Utilization refers to how much of a lending pool is currently lent out to traders. If utilization gets to 100% lenders will have to wait to withdraw their money.
Crypto lending involves two parties: lenders (i.e. people wanting to earn interest) and traders who are paying interest to borrow money to make bigger bets on their trades.
Lending protocols (such as Francium and Everlend) facilitate lenders and traders interactions. In order to remove the hassle or coordinating every specific deposit and borrow between each lender and buyer, they maintain a pool of funds that can be deposited into and withdrawn from.
You can think of this pool as a bucket of money. Lenders put their money in a bucket whenever they want and traders take money from the bucket whenever they want. Traders then slowly put money back into the bucket as interest which is earned by the lenders.
When there is money in the bucket that traders aren't using then lenders can remove their money (along with the interest they earned). However if the bucket of money is empty because traders are using all of it lenders have to wait until there is money in the bucket again to withdraw their deposit.
Utilization refers to how full the bucket is. If a pool is 100% utilized it means the bucket is empty. If it's 50% utilized it means it's half full and so on.
Short answer: lenders will be unable to withdraw and traders will be unable to borrow more. This is in no one's best interest. Therefore interest rates are adjusted to incentivize utilization to go below 100%.
Longer answer: Lending protocols make money by taking a small cut of the interest paid by traders. If a lending pool is 100% utilized it means the lending protocol's ability to earn money is capped. Therefore as utilization approaches 100% lending protocols automatically raise interest rates to both incentivize new lenders to deposit and traders to return their funds. In this way interest rates are used to balance out the utilization rates. When one increases the other increases and vice versa.
