DeFi lending platforms use dynamic interest rates that fluctuate based on supply and demand. Unlike traditional banks, where central authorities set interest rates, DeFi protocols adjust borrowing and lending rates algorithmically.

These fall into two categories:

• Variable interest rates: the most common choice, where rates adjust based on supply and demand of each asset.
• Fixed interest rates: more challenging in Web3 due to market volatility, but +++

The utilization rate refers to the percentage of supplied assets that have been borrowed. For example, if $10,000 worth of USDC has been supplied to the platform, and $5,000 of that has been borrowed, USDC’s utilization rate would be 50%. Each asset, therefore, has its own utilization rate, and the interest rate model may vary based on how liquid the asset is.

DeFi lending platforms use dynamic interest rates based on supply and demand, adjusting for market volatility. Learn how variable and fixed rates work and the impact of utilization rates on borrowing and lending costs.

Interest rate volatility can be a concern, as fluctuations in the cryptocurrency markets can rapidly change the utilization rate, causing borrowing costs to spike or lending yields to drop unexpectedly.

This can make it difficult for borrowers to predict their repayment costs and for lenders to estimate their returns. In extreme cases, sudden increases in interest rates may force borrowers to repay loans prematurely to avoid unsustainable costs.

To learn more about Lending & Borrowing, visit:

• Lending & Borrowing Overview
• How Lending & Borrowing Works
• Liquidations
• Flash Loans
• Lending & Borrowing Key Terms
• Lending & Borrowing Key Considerations
• Lending & Borrowing Projects