> ## Documentation Index > Fetch the complete documentation index at: https://kamino.com/docs/llms.txt > Use this file to discover all available pages before exploring further. # Concepts > Reserves, utilization, auto-compounding, curators, and bad debt — how Lending Vaults work under the hood ## 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. Reserves exist for both lending models: * **Variable-rate reserves** — one reserve per asset per market; rate fluctuates with utilization * **Fixed-rate reserves** — one reserve per rate/duration pair (USDC at 5.0%/3-month is a separate reserve from USDC at 5.5%/6-month) The reserve is the fundamental unit of both models. *** ## 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. *** ## 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. *** ## 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:** | Event | Share price | Your shares | Value | | ------------------- | ----------- | ----------- | ------- | | Deposit 1,000 USDC | \$1.00 | 1,000 | \$1,000 | | 6 months at 9% APY | \$1.044 | 1,000 | \$1,044 | | 12 months at 9% APY | \$1.090 | 1,000 | \$1,090 | Withdrawing at any point redeems your shares at the current share price. *** ## 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:** | Reserve | Allocation | APY | | -------------------- | ---------- | --- | | USDC Main Market | 60% | 8% | | USDC JLP Market | 30% | 12% | | Fixed Rate (3-month) | 10% | 6% | ``` Blended APY = (60% × 8%) + (30% × 12%) + (10% × 6%) = 9.0% ``` **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. *** ## 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 * Adjust fixed-rate allocations based on available rate/duration opportunities **[Insurance Pool](/products/lending-vaults/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. *** ## 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](/products/lending-vaults/insurance-pool) provide a buffer: the curator has direct financial exposure to the vault's performance and cannot exit during the cooldown window. *** ## Variable vs. fixed reserves A vault can allocate to both variable and fixed-rate reserves simultaneously. | | Variable reserves | Fixed-rate reserves | | -------------------- | ------------------------------------------ | -------------------------------------------------------- | | Rate | Fluctuates with utilization | Locked for the term duration | | When yield is earned | Continuous | Variable while waiting; fixed once matched to a borrower | | Withdrawal | Anytime (subject to utilization) | Capital may be committed for the term | | Best for | Flexible allocation, capturing rate spikes | Predictable yield on a portion of the portfolio | The blended vault APY reflects both types. A vault with partial fixed allocation has more predictable yield on that portion. This mix is one tool curators use to manage yield volatility. *** ## 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](/products/lending-vaults/benchmark-rate) provides an objective baseline to compare against — a deposit-weighted average of yields across the largest DeFi lending protocols.