Author:Nico Pei is a Chinese fashion designer and the founder of the fashion brand "PEI N
Translated by Jiahuan, Chaincatcher
Lessons from Private Credit
Fixed-rate lending dominates the private credit sector not because lenders prefer it, but because borrowers need certainty.
Borrowers—corporations, private equity firms, and real estate sponsors—primarily care about the predictability of cash flows. Fixed rates eliminate the risk of rising benchmark interest rates, simplify budgeting, and reduce refinancing risk. This is especially important for leveraged or long-term projects, where interest rate volatility could threaten solvency.
By contrast, lenders typically prefer floating rates. Lenders price loans as "benchmark rate + credit spread." A floating structure protects profit margins when interest rates rise, reduces duration risk, and allows lenders to capture upside gains when benchmark rates increase. Fixed rates are usually offered only when lenders can hedge interest rate risk or charge an additional premium.
Therefore, fixed-rate products are a response to borrower demand, not a default market structure. This explains a key lesson in DeFi: without clear, persistent borrower demand for rate certainty, fixed-rate lending struggles to achieve liquidity, scale, or sustainability.
Who are the real borrowers on Aave and Morpho?
Misconception: "Traders borrow from the money market to leverage up or to short sell."
Most single-sided leverage is achieved through perpetual contracts (Perps), as they offer excellent capital efficiency. In contrast, money markets require over-collateralization and are therefore unsuitable for speculative leveraged trading.
The stablecoin lending volume on Aave alone is approximately $8 billion. Who are these borrowers?
Broadly speaking, there are two types of borrowers:
Long-term holders / Whales / Treasury: Collateralize crypto assets to borrow stablecoins and obtain liquidity without selling their assets, thereby retaining upside exposure and avoiding realization events or tax liabilities.
Leveraged Yield Farmers: Borrowing is used to leveragely increase exposure to yield-bearing assets (such as LST/LRT, stETH) or yield-bearing stablecoins (such as sUSDe). The goal is to achieve higher net returns, rather than profiting from directional bets (i.e., going long or short).
Is there a real demand for fixed rates on-chain?
Some of them—demand is concentrated in institutions that collateralize crypto assets and in revolving loan strategies.
Institutions that collateralize crypto assets
Maple Finance provides stablecoins through over-collateralized loans, using blue-chip crypto assets such as BTC and ETH as collateral. Borrowers include high-net-worth individuals, family offices, hedge funds, and other participants seeking funds with predictable fixed interest rates.
Although the lending and borrowing yield for Aave USDC is approximately 3.5%, institutional fixed-rate loans on Maple Finance settle at around 5.3% to 8% APY for prime collateral—meaning there is a premium of about 180–450 basis points when loans transition from floating rates and variable terms to fixed rates.
In terms of market size, just the Syrup pool on Maple has a TVL (Total Value Locked) of approximately $267 million, comparable in scale to Aave's outstanding loans of about $3.75 billion on the Ethereum mainnet.
(Aave ~3.5% vs. Maple ~8%: Fixed-rate crypto collateral loans carry a premium of ~180–400 basis points)
However, it is worth noting that some borrowers choose Maple over Aave to avoid hacking risks. But as DeFi continues to mature, and transparency and liquidation mechanisms have proven to be resilient, the historical smart contract risks are diminishing. Protocols like Aave are increasingly viewed as secure infrastructure, suggesting that the premium for off-chain, fixed-rate crypto loans should gradually compress over time if on-chain fixed-rate options become available.
Revolving Loan Strategy
Although the demand from revolving lenders is in the billions, revolving strategies are almost unprofitable due to unpredictable lending rates:
Although recyclers benefit from the fixed-rate income side (e.g., PTs), financing the recycling strategy with floating-rate borrowing introduces interest rate volatility risk, which can suddenly erase months of gains and even push the strategy into a loss.
According to historical data, the borrowing rates of Aave and Morpho are far from stable:
If both the borrowing rate and the interest-bearing asset rate are fixed, funding risk is eliminated. The strategy becomes easier to execute, positions can be held as expected, and capital can be efficiently scaled—allowing participants to confidently deploy funds and drive the market toward equilibrium.
With over 5 years of battle-tested security and the development of on-chain fixed income led by Pendle PTs, demand for on-chain fixed-rate loans is rapidly growing.
If the demand for fixed-rate loans already exists, why hasn't the market grown? Let's take a closer look at the supply side of fixed-rate loans.
Liquidity is the lifeline of on-chain funds.
Liquidity means the ability to adjust or exit positions at any time—without lock-up periods—allowing lenders to withdraw capital, borrowers to close positions, reclaim collateral, or repay loans early, without restrictions or penalties.
Pendle PT holders have sacrificed some liquidity, as the Pendle v2 AMM and order book cannot absorb market exits exceeding approximately $1 million without significant slippage, even in its largest liquidity pools.
