Why Institutions Aren’t Coming On-Chain

Compiled by: Ken, Chaincatcher

Introduction

Current money market protocols (such as Aave, Morpho, Kamino, Euler) serve lenders well, but due to the lack of fixed borrowing costs, they have failed to serve a broader group of borrowers, especially institutional borrowers. Since only lenders are well served, market growth has stagnated.

From the perspective of money market protocols, P2P fixed interest rates are a natural solution, while interest rate markets offer an alternative with 240-500 times higher capital efficiency.

P2P fixed interest rates and interest rate markets are complementary and are vital to each other’s prosperity.

Insights from Leading Protocols: Everyone Wants to Offer Fixed Rates to Borrowers

The early-year roadmaps of various teams often set the tone for upcoming developments.

Morpho, Kamino, and Euler Finance are leading on-chain money markets with a total locked value of $10 billion. Looking at their 2026 roadmaps, one clear theme stands out: fixed interest rates.

Morpho:

[1] Morpho V2 Briefing

Kamino:

[2] Kamino’s 2026 Plan

Euler:

[3] Euler’s 2026 Roadmap

The terms “fixed interest rate” or “predictable interest rate” appear 37 times in the 2026 announcements of Morpho, Kamino, and Euler Finance. Excluding irrelevant words, these are the most frequently mentioned terms in the announcements and are listed as top priorities in all three roadmaps.

Other keywords include: institutions, real-world assets, and credit.

What’s going on?

Early DeFi: Borrower Fixed Rates Are “Basically Not Important”

Early DeFi was fun and experimental for builders. But for users, it can be summarized in two words: absurd speculation and terrifying hacks.

Absurd Speculation

From 2018 to 2024, DeFi was like a “Mars casino” disconnected from the real world. Liquidity was mainly driven by early retail investors and speculative activities. Everyone chased four-figure annual yields. No one cared about borrowing at fixed interest rates.

Markets were highly volatile and unpredictable. Liquidity lacked stickiness. Total collateralization ratios fluctuated wildly with market sentiment. Since demand for fixed-rate borrowing was minimal, demand for fixed-rate lending was even less.

Lenders preferred the flexibility to withdraw funds at any time. No one wanted their funds locked for a month — because in a nascent, rapidly changing market, a month felt like a lifetime.

Terrifying Hacks

Between 2020 and 2022, hacks were frequent. Even blue-chip protocols were not immune: Compound suffered a major governance vulnerability in 2021, resulting in losses of tens of millions of dollars. Overall, DeFi vulnerabilities during this period caused billions in losses, deepening institutional doubts about smart contract security.

Institutions and high-net-worth capital have limited trust in smart contract security. As a result, participation from more conservative pools remains very low.

Instead, institutions and high-net-worth individuals borrow from off-chain platforms like Celsius, BlockFi, Genesis, and Maple Finance to avoid smart contract risks.

At that time, there was no “just use Aave” mentality, because Aave’s position as the safest DeFi protocol had not yet been established.

Catalysts for Change

I’m not sure if it’s intentional or coincidental, but we often refer to platforms like Aave and Morpho as “lending protocols” — even though both lenders and borrowers are using them, which is certainly noteworthy.

The name “lending protocol” is actually very fitting: these platforms excel at serving lenders but are clearly lacking in serving borrowers.

Borrowers seek fixed borrowing costs, while lenders want the flexibility to withdraw funds at any time and earn floating rates. Current protocols serve lenders well but fail to serve borrowers. Without fixed-rate borrowing options, institutions won’t borrow on-chain, and the bilateral market cannot grow — which is why these platforms are actively working on fixed interest rate features.

Even though this structure is highly favorable to lenders, change often stems from user pain points or product improvements. Over the past year and a half, DeFi has accumulated significant experience in both areas.

Pain Point 1: Fixed Income Cycling Strategies

Traditional finance offers a wide range of fixed income products. DeFi only started to have such products around 2024, when Pendle and liquidity staking protocols began splitting ETH staking yields.

When cycling fixed income tokens through loans, the pain caused by interest rate fluctuations becomes obvious — the 30-50% APY promised by cycling strategies is often wiped out by rate volatility.

I personally tried to automate opening and closing these strategies based on interest rate changes, but each adjustment incurred costs at multiple levels: underlying yield sources, Pendle, money markets, and gas fees. It’s clear that volatile lending rates are unsustainable — they often turn my returns negative. Pricing borrowing costs based on on-chain liquidity dynamics introduces volatility far beyond acceptable levels.

This pain is just the beginning of private credit on-chain. Most private credit prefers fixed interest rates because real-world business activities require certainty. If DeFi wants to evolve beyond being a “Mars casino” disconnected from the real economy and truly support meaningful commercial activities (like GPU collateralized loans and trading company credit), fixed interest rates are inevitable.

