Rate Discovery in Decentralised Lending

Charlotte Eli and Hervé Alexandre ()
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Hervé Alexandre: DRM-Finance - DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper introduces a novel framework for rate discovery in decentralised finance (DeFi), focusing on the unique challenges and opportunities within decentralised lending platforms. We explore the mechanisms of interest rate formation in a decentralised environment, without traditional banking institutions' control. By leveraging lending pool dynamics, we propose a method that integrates borrowers' risk profiles with market liquidity conditions to determine fair borrowing rates without third-party involvement. Our model aims to offer a transparent and reliable solution for rate discovery in DeFi. Through a series of simulations, we demonstrate the potential of our framework to improve lending practices in the DeFi ecosystem, making it a viable and competitive alternative to conventional financial systems. The findings suggest that our approach not only enhances the transparency and fairness of the lending process but also encourages a more informed participation of lenders and borrowers, ultimately contributing to the stability and growth of the DeFi market.

Date: 2025-06-06
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Published in The Journal of The British Blockchain Association, 2025, 8 (2), pp.1-12. ⟨10.31585/jbba-8-2-(7)2025⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05572609

DOI: 10.31585/jbba-8-2-(7)2025

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