The Dials: Rates, Caps & the Flywheel

We just traced the money - where LP yield comes from and how the borrow rate bridges it. Now let's open the control panel and see the few dials that steer the whole system, almost on their own.

The remarkable thing about Own's economics is how little anyone has to touch. Set a handful of dials sensibly and the market tunes itself. Let's meet the three that matter.

Dial one: the kink

The borrow rate from last chapter isn't fixed. The premium part of it moves with lending utilization - how much of the vault's lending capacity has actually been borrowed - along a two-slope curve that bends at a point called the kink, set at 80%:

  borrow rate
      ^
      |                                    /  <- steep slope (+72%)
      |                                   /      (the brake)
      |                                  /
      |                                 /
  ~7% |...............................'   <- the kink (80% full)
      |                   ____....----
      |____....-----''''
      |     base (Aave) + 3% premium, rising gently (+1%)
      +----------------------------------------> lending utilization
      0%          cheap & filling         80%    100%

Read it left to right:

Below the kink (the gentle slope): borrowing is cheap, so the book fills. Each extra dollar borrowed nudges the rate - and LP income - up a little.
At the kink (80%): the book is nearly full, LP capital is working hard, and borrowing is still cheaper than perp funding (~7% vs ~13%). This is the sweet spot the curve is aimed at.
Above the kink (the steep slope): the rate spikes hard - the second slope climbs toward +72%. Leverage suddenly becomes uneconomic, borrowers repay and unwind, and utilization falls back below the kink. An automatic brake.

This one dial sets both yield and supply at once. Yield rises naturally as the book fills toward the kink. And supply self-corrects: a push past the kink spikes the rate, which both drives borrowers to repay and lifts LP yield, pulling in fresh deposits. Either response restores breathing room. Nobody adjusts anything.

Dial two: the caps

The kink governs the lending book. A second set of dials governs solvency - you met most of them in Chapter 7; here's the full set in one place:

The global solvency cap - 65%. Net exposure (whatever the reserves don't cover) may never exceed 65% of the LP collateral pool. This isn't a taste choice - it's sized against the worst case the guarantee must survive: the move between a redemption going unfilled and its claim settling. Stablecoin collateral barely moves over that window; crypto collateral can fall while the stock gaps up; 65% leaves margin for both plus oracle staleness and slippage.
Per-asset ceilings - $1M each at launch. No single asset can soak up the system's capacity, and an asset with no ceiling set can't be minted at all. Small caps are the honest version of a new guarantee: the blast radius of anything unproven is bounded in dollars, and the ceilings rise as the system proves out.
Concentration caps. Each collateral vault can be limited to a maximum share of the counted collateral, so a volatile collateral type never quietly becomes the whole backing.
The lending caps. Loans open at up to 70% loan-to-value; a position is liquidatable past 80%; and the vault's whole lending book is capped well below its collateral (35% at launch), so lending can never crowd out the insurance job.

And one golden rule holds the whole risk model together: never raise the 65% cap to make room for more demand. The cap is the safety limit, not a growth lever. When demand bumps against it, the fix is to attract more collateral and more reserves - which raise capacity automatically - never to loosen the brake.

A word on liquidations (the self-healing kind)

Chapter 9 flagged that loopers, unlike plain holders, carry liquidation risk. Here's what actually happens, because it's the structural opposite of the death-spiral liquidations that plague overcollateralized synthetics.

Every borrow position has a health factor - collateral value times the 80% threshold, over debt. If it slips below 1, anyone can step in, repay part of the debt, and seize eToken collateral at a small bonus. But notice what the seized eTokens are: the protocol's own liability. Liquidating them shrinks the system's exposure at the same moment the repaid USDC shrinks the vault's debt - both the borrower's health and the protocol's health improve in the same stroke. A falling market makes the system safer as it deleverages, not sicker. (In the rare case a position's collateral runs out before its debt, the shortfall is settled immediately and booked transparently - bad debt is never left to quietly compound against LPs.)

Dial three: the flywheel

Put the kink and the caps together and you get a loop that feeds itself - the flywheel:

        More LP collateral deposited
                  |
                  v
        Bigger lending + backing capacity ──▶ More funds can loop/borrow
                  ^                                     |
                  |                                     v
        Higher LP yield ◀──────── Utilization rises, premium rises
                  ^                                     |
                  |                                     v
        LPs attracted by the yield ◀────── More interest + flow earned
                  |
                  +──────────▶ (back to top - it compounds)

The self-balancing trick is that LP rewards are tied to how full the book is. When borrowing demand runs hot, utilization climbs toward the kink, LP yield rises, that yield pulls in collateral, and the fresh collateral reopens capacity for still more borrowing. The system draws in exactly the collateral it needs, exactly when it needs it - and capacity on the uncovered residual is linear in collateral, so growth never requires loosening a single safety parameter.

That's the engine room. Next: the one party we haven't paid yet - the protocol itself.

What just happened

The borrow premium rides a two-slope curve bending at the kink (80% lending utilization): cheap and filling below it, a rate spike above it that acts as an automatic brake.
The 65% solvency cap is sized against the guarantee's worst case and is governed by the golden rule: attract more collateral, never loosen the cap.
Per-asset ceilings ($1M at launch, unset = unmintable), concentration caps, and lending caps (70% LTV, 80% liquidation, 35% book cap) bound every other dimension of risk.
Loop liquidations are self-healing: seizing eToken collateral shrinks protocol exposure while repayment shrinks debt - both sides get healthier in the same stroke.
The flywheel: yield draws collateral, collateral adds capacity, capacity invites borrowing, borrowing lifts yield - compounding growth with no safety parameter ever loosened.

11. The Dials: Rates, Caps & the Flywheel