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What is a lending reserve

A reserve is a single-asset pool within a lending market. Capital deposited into a reserve is lent to borrowers; the interest borrowers pay is the source of all lender yield. There is no separate yield source — if borrowers aren’t paying interest, lenders aren’t earning. Each asset has its own reserve because different assets carry different risk profiles and warrant different rates. USDC in the Main Market is a different reserve from USDC in the JLP Market — different borrowers, different collateral, different rates. Each reserve has one asset and one rate model — the rate fluctuates with utilization.

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Utilization

Utilization is the fraction of a reserve’s deposits currently borrowed: 
Utilization = Borrowed / Total Deposited
This is the signal that drives variable borrow rates — and the key determinant of lender yield. Lender yield formula: 
Supply APY ≈ Borrow Rate × Utilization × (1 − Protocol Spread)
Worked example: $1M pool, $750k borrowed (75% utilization), 10% borrow rate, 15% protocol spread: 
Interest generated: $750,000 × 10% = $75,000/year
After protocol spread: $75,000 × 0.85 = $63,750
Supply APY (distributed over $1M): 63,750 / 1,000,000 = 6.375%
The idle $250k earns nothing but sits in the denominator — this is why supply APY is always materially lower than the borrow rate. Why high utilization benefits lenders: More of your capital is working. At 75% utilization you earn ~6.4%; at 50% utilization on the same pool and rates, you’d earn ~4.25%. Why extreme utilization is a problem: At 95%+, very little capital is available for withdrawal. Kamino’s rate curves are designed to prevent this — borrow rates escalate sharply above the kink point, pushing borrowers to repay and attracting new deposits.

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What a vault does

A Lending Vault is a capital allocator, not a lending pool itself. It holds your deposit and deploys that capital across multiple reserves according to the curator’s strategy. You interact only with the vault; the vault handles everything underneath:
  • Which reserves to allocate to and in what proportion
  • When to rebalance (e.g., if a reserve’s utilization drops sharply)
  • When to pull back from a reserve showing stress
One deposit. One share balance. One blended yield. Allocation decisions happen entirely at the vault layer.

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Share price and auto-compounding

When you deposit, you receive vault shares. Your position is tracked by share count, not a fixed token balance. 
Share Price = Total Vault Assets / Total Shares Outstanding
As interest accrues in the underlying reserves, total vault assets grow while shares outstanding stay fixed — so share price rises. Your share count never changes between deposit and withdrawal; what changes is what each share is worth. This is auto-compounding. You don’t receive periodic interest payments and manually reinvest them — your shares silently appreciate. Reinvestment is continuous and requires no action. Example:
EventShare priceYour sharesValue
Deposit 1,000 USDC$1.001,000$1,000
6 months at 9% APY$1.0441,000$1,044
12 months at 9% APY$1.0901,000$1,090
Withdrawing at any point redeems your shares at the current share price.

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Blended APY

Vault yield is the weighted average of the APYs earned across all active reserve allocations: 
Vault APY = Σ (Reserve APY_i × Allocation_i)
Example — a USDC vault with three allocations:
ReserveAllocationAPY
USDC Main Market60%8%
USDC JLP Market40%12%
Blended APY = (60% × 8%) + (40% × 12%) = 9.6%
What makes the blended APY move:
  • Utilization shifts in any underlying reserve
  • Curator rebalancing capital between reserves
  • Emission programs starting or ending
  • Large new deposits or withdrawals
What the displayed APY includes: Base interest from borrowers + KMNO emissions when active. What it typically does NOT include: Farm rewards (displayed separately), external partner incentives, points programs. A 9% APY with 3% from KMNO emissions is not the same as 9% paid entirely in USDC interest — the first embeds token price risk in the headline figure. APY vs. APR: APY accounts for compounding; APR does not. Lending Vaults auto-compound, so the displayed figure is APY. At 2% per month, APR = 24% and APY = 26.8%. Always confirm which metric a platform displays before comparing.

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What curators do

The curator is the vault’s active manager. They set and update allocation targets — which reserves to use, what proportion for each, when to rebalance. This requires ongoing monitoring and judgment, not a one-time configuration. Active curators:
  • Monitor utilization rates across reserves
  • Move capital toward higher-yielding reserves as conditions change
  • Pull back from reserves approaching extreme utilization or showing stress Insurance Pool: Curators can lock their own capital into the vault via a dedicated Insurance Pool with a cooldown period (typically 30 days). This capital gives the curator direct financial exposure to their own allocation decisions — if the vault takes losses, the curator’s locked position is at risk alongside depositors, and the cooldown prevents them from exiting before depositors can react.
A curator with meaningful capital locked in the Insurance Pool for 30+ days has direct financial skin in the game. This is the strongest alignment signal available.

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Bad debt

Bad debt occurs when a borrower’s position is liquidated but the collateral proceeds are insufficient to cover the full debt. The shortfall is absorbed proportionally by lenders in that reserve — their share price is reduced to reflect the loss. Example: A reserve has $10M in deposits. A liquidation produces $500k in bad debt. A lender with 5% of the reserve loses $25k of effective value via share price reduction. Kamino’s track record: $0 bad debt across all protocol markets since launch. This reflects conservative parameter-setting, the dynamic liquidation penalty design (which incentivizes early liquidation before positions go deeply underwater), and active monitoring.
Vaults where the curator has locked capital in an Insurance Pool provide a buffer: the curator has direct financial exposure to the vault’s performance and cannot exit during the cooldown window.

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Comparing yields across vaults

Headline APY numbers are not directly comparable without decomposing what they contain:
  1. Yield sources — base interest vs. emissions vs. farm rewards. Emissions carry token price risk.
  2. Reserve concentration — a vault heavy in one high-APY reserve takes more allocation risk than a distributed vault.
  3. Collateral in underlying reserves — yield in markets accepting riskier collateral (e.g., JLP) is higher because the lending market accepts more risk. Higher yield reflects accepted risk, not a free lunch.
  4. Curator track record — allocation decisions drive how the vault responds to rate changes and market conditions.
A 10% APY in organic USDC interest from a broadly distributed vault is a materially different product from a 12% APY concentrated in one high-utilization reserve with token emissions. For stablecoin vaults specifically, the Benchmark Rate provides an objective baseline to compare against — a deposit-weighted average of yields across the largest DeFi lending protocols.