Interest Rate Spread

Definition ∞ Interest Rate Spread refers to the difference between the interest rate a financial institution pays to depositors and the interest rate it charges to borrowers. This differential represents a primary source of income for traditional banks and decentralized lending protocols. It reflects the cost of capital and the risk premium associated with lending.
Context ∞ In decentralized finance, the interest rate spread is a critical metric for assessing the profitability and stability of lending platforms. A key discussion centers on the volatility of these spreads due to fluctuating supply and demand for digital assets and liquidity conditions. Future developments may see more sophisticated algorithms and risk management techniques applied to stabilize spreads and offer more predictable returns for participants.