// GLOSSARY -- DEFI

What is Lending Rate?

1 min read Updated

A lending rate in DeFi is the interest rate earned by depositors who supply assets to a lending protocol — determined algorithmically based on the utilization of the lending pool.

WHY IT MATTERS

DeFi lending rates are set by supply and demand. When a pool is heavily borrowed (high utilization), rates increase to attract more deposits and discourage borrowing. When utilization is low, rates decrease.

The rate model is encoded in the smart contract — typically a piecewise linear function with a 'kink' at optimal utilization (e.g., 80%). Below the kink, rates increase gently. Above it, rates spike to prevent full utilization.

Lending rates are variable by default in DeFi. Some protocols offer stable rates (Aave) that provide predictability at a premium. Rates update with every transaction that changes utilization.

FREQUENTLY ASKED QUESTIONS

What's a typical DeFi lending rate?
Stablecoins: 2-8% APY. ETH: 1-5%. Volatile tokens: 3-15%+. Rates change constantly based on utilization. Check protocols directly for current rates.
Are lending rates guaranteed?
No — variable rates change with every block based on utilization. Historical rates don't predict future rates. Stable rate options exist but can still be rebalanced in extreme conditions.
Where do lending yields come from?
From borrowers paying interest. The lending rate is funded by the borrowing rate minus the protocol's reserve factor (fee). Real yield from real economic activity.

FURTHER READING

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