What Is the Role of the ‘Risk-Free Rate’ in the Black-Scholes Model and How Is It Determined for Crypto?

The risk-free rate represents the theoretical return on an investment with zero risk over the option's life. In Black-Scholes, it is used to discount the expected future payoff of the option to its present value.

For crypto, determining a true risk-free rate is challenging. Proxies like the US Treasury bill yield or rates from highly-trusted DeFi lending protocols are often used, though they introduce their own market and credit risks.