Variable Interest Rates

Definition ∞ Variable interest rates in decentralized finance refer to lending or borrowing rates for digital assets that fluctuate dynamically based on market supply and demand within a protocol. Unlike fixed rates, these rates adjust in real-time, often algorithmically, to maintain liquidity and incentivize participation. High demand for borrowing a specific asset will cause its interest rate to increase. These rates directly influence the cost of capital and potential returns for users.
Context ∞ News reports frequently discuss variable interest rates in the context of decentralized lending platforms, highlighting their impact on user profitability and risk management. Changes in these rates can signal shifts in market liquidity, asset demand, or overall protocol health. Understanding the dynamics of variable interest rates is essential for participants in decentralized finance, particularly for managing their positions.