The liquidity of the protocol is the availability of the capital to face business operations: borrowing amounts and redeeming rTokens. It is a key metric, as lack of liquidity will block business operations.
At any point in time, the liquidity of the protocol can be assessed through the utilization rate: the share of reserve that is currently borrowed for each currency.
The historical utilization rate and rToken valuation help us assess the level of liquidity risk of the protocol. Once this risk is understood, we can put in place risk management techniques through theinterest rate model and set up alternative sources of rToken liquidity.