Blockchain innovation has always been rooted in the concepts of creating, storing, and transacting in digital money. Whether it’s affordably sending money across borders or self-custodying wealth, demand for Bitcoin has largely been driven by the need for a financial service. Similarly, with Ether, demand has been a function of using the asset in investment contracts, financial derivatives, and lending agreements.
As is expected of useful money, cryptocurrencies have quickly begun to develop credit markets in which long term holders can lend out their assets to those that have a greater immediate need for them. In exchange for lending out their capital, holders are compensated for the time value of their money via an interest rate. Interest rates are essential to any valuable forms of money because they help create non zero-sum wealth as both borrowers and long term investors can reap the reward of more efficient capital allocation.