Risks in DeFi-Lending Protocols - An Exploratory Categorization and Analysis of Interest Rate Differences

According to well-established principles of risk management, interest rates reflect different levels of risk. Understanding this level of risk is crucial for investors when making investment decisions. In this paper, risk factors in DeFi-lending are identified and categorized within a framework which is not only focused on technical but also on financial aspects. In a subsequent step, the influence of unsystematic risk factors on interest rates are explored to tentatively assess the validity of the literature-derived framework. Our observations indicate that operational risks emanating from the underlying layer-1-solution do seem to have a strong influence. Furthermore, first indications for the validity of scalability challenges and smart contract risks were found. For oracle risks as well as governance risks our approach yielded no results.