Definition ∞ An interest rate swap is a financial derivative contract where two parties agree to exchange future interest payments based on a specified principal amount. Typically, one party pays a fixed interest rate while the other pays a floating interest rate, or vice versa. This instrument allows entities to manage their exposure to interest rate fluctuations. It is a common tool for hedging and speculation in traditional finance.
Context ∞ While traditionally a staple of conventional finance, the concept of interest rate swaps is gaining relevance in decentralized finance (DeFi) as protocols seek to offer more sophisticated financial instruments. A key discussion involves the technical challenges of creating and executing these complex derivatives on-chain, ensuring oracle reliability and collateral management. Future developments will likely focus on standardized DeFi protocols that enable transparent and efficient interest rate swap markets.
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