Why has fixed-rate lending never been able to explode in DeFi?

Fixed interest rate lending has long been regarded as an important piece in the maturation of decentralized finance (DeFi). However, despite multiple market cycles, fixed-rate products have never become mainstream. Instead, the floating interest rate money markets continue to expand, supporting the majority of on-chain lending activity.

In response to this structural phenomenon, crypto researcher Prince (X account @0xPrince) recently published a lengthy analysis pointing out that the limitations of fixed interest rates in DeFi are not simply because users “don’t want them,” but because protocols design products based on traditional credit market assumptions, yet deploy them in an ecosystem that highly favors liquidity, resulting in a long-term mismatch between capital behavior and product structure.

This article summarizes and reinterprets his views, analyzing why fixed interest rate lending has always been difficult to scale in the crypto market.

Traditional finance has credit markets; DeFi is more like an instant capital market

In traditional financial systems, the widespread existence of fixed interest rates is not because they are inherently attractive, but because the entire system operates around “time” and “maturity management.” There is a complete yield curve for pricing, with benchmark interest rates changing relatively slowly. Banks and financial institutions manage their balance sheets, hedge risks, and securitize assets to absorb the asymmetry in terms between borrowers and lenders.

The key is not whether fixed interest rate loans exist, but that when the terms of borrowing and lending cannot be perfectly aligned, someone in the system can bear that mismatch. However, DeFi has never truly established such an intermediary layer. In contrast, on-chain lending is more like a real-time capital market, where most funds are entered with the core purpose of earning yield on idle assets while maintaining high liquidity. When lenders behave more like cash managers rather than long-term investors, the market naturally grows around “cash-like products” rather than “credit-like products.”

Lenders value exit flexibility over interest rate types

The biggest difference between fixed and floating interest rates in DeFi is not just the calculation method but the commitment to “exit rights.” In the floating rate market, represented by protocols like Aave, the tokens received by lenders are essentially highly liquid positions, allowing funds to be withdrawn at any time, quickly adjust strategies, or even be used as collateral in other protocols. This option itself is part of the product’s value.

Lenders are not unaware that they sacrifice some yield for this, but they consciously accept a lower annualized return in exchange for liquidity, composability, and low management costs. Fixed interest rate products, on the other hand, are the opposite: to earn a maturity premium, lenders must accept that their funds cannot be freely moved for a period. In practice, the extra returns offered by most fixed-rate designs are insufficient to compensate for the lost flexibility, leading to a lack of motivation for lenders to enter.

Highly liquid collateral assets are inherently more suitable for floating interest rates

Currently, the largest-scale lending activities in crypto markets are mostly not traditional credit loans but collateralized loans and repo-like transactions using highly liquid crypto assets. These markets are inherently more suitable for floating interest rates because collateral can be liquidated instantly, risks are continuously re-priced, and both parties expect conditions to adjust with market changes.

This structure also explains why the apparent interest rates seen by DeFi lenders are often higher than the actual returns received. In protocols like Aave, there is a clear spread between borrowing and lending rates. Besides protocol fees, a more important reason is that the system must maintain a certain low utilization rate to ensure smooth withdrawals under market stress. In other words, lenders have long been accustomed to paying a price for liquidity.

Borrowing demand is short-term; fixed interest rates lack incentives

From the borrower’s perspective, although fixed rates offer certainty, the main use of on-chain lending is not for long-term capital needs but for strategic operations such as leverage cycles, basis trading, hedging, and avoiding liquidations. These borrowing behaviors are usually highly flexible and short-term; borrowers do not intend to hold debt long-term.

Therefore, borrowers are unwilling to pay a premium for fixed terms and prefer to quickly expand positions when rates are favorable and exit swiftly when the market turns. This creates a structural contradiction: lenders need higher returns to lock in their funds, but borrowers lack the willingness to pay that premium, resulting in a long-term imbalance in the fixed interest rate market.

Liquidity fragmentation makes fixed interest rates harder to expand

Fixed interest rate products inevitably come with maturity dates, which segment liquidity into different time periods. For lenders, exiting before maturity requires finding buyers willing to accept the same term risk. However, in DeFi, a deep secondary credit market has never fully formed, so early withdrawals often entail significant discounts.

Once lenders realize this “nominal transferability but limited actual liquidity” situation, fixed-rate positions are no longer like deposits but more like actively managed investments. For most funds seeking simplicity and flexibility, this experience is enough to discourage further investment.

Why funds ultimately choose Aave

The distribution of funds provides the answer. Protocols like Aave, which operate with floating interest rates, can maintain a multi-billion dollar scale over the long term not because they offer the highest rates, but because their positions are “cash-like” in practical use. Even with mid-to-low single-digit annual yields, lenders can adjust strategies at any time and integrate these positions into more complex DeFi portfolios.

In contrast, even if fixed-rate protocols appear more attractive numerically, they are closer to holding a bond until maturity. For DeFi funds accustomed to high liquidity and rapid rotation, options themselves are part of the return. This is also why liquidity ultimately concentrates in floating interest rate markets.

Fixed interest rates can exist but are unlikely to become the default choice

Overall, fixed interest rates in DeFi are not without space, but they are unlikely to become the default destination for capital. As long as most lenders expect nominal liquidity and highly value composability and automatic adjustment, floating interest rates will continue to dominate.

A more probable development is to make floating interest rates the foundational layer of capital, with fixed interest rates serving as a clear, voluntary maturity tool for those seeking certainty. Instead of disguising credit as deposits, it is better to honestly expose maturity risk and price it correctly.

This article, Why Fixed Interest Rate Lending Has Never Exploded in DeFi, first appeared on Chain News ABMedia.