Interest Rate Differentials

Interest rate differentials represent the difference in the annualized interest rates between two distinct crypto assets or lending protocols. In the context of crypto swaps, these differentials are a critical component in determining the cost of carry for holding a position.

When a trader enters a swap, they are essentially betting on the spread between the yields of the two assets involved. If the interest rate of the asset being bought is higher than the asset being sold, the trader may receive a positive carry.

These differentials are dynamic and fluctuate based on supply and demand within lending markets and the broader macroeconomic environment. Understanding these rates is vital for arbitrageurs who look to profit from discrepancies across different decentralized lending platforms.