Default Risk Premium

The default risk premium is the additional return that an investor requires for holding an asset that carries a risk of default. It compensates the investor for the possibility that the issuer will not be able to meet its payment obligations.

In crypto lending, higher interest rates often reflect a higher default risk premium, signaling that the market perceives the borrower as more likely to fail. This premium is dynamic and changes based on market conditions, the borrower's financial health, and overall economic sentiment.

It is a fundamental concept in pricing credit-sensitive instruments and evaluating the risk-reward profile of different investment opportunities. It helps participants quantify the cost of taking on counterparty risk.