What compensation do on-chain lenders give up for this invaluable feature? Based on Pendle PT, it's usually 10%+ APY, and when yield token trading is aggressive (e.g., usdai on Arbitrum), it can even reach 30%+ APY.
Clearly, crypto loan borrowers cannot sustain paying 10% interest for a fixed rate. This rate is not sustainable without speculating on YT points.
I am fully aware that PTs (Principal Tokens) add an additional layer of risk on top of core money markets like Aave or Morpho—including Pendle protocol risk and underlying asset risk. PTs are structurally significantly riskier than the underlying lending.
However, this remains true: if borrowers are unwilling to pay ultra-high interest rates, it would be impossible to scale up the market by asking lenders to give up flexible fixed interest rates. When liquidity is removed, yields must rise sharply to compensate—and these interest rates are unsustainable for real, non-speculative borrowing needs.
Term Finance and TermMax are good examples of fixed-rate markets that struggle to scale due to this mismatch: few lenders are willing to give up liquidity for low returns, while borrowers don't want to pay 10% APY for a fixed rate when Aave's rate is 4%.
Since liquidity is valuable, how can we effectively meet the demand for fixed-rate lending and borrowing, so as to achieve a balanced market that satisfies both lenders and borrowers?
The Way Out: Abandon the Old Mindset of "Point-to-Point Matching"
The solution is not to forcibly match "fixed-rate borrowers" with "fixed-rate lenders." Instead, "fixed-rate borrowers" should be matched with "interest rate traders."
First, most on-chain funds only trust the security of top protocols like Aave and Morpho, and are accustomed to passive wealth management.
Therefore, in order to scale the fixed rate market, the lender experience must be exactly the same as their current experience on Aave:
Deposit at Any Time
Withdraw at any time
Minimum additional trust assumption
No lock-up period
Ideally, a fixed-rate protocol could directly leverage the security and liquidity of Aave, Morpho, and Euler. Ideally, it would be a protocol built on top of these trusted money markets.
Transaction Interest Rate vs. Transaction Tenor
Second, in fixed-rate loans, borrowers do not need to lock the entire loan duration with a fixed-term agreement. Instead, they only need to find capital (such as hedgers or traders) willing to absorb the difference between the agreed fixed rate and Aave's floating rate, while the remaining funds can be sourced from floating-rate markets like Aave, Morpho, or Euler.
This mechanism is achieved through interest rate swaps: hedgers exchange fixed payments for floating income that perfectly matches Aave's floating rate, providing borrowers with interest rate certainty while allowing macro traders to express their views on interest rate movements with high capital efficiency (such as implied leverage). This avoids the issue in traditional models where lenders sacrifice flexibility, thus promoting market scalability.
Capital Efficiency: Traders only need to deposit collateral to cover their interest rate risk exposure, which is much smaller than the full notional amount of the loan. For example, for a 1-month position, a $10 million short exposure on Aave's borrowing rate with a fixed annual percentage yield (APY) of 4%, the trader would only need to deposit $3,330 — this represents an implicit leverage of 3,000 times, demonstrating extremely high capital efficiency.
Given that Aave interest rates often fluctuate between 3.5% and 6.5%, this level of implicit leverage allows traders to trade interest rates like tokens, which frequently vary from $3.5 to $6.5. This:
Several orders of magnitude more volatile than mainstream cryptocurrencies;
Strongly correlated with the prices of major cryptocurrencies and overall market liquidity;
And without using explicit leverage (e.g., 40x on BTC), which is easily liquidated.
For the purpose of this article, I will not go into detail about the difference between implicit leverage and explicit leverage. I will save that for another article.
The Path of Credit Expansion on the Blockchain
I foresee that as on-chain credit grows, the demand for fixed-rate loans will increase, as borrowers place greater emphasis on predictable financing costs to support larger, longer-term positions and productive capital allocation.
Cap Protocol is leading the field of on-chain credit expansion and is a team I closely follow. Cap enables restaking protocols such as Symbiotic and EigenLayer to provide insurance coverage for institutional credit-based stablecoin loans.
Currently, interest rates are determined by utilization curves optimized for short-term liquidity. However, institutional borrowers place high value on interest rate certainty. As on-chain credit scales, a dedicated interest rate trading layer will become essential for supporting duration-aware pricing and risk transfer.
3Jane is another protocol I'm closely following. It focuses on on-chain consumer credit, a niche market where fixed-rate loans are essential, as nearly all consumer credit is offered at fixed rates.
In the future, borrowers could be served through unique interest rate markets segmented by creditworthiness or asset-backed collateral. In traditional finance, consumer credit is typically initiated at fixed rates based on retrospective credit scores, after which the loans are sold or securitized and priced in secondary markets. Unlike locking borrowers into a single interest rate set by the lender, on-chain interest rate markets allow borrowers direct access to market-driven rates.