Definition ∞ Interest rate models are mathematical constructs used to describe and predict the behavior of interest rates over time. These models are applied in finance to value interest-rate-dependent securities and manage risk. They attempt to capture factors such as volatility, mean reversion, and the term structure of interest rates. Such models are fundamental for pricing derivatives and assessing financial exposures.
Context ∞ In decentralized finance, interest rate models are essential for protocols offering lending and borrowing services, determining the variable rates for digital assets. The discussion often involves how these models adapt to the unique characteristics of crypto markets, including higher volatility and algorithmic governance. Research focuses on creating more resilient and efficient models that account for liquidity fluctuations and protocol-specific risks in the digital asset ecosystem.
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