Why Is the Choice of the Risk-Free Rate Challenging in Crypto Options Modeling?

The choice of the risk-free rate is challenging in crypto options modeling because a true risk-free rate is difficult to define in decentralized finance. Traders must choose a proxy, such as the interest rate on a stablecoin lending protocol, which carries some counterparty risk.

The high volatility and lack of a standardized, universally accepted risk-free benchmark complicate accurate pricing.