Fixed-Rate Lending
A DeFi lending arrangement where the interest rate is locked in for a set term, rather than fluctuating with a pool's changing utilization rate.
Fixed-rate lending is a DeFi lending model that locks in a specific interest rate for a defined term at the time a loan or deposit is made, in contrast to the variable rates most lending pools charge, which fluctuate continuously based on the pool's current utilization rate (see Kaavon's "Utilization Rate" glossary definition) under its interest rate model (see Kaavon's "Interest Rate Model" glossary definition). A borrower or lender using fixed-rate lending knows their exact rate upfront for the agreed term, regardless of how utilization or market rates move afterward.
Fixed-rate lending protocols typically implement this either by directly matching fixed-rate borrowers and lenders for a specific term, or by using an interest rate swap-like mechanism (see Kaavon's "Interest Rate Swap" glossary definition) layered on top of a variable-rate pool to synthetically convert that variable exposure into a fixed one. The tradeoff for the certainty fixed-rate lending provides is reduced flexibility — a fixed-rate position may not be able to adjust or exit as freely as a standard variable-rate pool deposit, and a fixed-rate commitment locked in before a shift in market conditions can end up less favorable than a variable rate would have been in hindsight.
Examples
- A borrower choosing fixed-rate lending knows their exact interest cost for the full loan term upfront, rather than being exposed to the pool's fluctuating variable rate.
- A fixed-rate lending commitment made right before a sharp rate increase in the broader variable-rate market can end up being a worse deal in hindsight than if the borrower had accepted variable rate exposure instead.