Fixed-rate lending has long been considered a crucial piece of the puzzle for the maturation of decentralized finance (DeFi). However, through multiple market cycles, fixed-rate products have consistently failed to become mainstream; instead, the floating-rate funding market has continued to expand, carrying the majority of on-chain lending activities.
In response to this structural phenomenon, crypto researcher Prince (X account @0xPrince) recently published a lengthy analysis pointing out that the limitation of fixed interest rates in DeFi is not simply because users "don't want" it, but because the protocols design products based on the assumptions of the traditional credit market, yet deploy them in an ecosystem that highly favors liquidity, leading to a long-term mismatch between capital behavior and product structure.
This article reorganizes and rewrites his views to analyze why fixed-rate lending has always been difficult to scale in the crypto market.
Traditional finance has a credit market, while DeFi is more like an instant money market.
In the traditional financial system, fixed interest rates can exist on a large scale not because they are inherently attractive, but because the entire system operates around "time" and "maturity management." The market has a complete yield curve as the basis for pricing, the benchmark interest rate changes relatively slowly, and banks and financial institutions absorb the maturity asymmetry between borrowers and lenders through balance sheet management, hedging tools, and securitization mechanisms.
The key issue isn't whether fixed-rate loans exist, but rather that when the terms of borrowers and lenders don't perfectly align, someone in the system is always there to cover that mismatch. However, DeFi has never truly established such an intermediary layer. In contrast, on-chain lending is more like a readily available capital market, where the core purpose of most funds entering the market is to generate returns on idle assets while maintaining high liquidity. When lenders' behavior resembles cash management rather than long-term investment, the market will naturally grow around "cash-like products" rather than "credit-like products."
What lenders truly value is the flexibility of exit strategies, not the form of interest rates.
In DeFi, the biggest difference between fixed and floating interest rates isn't just how the rate is calculated, but rather the commitment to "exit rights." In floating-rate markets like Aave, the tokens lenders receive are essentially highly liquid positions; funds can be withdrawn at any time, strategies can be quickly adjusted, and they can even be reused as collateral in other protocols. This option itself is part of the product's value.
Lenders are not unaware that they are sacrificing some returns; rather, they consciously exchange lower annualized returns for liquidity, composability, and lower management costs. Fixed-rate products, on the other hand, require lenders to accept that their funds cannot be freely moved for a period of time in order to obtain a term premium. However, in practice, the additional returns offered by most fixed-rate designs are insufficient to compensate for the lost flexibility, resulting in a lack of incentive for lenders to enter the market.
Highly liquid collateral is inherently better suited for floating interest rates.
Currently, the largest lending activities in the crypto market are mostly not traditional credit loans, but rather margin lending and repurchase-like transactions secured by highly liquid crypto assets. These markets are inherently more suited to floating interest rates because the collateral can be readily converted into cash, risk is continuously repriced, and both parties expect the terms to adjust as the market changes.
This structure also explains why the interest rates that DeFi lenders see on the surface are often higher than the actual returns they receive. In protocols like Aave, there is a significant interest rate differential between borrowing and lending rates. Besides protocol fees, a more important reason is that the system must maintain a relatively low utilization rate to ensure smooth withdrawals under market pressure. In other words, lenders have long been accustomed to paying a price for liquidity.
Borrowing demand is predominantly short-term, and fixed interest rates lack incentive.
From the borrower's perspective, while fixed interest rates offer certainty, the primary use of on-chain lending is not for long-term funding needs, but rather for various strategic operations, including leverage cycles, basis trading, hedging, and avoiding liquidation. These types of borrowing are typically highly flexible and short-term, as borrowers do not intend to hold the debt long-term.
This is why borrowers are unwilling to pay an extra premium for the term, instead preferring to rapidly expand their positions when interest rates are favorable and exit quickly when the market turns. This results in a structural contradiction: lenders require higher returns to lock up funds, but borrowers lack the willingness to pay that premium, leaving the fixed-rate market in a state of long-term imbalance.
Liquidity fragmentation makes it more difficult for fixed-rate rates to expand.
Fixed-rate products inevitably have a maturity date, which means that liquidity is divided into different time segments. For lenders, if they want to exit before maturity, they must find buyers willing to take on the same term risk. However, in DeFi, a truly deep secondary credit market has yet to emerge, resulting in early exits often incurring significant discounts.
Once lenders realize this situation of "nominal transferability but limited liquidity," fixed-rate positions no longer resemble deposits but rather investments requiring active management. For most funds seeking simplicity and flexibility, this experience is enough to deter further investment.
Why did the funds ultimately choose Aave?
The results clearly demonstrate the answer in the distribution of funds. Floating-rate protocols like Aave can maintain a scale of billions of dollars over the long term not because of the highest interest rates, but because their positions are "like cash" in practical use. Even with annualized returns of only mid-to-low single digits, lenders can still adjust their strategies at any time and integrate their positions into more complex DeFi portfolios.
In contrast, while fixed-rate agreements may be more attractive numerically, they are closer to a bond that must be held until maturity. For DeFi funds accustomed to high liquidity and rapid turnover, the option itself is part of the return, which is why liquidity ultimately concentrates in the floating-rate market.
Fixed interest rates may exist, but they are unlikely to become a pre-set option.
Overall, fixed rates are not without potential in DeFi, but they are unlikely to become the primary destination for funds. As long as most lenders still expect face-value liquidity and highly value composability and auto-adjustment capabilities, floating rates will continue to dominate.
A more likely development is for floating interest rates to form the base layer of funding, while fixed interest rates serve as a defined, voluntary term instrument available to those who genuinely seek certainty. Rather than disguising credit as deposits, it's better to honestly allow term risk to be seen and properly priced.
Why has fixed-rate lending failed to take off in DeFi? This article first appeared on ABMedia, a ABMedia .
