The annualised interest rate on an on-chain loan, floating continuously with utilisation rather than fixed at origination.
Interest accrues per block and is added to your debt, so a position left alone slowly drifts towards liquidation even with prices unchanged. There is no monthly statement; the debt simply grows.
The rate is not yours to lock. A surge in borrowing demand can take a 4% rate to 40% within hours, and a borrow that made sense as a carry trade becomes a losing one without any price movement. Fixed-rate on-chain lending exists but is a smaller market.
Borrowing against volatile collateral to buy more of it is looping-leverage, and the borrow rate is the running cost of that leverage. When the rate exceeds any plausible return on what you bought, the trade is negative carry and time is working against you.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.
Educational only, not advice. Spotted an error? Post in Site Feedback.