When the borrow cap is reached but the supply cap is not full, interest rates keep rising. This isn't a protocol bug; the interest rate model is raising the price to attract new deposits and force borrowers to repay, restoring market liquidity.
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The core of this issue is that every Morpho lending market has two independent limits: the Supply Cap, set by vault curators, limits the maximum amount of funds the market can draw from the vault; the Borrow Cap is determined by the market's actual utilization rate. When utilization approaches 100%, there is no idle capital left to lend.
Step 1: Understanding How the Rate Model Reacts to High Utilization
Morpho uses the AdaptiveCurveIRM interest rate model, targeting a 90% utilization rate. When utilization exceeds 90%, borrowing rates increase rapidly.
Check whether the market's current utilization has already surpassed 90%: view the Utilization Rate on the Morpho market page or query totalBorrowAssets / totalSupplyAssets on-chain to see where utilization stands.
Step 2: Confirming the Size and Speed of Rate Hikes
Learn how much rates have risen and how fast. AdaptiveCurveIRM has two mechanisms: the rate curve (Curve Mechanism) and the adaptive mechanism (Adaptive Mechanism). When utilization hits 100%, the instantaneous borrowing rate is 4× the target rate (rateAtTarget). More importantly, if utilization stays above 90%, rateAtTarget itself keeps moving up, shifting the entire curve upward.
Check the current borrowing rate and its rising trend.
Risk warning: When utilization spikes to 100%, the borrowing rate jumps to 4× the normal level. This rapid hike serves two purposes: it pushes existing borrowers to repay quickly to avoid high interest, and it attracts outside depositors to add funds into this high-yield market. According to a Morpho co-founder, in most cases the market rate returns to balance (back to ~90% utilization) within minutes, but during periods of market stress, recovery can take hours.
Case A: Utilization Above 90% but Not Yet 100%
The rate increase is relatively mild (between 1× and 4×), driven mainly by the balance between borrower repayments and new deposits. Liquidity still exists, it's just become more expensive.
Case B: Utilization Reaches 100%
The borrowing rate hits 4× the target rate. At this point there is no idle capital; any new deposit is instantly borrowed again. The high rate will persist until someone repays or fresh capital enters the market.
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Common Misconception
Many assume a high supply cap means ample liquidity. But the supply cap is merely the ceiling on how much the vault can deposit into the market – it doesn't mean that much idle capital is actually there. If the market's actual utilization is maxed out (all deposited funds have been borrowed), even if the supply cap still has room, any new deposit would be borrowed immediately, not solving the "borrow cap is full" problem. Only by raising rates to force repayments, or by attracting external capital, can utilization drop and release liquidity.
