How Morpho interest rates work: the Adaptive Curve IRM

Every Morpho market has an interest rate model: a formula, fixed when the market is created, that sets what borrowers pay. Morpho governance has approved only one model so far, the AdaptiveCurveIRM, so in practice every Morpho market uses it. It combines a familiar rate curve with a second mechanism that slowly moves the whole curve up or down.

Utilization: the input

The model reacts to one number:

utilization = total borrowed / total supplied

If lenders have supplied 100 million USDC to a market and borrowers have taken 90 million, utilization is 90%. The model tries to keep every market close to a target utilization of 90%. That is high for a lending market. Morpho can aim that high partly because collateral is kept separately and never lent out, so liquidations do not depend on spare cash in the pool.

Part one: the curve

The curve is anchored by one number, the rate at target: the borrow rate when utilization is exactly 90%. Below the target the rate slopes down to a quarter of the rate at target at 0% utilization. Above the target it climbs steeply to four times the rate at target at 100%. Morpho calls this factor of 4 the curve steepness.

Below the target:

rate = rate at target x (1 - 0.75 x (0.9 - utilization) / 0.9)

Above the target:

rate = rate at target x (1 + 3 x (utilization - 0.9) / 0.1)

With a rate at target of 4%, which is also the starting value for every new market, the curve looks like this:

The shape matters. Going from 0% to 90% utilization only moves the rate from 1% to 4%. The last 10 points of utilization move it from 4% to 16%. Near full utilization, a sharply higher rate pushes borrowers to repay and draws in new lenders, which frees up cash for withdrawals.

Part two: the curve moves by itself

The rate at target is not fixed. While utilization stays above 90%, it rises continuously. While utilization stays below 90%, it falls. The further utilization is from the target, the faster it moves. Since the rate at target anchors the whole curve, every point on the curve moves with it.

First the model measures how far utilization is from the target, as a number between -1 and 1:

error = (utilization - 0.9) / 0.9 below the target, and error = (utilization - 0.9) / 0.1 above it

Then the rate at target grows or shrinks exponentially with time:

new rate at target = old rate at target x e ^ (50 x error x years elapsed)

The 50 is the adjustment speed, measured per year. Here is what it means if utilization stays at one level:

A worked example: a market has a rate at target of 4% and sits at 95% utilization for 10 days. The rate at target roughly doubles to about 7.9%, so the borrow rate at 95% goes from 10% to about 19.8% without any vote or human decision. Borrowers who find that too expensive repay, and utilization falls back toward the target.

Why build it this way? A market's settings can never change, so no one can retune its curve when conditions change, as governance does on pooled lenders. The adaptive part lets each market find a market-clearing rate on its own. The design is described in Morpho's article introducing the AdaptiveCurveIRM.

Floors and ceilings

The constants in the model's source code set hard limits:

• A new market starts with a rate at target of 4%.
• The rate at target cannot fall below 0.1%, so the lowest possible borrow rate is 0.025% at 0% utilization.
• The rate at target cannot rise above 200%, so the highest possible borrow rate is 800% at 100% utilization.

Where the supply rate comes from

Lenders are paid out of what borrowers pay. The interest from the borrowed part is shared across all supplied funds, including the part that is not lent out:

supply APY = borrow APY x utilization x (1 - fee)

The fee is a market fee that Morpho governance can switch on, capped at 25% of borrower interest. At the time of writing (September 2026), Morpho's documentation states that no market fees are active, so the fee is zero. A market charging borrowers 5% at 90% utilization therefore pays lenders 5% x 0.9 = 4.5%.

From market rates to a vault's APY

A vault earns the supply rates of the markets it lends into, weighted by how much it has in each. Idle cash earns nothing and pulls the average down. The curator's performance fee then comes off the interest. An illustrative USDC vault:

0.5 x 4% + 0.3 x 6% + 0.2 x 2% = 4.2% before fees. With a 10% performance fee, depositors earn 4.2% x 0.9 = 3.78%. The full breakdown, including rewards, is in Morpho APY explained.

Rates are set per second

The model returns a rate per second, and interest compounds continuously. The rates in the tables above are APRs, the simple yearly rate. Apps usually show APY, which includes compounding:

APY = e ^ APR - 1

A 4% APR is about 4.08% APY. A 16% APR is about 17.35% APY. You can compare live rates on the borrow rates page and the markets page.