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Rate Discovery in Decentralized Lending

Author

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  • Hervé Alexandre

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Charlotte Eli

Abstract

This paper introduces a novel framework for rate discovery in de-centralized finance (DeFi), focusing on the unique challenges andopportunities within decentralized lending platforms. We explorethe mechanisms of interest rate formation in a decentralized en-vironment, free from traditional banking institutions' control. Byleveraging lending pool dynamics, we propose a method that inte-grates borrowers' risk profiles with market liquidity conditions todetermine fair borrowing rates without third party involvment. Ourmodel aims to offer a transparent and reliable solution for rate dis-covery in DeFi. Through a series of simulations, we demonstratethe potential of our framework to improve lending practices in theDeFi ecosystem, making it a viable and competitive alternative toconventional financial systems. The findings suggest that our ap-proach not only enhances the transparency and fairness of the lend-ing process but also encourages a more informed participation oflenders and borrowers, ultimately contributing to the stability andgrowth of the DeFi market.

Suggested Citation

  • Hervé Alexandre & Charlotte Eli, 2025. "Rate Discovery in Decentralized Lending," Post-Print hal-05366110, HAL.
    • Handle: RePEc:hal:journl:hal-05366110
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