Definition ∞ A carry trade involves borrowing a low-yielding asset and investing the proceeds in a higher-yielding asset, aiming to profit from the interest rate differential. This strategy relies on the expectation that exchange rates between the assets will remain stable or move favorably. Participants typically leverage their positions to amplify potential returns, which also elevates the associated risk. In traditional finance, this often involves different national currencies, while in crypto, it can involve stablecoins or various digital assets.
Context ∞ In the digital asset landscape, carry trades are often observed in decentralized finance (DeFi) protocols, where users might borrow stablecoins at a low rate and lend them out for a higher yield. The situation frequently involves arbitrage opportunities between various lending platforms or yield farming strategies. A critical development to watch for includes regulatory scrutiny on DeFi lending and borrowing, which could impact the viability and risk profiles of such trades.
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