Interest rates are the percentage cost paid to borrow money or the percentage return earned for lending or holding funds over a set period. In crypto, they show up as rates paid on loans, rates earned in lending or “savings” products, and yield metrics such as APR, which annualizes returns using simple interest.
How interest rates work in crypto lending and borrowing
Crypto platforms and DeFi protocols use interest rates to match lenders, who supply assets, with borrowers, who post collateral to take loans. Rates can be fixed for a term or variable, adjusting based on supply and demand. If many users want to borrow USDC and few are lending it, the borrow rate typically rises, while the lending rate increases to attract more supply.
A practical example is a trader borrowing a stablecoin against deposited ETH to access liquidity without selling their ETH. The borrower pays interest, while lenders earn interest for providing the stablecoins. Many DeFi markets algorithmically adjust these rates block by block, making them more reactive than traditional bank rates.
Broader market impact and “risk-free” benchmarks
Interest rates also matter beyond lending products. In traditional finance, central bank policy rates influence the cost of capital and the attractiveness of safer yields. When safer yields rise, some investors may demand higher returns to hold riskier assets, including crypto, which can affect market liquidity and sentiment.
Crypto markets also have their own implicit benchmarks. In derivatives, the relationship between spot and futures prices can imply a “carry” rate. For instance, when futures trade above spot (contango), it can resemble a positive implied financing rate, while the opposite (backwardation) can imply a negative one.
Understanding interest rates helps users compare yields, evaluate loan costs, and interpret how changing liquidity conditions can ripple through crypto, making it a key concept for navigating the ecosystem.