Pain Point 2: Widening Spread Between Fixed and Floating Rates

Because lending protocols provide excellent service to lenders — flexible withdrawals, no KYC, and easy programmable operations — on-chain lending liquidity has been steadily growing.

[5] Aave TVL historical chart. The growth rate of this chart is about twice the increase in Bitcoin’s price.

As lending liquidity increases, the floating borrowing rates of these protocols decrease. While this seems beneficial for borrowers, it largely doesn’t matter to institutional borrowers — they prefer fixed-rate loans and are obtaining them through off-chain channels.

The real market pain point is the ever-widening gap between off-chain fixed borrowing costs and on-chain floating rates. This gap is substantial: institutions pay an average premium of 250 basis points (bps) for fixed-rate borrowing, and for blue-chip altcoins collateral, premiums can reach up to 400 bps. With a 4% Aave base rate, this represents a 60-100% premium.

[6] Fixed-rate loans collateralized by crypto assets: about 180-400 bps premium over Aave’s ~3.5%, with Maple offering around 8%.

On the other hand, on-chain yields are compressed. Because the current lending market is structurally lender-biased, more lenders are attracted than borrowers — ultimately harming lenders’ returns and causing protocol growth to plateau.

Product Progress: DeFi Becomes the Default for Lending

In development, Morpho has integrated into Coinbase as a major revenue source, while Aave has become a pillar for protocol treasury management, retail stablecoin savings, and new stablecoin banking. DeFi lending protocols offer the most convenient way to earn yields on stablecoins, with liquidity flowing steadily on-chain.

As TVL increases and yields decrease, these protocols are actively iterating, thinking about how to also become excellent “borrowing protocols” to serve borrowers and balance the bilateral market.

Meanwhile, DeFi protocols are becoming increasingly modular — a natural evolution from Aave’s “one-size-fits-all” liquidity pool model (though I believe the pool model will still have long-term demand — a topic for future articles). With Morpho, Kamino, and Euler leading modular lending markets, loans can now be more precisely tailored based on collateral types, LTV (Loan-to-Value), and other parameters. The concept of independent credit markets has emerged. Even Aave v4 is upgrading to a hub-and-spoke modular market structure.

Modular market structures pave the way for new collateral types (Pendle PTs, fixed income products, private credit, RWAs) on-chain, further amplifying the demand for fixed interest rate borrowing.

Mature DeFi: Money Markets Thrive Through Interest Rate Markets

Market Gap

Borrowers strongly prefer fixed interest rates (off-chain services are good) > Lenders strongly prefer floating rates and the flexibility to withdraw funds at any time (on-chain services are good)

If this market gap is not bridged, on-chain money markets will remain at their current scale and cannot expand into broader currency and credit markets. There are two clear paths to bridge this gap, which are not mutually exclusive but highly complementary and even symbiotic.

Path 1: Managed P2P Fixed Interest Rates

The P2P fixed interest rate model is very straightforward: for every fixed-rate borrowing demand, an equal amount of funds is locked for fixed-rate lending. While this model is elegant and simple, it requires 1:1 liquidity matching.

According to the 2026 announcements, all major lending protocols are building towards P2P fixed interest rate models. However, retail users will not lend directly to these P2P fixed-rate markets, mainly for two reasons:

• They value withdrawal flexibility;
• They face too many independent markets to evaluate and choose from.

Therefore, only liquidity currently deployed in risk management vaults can be lent to these fixed-rate markets — and even then, only a portion. Risk management entities must retain sufficient liquidity to meet depositors’ immediate withdrawal needs.

This creates a tricky dynamic game for risk management vaults that need to meet immediate withdrawal demands:

When deposits surge and vault liquidity becomes insufficient due to funds being locked in fixed-rate loans, the vault lacks mechanisms to curb withdrawals or incentivize deposits. Unlike money markets with utilization curves, vaults are not designed to maintain withdrawal liquidity. More withdrawals do not lead to higher yields for the vault. If the vault is forced to sell its fixed-rate loans on the secondary market, these loans are likely to be discounted — potentially leading to insolvency (similar to the Silicon Valley Bank scenario in March 2023).

To mitigate this tricky dynamic, risk management entities prefer to do what traditional lenders do: use interest rate swaps to convert fixed-rate loans into floating-rate ones.

They pay fixed interest rates in the swap market and receive floating rates in return, avoiding the risk of being locked into low fixed rates when floating rates rise and withdrawals increase.

In this scenario, institutional lenders and risk management entities use the interest rate market to better provide fixed-rate liquidity.

Path 2: Interest Rate Markets Based on Money Markets

Interest rate markets do not directly match fixed-rate lenders and borrowers. Instead, they match borrowers with funds willing to compensate for the difference between the “agreed fixed rate” and the “floating rate generated by the money market utilization curve.” This approach offers capital efficiency 240 to 400 times higher than the 1:1 liquidity matching in P2P markets.

