Interest Rates for Assets That Have Gates

2. How Utilization Curves Work

The borrow rate is a function of how full the pool is. When most of the capital is idle, borrowing is cheap. As utilization rises toward a target, the rate climbs gently. Above that target, the rate goes vertical. At 100% utilization, borrow rates on major protocols can exceed 75% APR.

The steep part of the curve does two things. It forces borrowers to repay so depositors can withdraw. And it attracts new deposits by offering higher supply rates when the pool is running low. Both sides of the market respond to the same signal. Aave, Compound, and Morpho all use variations of this model. The details differ but the core mechanic is the same: the rate responds to how full the pool is.

The rate is retroactive and universal. Every borrower in the pool pays the same rate. It changes continuously as utilization moves. A single large withdrawal reprices every open position at once. This works because the borrower can respond instantly. Repay in the same block. Escape the elevated rate. The signal has a feedback loop.

3. Why the Feedback Loop Breaks

When you borrow USDC against ETH on Aave and the rate spikes, you have options. You can repay immediately. You can add collateral. You can move to a cheaper pool. The rate spike is a signal and you have the tools to respond to it in real time.

When you borrow against a quarterly gated fund share and the rate spikes, you cannot do any of those things. The redemption window is 90 days out. The borrower is locked in regardless of what the rate does between windows. Repricing their loan because someone else opened a position in the same pool punishes behavior the borrower has no ability to change. The signal has no feedback loop. What matters is not how full the pool is, but whether this specific borrower is settling on schedule.

4. The Rate Model

Two components. The base rate is SOFR (~3.65% as of this writing), which floats with the market. The spread over SOFR is where the gate logic lives. Starting spread is 300 bps, set at issuance. If demand for the specific asset is high (surge pricing), the spread widens for that position. After issuance, the spread only moves in one direction: up, on each missed redemption window.

The rate does not go up because of how much has been lent across a pool. It goes up based on the windows the lender determines are reasonable for the borrower to exit.

Interest accrues and capitalizes. No periodic payments. The borrower owes nothing until the position settles.

5. Foreclosure, Not an Open Ended Penalty

Traditional foreclosure is slow. The lender files, negotiates, litigates. It can take 12 to 24 months to seize collateral on a defaulted NAV facility. The borrower sits in default, paying penalty interest, while both sides run up legal fees.

When the collateral sits with a third party custodian and the enforcement rules are preset, foreclosure follows the agreed sequence automatically. After the configured maximum of missed windows, the custodian transfers the asset to the lender. No filing. No negotiation. No 18 month timeline. The lender sells through whatever channel gets the best price and settles the waterfall: principal plus accrued interest first, remainder to the borrower, shortfall absorbed by the borrower's first loss pool. All automated, all verifiable, all immediate. Standardizing this process across every loan removes the bespoke legal cost from each deal. Borrowers get faster origination and tighter spreads because the enforcement is already built.