Interest Rate Parity in Decentralized Finance

This paper studies determinants of interest rates on Decentralized lending protocols. Using transaction level data, we show these protocols are being used to make long or short leveraged positions in the cryptocurrency market. We identify a significant relationship between the interest rate differential and the perpetual futures premium for the ETH/USDT market. However, the link is economically weak, indicating that the speculative beliefs in the two markets are only weakly correlated and that the markets are segmented. Arbitrage across the two markets is ineffective due to wide no-arbitrage bounds, which are governed by high trading costs, gas fees, and price impacts.

Keywords: Cryptocurrency, decentralized finance, lending protocols, perpetual futures, arbitrage.

JEL Classification: F31, G14, G15, G18, G23

Suggested Citation: Suggested Citation

Chaudhary, Amit and Kozhan, Roman and Viswanath-Natraj, Ganesh, Interest Rate Parity in Decentralized Finance (May 4, 2023). WBS Finance Group Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4437706 or http://dx.doi.org/10.2139/ssrn.4437706