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Interest Rate Transmission in Decentralized Finance: Evidence from Aave Lending Protocol

Author

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  • Grigoriy Korolev

    (New Economic School)

Abstract

This paper examines the transmission of US risk-free rates to interest rates in decentralized finance (DeFi) lending market for USD-pegged stablecoins. Although DeFi protocols operate without central banks, their connection to the traditional financial system remains an open question. We use a theoretical model of DeFi lending that incorporates arbitrage between traditional and crypto markets. The model predicts that interest rate transmission depends on DeFi-specific factors, including utilization rates, crypto market conditions and the persistence of lending rates. To test these predictions, we construct a novel dataset from Ethereum blockchain data covering USDT, USDC and DAI. Our empirical results show that risk-free rate has statistically significant predictive content for stablecoin lending rates. Higher risk-free rates are correlated with higher deposit rates, and this correlation operates through the utilization channel. However, this effect is largely mediated by crypto-native factors. These findings have important implications for financial stability monitoring and for understanding the transmission of interest rates through novel digital asset markets.

Suggested Citation

  • Grigoriy Korolev, 2026. "Interest Rate Transmission in Decentralized Finance: Evidence from Aave Lending Protocol," Working Papers sp0003, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:sp0003
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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