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

Grigoriy Korolev ()
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Grigoriy Korolev: New Economic School

No sp0003, Working Papers from New Economic School (NES)

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.

Keywords: Decentralized Finance; stablecoin; lending; interest rate. (search for similar items in EconPapers)
JEL-codes: G15 G23 G29 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2026-09
New Economics Papers: this item is included in nep-mon
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