Template-Type: ReDIF-Paper 1.0
Author-Name: Grigoriy Korolev
Author-X-Name-First: Grigoriy
Author-X-Name-Last: Korolev
Author-Email: gkorolev@nes.ru
Author-Workplace-Name: New Economic School
Title: Interest Rate Transmission in Decentralized Finance: Evidence from Aave Lending Protocol
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.
Length: 40 pages
Creation-Date: 2026-09
File-URL: https://www.nes.ru/files/Preprints-resh/SP003.pdf
File-Format: Application/pdf
Number: sp0003
Classification-JEL: G15, G23, G29
Keywords: Decentralized Finance, stablecoin, lending, interest rate.
Handle: RePEc:abo:neswpt:sp0003