> For the complete documentation index, see [llms.txt](https://usefelix.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://usefelix.gitbook.io/docs/lending-products/publish-your-docs/how-it-works.md).

# How it Works

## How the Vanilla Markets Work

Vanilla Markets match asset suppliers (lenders) with collateralised borrowers in real time. Unlike the feUSD CDP system, there are **no redemptions or fixed borrower‑set rates**—pricing is entirely driven by the utilisation curve.

* Borrowers post collateral (HYPE, UBTC, ETH …) and borrow the asset of their choosing—for example USDC or HYPE itself.
* Lenders supply those same assets and earn yield when there is borrow demand.
* Interest rates float block‑by‑block based on the pool’s utilisation: higher utilisation ⇒ higher APR for borrowers (and APY for lenders).
* All positions are **over‑collateralised** to protect lenders from default risk.

## Key Risks per User Type

**Borrowers**

* **Liquidation risk** — if the Health Factor of a loan falls below **1.0**, collateral is seized and sold.
* **Rate volatility** — borrow APR can spike sharply during liquidity crunches; costs are unpredictable.

**Lenders**

* **Bad debt risk** — during market duress, liquidations may be unprofitable and cannot cover the borrower’s debt (e.g., oracle lag, deep slippage). Any residual shortfall is automatically socialised across all suppliers in that pool, reducing the value of each lender share.

## Variable‑Rate Mechanics

| Metric          | Formula                                                                     | Impact                                           |
| --------------- | --------------------------------------------------------------------------- | ------------------------------------------------ |
| **Utilisation** | `U = Total Borrows / Total Supply`                                          | Drives both borrow APR and lender APY.           |
| **Borrow APR**  | Piecewise linear curve (e.g.,  7 % base → 25 % at 90 % U → 100 % at 99 % U) | Spikes when liquidity is scarce.                 |
| **Lender APY**  | `Borrow APR × U` minus a protocol spread                                    | Falls when utilisation drops or borrowers repay. |