Benchmark Rate

In traditional finance, benchmark rates are typically based on rates set by central banks. This sets a baseline for borrowing costs, with lenders adding an additional margin on top of the benchmark for their services.

Benchmark rates are also essential when determining and pricing risk. With a consistent point of reference, market participants can fairly compare borrowing costs, price contracts, and evaluate financial products more effectively.

Unlike the traditional financial markets, where participants can point to widely established benchmark rates, crypto markets lack a single reference rate. DeFi lending markets are instead fragmented across various protocols, each with their own smart contract-driven interest rate models. Some market participants reference lending rates from protocols like Aave or Compound as their reference points, while others rely on benchmark data sourced from oracle protocols such as Chainlink.

Establishing widely adopted benchmark rates for DeFi markets would enable a common standard for financial product pricing. This could support the maturation of the market and the development of more sophisticated instruments, including interest rate swaps, fixed-rate loans and onchain crypto-backed mortgages.