DeFi lending protocols have attracted billions of dollars in liquidity provision by offering huge returns, however the sector badly needs more fixed rate lending options according to one researcher.
A number of protocols, including Yield Protocol, UMA Protocol, and Mainframe are already venturing into fixed rate lending and borrowing markets for crypto collateral.
According to Messari researcher Jack Purdy fixed rates provide certainty for lenders and borrowers looking to accurately forecast their costs and returns on capital.
Referring to yield curves, which plot interest rates against varying maturity dates, he added that steeper curves mean that lenders require a higher return to compensate them for locking up capital. Flatter curves indicate that lenders are content with lower returns as the prospects for future growths are not so bright.
Fixed-rate lending is one of the most important primitives underpinning the global financial system
And yet it has been sorely lacking in DeFi… that is until recently
This is a big deal and here’s why pic.twitter.com/r9TtwWwp8S
— Jack Purdy (@jpurd17) October 28, 2020
Stable and predictable financial markets are important for future planning in calculating returns and gauging longer-term investor sentiment. The researcher also mentioned a yield curve inversion which occurs when investors are willing to lock in low long-term rates as they expect a more severe downturn.
In traditional finance, this leads to central banks lowering interest rates and the indicator can be used to predict recessions.
The current DeFi scene is anything but predictable and could be described as a Wild West mashup of protocols offering largely unsustainable returns and boasting yields in four figures to lure liquidity providers and degen farmers.
Some of the recent vaults on Yearn Finance that tap into other protocols are illustrative. The new GUSD vault is currently offering over 2200% APY for stablecoin deposits.
When the yETH vault was launched…