What determines interest rates on crypto lending platforms?

Differences in price between different platforms exist because markets are not truly efficient. The cost of digital assets varies slightly across markets due to the different fees that cryptocurrency exchanges charge investors. It also has to do with varying levels of trade volumes and liquidity.

In the traditional financial system, central banks determine the interest rates of their countries. However, crypto lending platforms are decentralized – instead of central banks or intermediaries, they are run by smart contracts. So, what determines the interest rates on crypto lending platforms?

First, interest rates are determined by loan-to-value ratios, which act as mediation variables in crypto lending.

Secondly, the price fluctuations of the lent assets influence their interest rates. This is the cause of the momentum effect in lending, which entices users to borrow more assets, causing pro-cyclical speculation.

Lastly, interest rates are determined by the lending amount, which further causes a moderation effect.

Generally, these three interest rate determinants show that crypto lending, to some extent, follows the risk-debt model.