How Does Decentralized Lending Affect the Traditional Concept of the Cost of Debt? ▴ Learn

How Does Decentralized Lending Affect the Traditional Concept of the Cost of Debt?

Decentralized lending, through platforms like Aave or Compound, introduces a dynamic, variable interest rate that is determined by supply and demand within the smart contract. This contrasts with the traditional fixed or prime-rate-based cost of debt.

The cost of debt for a protocol is the variable interest it pays, which is subject to high volatility and smart contract risk. This volatility adds complexity to the WACC calculation.

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