What Is the Potential Impact of a Negative Funding Rate on a Stablecoin’s Lending Rate?

A negative funding rate means short position holders are paying long position holders, indicating that the market is overly bearish and short demand is high. To execute these short positions, traders must borrow the underlying asset (or the stablecoin if it's the base currency for the loan).

This high demand for borrowing the stablecoin for shorting purposes can put upward pressure on the stablecoin's lending rate in the broader DeFi and centralized lending markets, as supply is strained to meet the high borrowing demand.