The logic for capital efficiency is as follows:

Borrow $100 million at floating rates from existing Aave liquidity; the borrower wants to convert this floating-rate loan into a one-month fixed-rate loan. Assuming a fixed rate priced at 5% APR:
$100 million * 5% / 12 = $416,666;
Interest rate swap achieves an inherent leverage of approximately 240x:
$100 million / $416,666 ≈ 240 times.

Morpho

Interest rate exchanges help hedgers and traders price and swap fixed and floating rates.

While interest rate exchanges based on money markets cannot offer purely fixed-rate loans like P2P models — if interest rates spike tenfold and stay high for a long period, hedgers could face auto-deleveraging (ADL) risk.

However, the likelihood of this happening is extremely low, and it has never occurred in Aave or Morpho’s three-year history. Interest rate exchanges can never fully eliminate ADL risk, but they can implement layered protections — such as conservative margin requirements, insurance funds, and other safeguards — to reduce it to negligible levels. This trade-off is very attractive: borrowers can access fixed-rate loans from proven, high TVL money markets like Aave, Morpho, Euler, and Kamino, while benefiting from 240-500 times higher capital efficiency than P2P markets.

Path 2 reflects traditional finance operations — daily $180 billion in interest rate swap trading volume fuels credit, fixed income products, and real economy activities.

This combination of proven money market safety, $30 billion in existing protocol liquidity, appropriate risk mitigation, and excellent capital efficiency makes interest rate exchanges a pragmatic path for expanding fixed-rate lending on-chain.

Exciting Future: Connecting Markets and Expanding Credit

If you’ve read through the previous dry mechanisms and market microstructure, I hope this section sparks your imagination about future development paths!

Some predictions:

1. Interest rate markets will become as important as existing lending protocols

Since borrowing mainly occurs off-chain and lending mainly on-chain, the market remains incomplete. The interest rate market connects borrowing needs by catering to different preferences of borrowers and lenders, greatly expanding the potential of existing money market protocols and becoming an indispensable part of on-chain money markets.

In traditional finance, interest rate markets and money markets are highly complementary. We will see the same dynamic play out on-chain.

2. Institutional credit: Interest rate markets will become the backbone of credit expansion

Disclaimer: Here, “credit” refers to unsecured or undercollateralized money market lending, not overcollateralized modular markets (like Morpho Blue).

The dependence of the credit market on interest rate markets exceeds even that of overcollateralized lending. When institutions finance real-world activities (like GPU clusters, acquisitions, or trading operations) via credit, predictable funding costs are crucial. Therefore, as on-chain private credit and RWAs expand, interest rate markets will also develop accordingly.

To connect off-chain real-world yield opportunities with on-chain stablecoin capital, interest rate markets are a more critical pillar for on-chain credit growth. @capmoney_ leads in institutional credit lending and is a team I follow closely to understand the future of this industry. If you’re interested, I recommend paying attention to them as well.

3. Consumer credit: Everyone will have the privilege to “borrow to spend”

Selling assets triggers capital gains tax, which is why ultra-high-net-worth individuals almost never sell assets; they choose to borrow to spend. I can imagine that in the near future, everyone will have the privilege of “borrowing to spend” instead of “selling to spend” — a privilege currently reserved for the super-rich.

Asset issuers, custodians, and exchanges will have strong incentives to issue credit cards that allow people to collateralize assets for borrowing and direct spending. To make this system work on a fully self-custodial stack, decentralized interest rate markets are essential.

@EtherFi’s credit card has pioneered collateral-based consumer credit models, growing 525% last year, with a peak daily transaction volume of $1.2 million. If you don’t have an EtherFi card yet, I highly recommend trying it out to explore “borrow-to-spend”!

Finally, I want to point out that fixed interest rates are not the only catalyst for money market growth. Many issues can only be addressed by money markets — such as supporting off-chain collateral, RWA-based redemption mechanisms, and oracle systems for cycle strategies, etc. The road ahead is challenging, and I am genuinely curious and hope to contribute to the evolution of this market.

If you’ve read this far, thank you for exploring these fascinating details with me!

At @SupernovaLabs_, we are obsessed daily with the subtle nuances of this market evolution. We aim to be a pillar supporting existing lending protocols, helping them better serve the borrowing side of the market. We believe this will unlock borrowing demand, drive credit expansion, and become an integral part of the on-chain economy. The opportunity is right in front of us — the time is now. Next week, we will have more announcements about product launches.

Sources:

[1] Morpho v2: https://morpho.org/blog/morpho-v2-liberating-the-potential-of-onchain-loans/
[2] Kamino The Next Chapter: https://gov.kamino.finance/t/kamino-the-next-chapter/864
[3] Euler’s 2026 Roadmap: https://x.com/0xJHan/status/2014754594253848955
[4] Casino on Mars: https://www.paradigm.xyz/2023/09/casino-on-mars
[5] DefiLlama: Aave TVL https://defillama.com/protocol/aave
[6] Maple Finance Yield: https://maple.finance/app