lending protocols operate, you'll realize the hidden risks behind these low interest rates.

Don't get me wrong, these protocols are not doing charity. When large amounts of capital flood in and big players start leveraging, the water level in the liquidity pools drops at an alarming rate. What happens when the utilization rate of funds skyrockets to the limit? Borrowing becomes impossible to top up positions, interest rates suddenly spike, and the system may become sluggish—these are not scare tactics but real scenarios that have occurred. The feeling of being trapped inside the system with no control is the price paid for chasing cheap rates.

So, what mechanism causes all this? Many lending protocols adopt an AdaptiveCurveIRM model, aiming to keep interest rates low most of the time and smooth out fluctuations. Sounds good, but the problem is: any algorithm has physical limits, and that limit is the utilization rate of funds.

The depth of liquidity pools is finite. When the market presents certain arbitrage opportunities—such as exchanges launching mining activities for hot projects, or a certain ecosystem coin's mining rewards soaring—rational participants flock to lending protocols, trying to drain liquidity. In these extreme scenarios, the entire system can easily fall into trouble. It's not a flaw in the model design; rather, market irrational exuberance can infinitely amplify risks.

The key to understanding this mechanism is: low interest rates and liquidity exhaustion are often two sides of the same coin.