When it comes to 'risk-free interest rates', traditional finance often thinks of U.S. Treasury bonds, which have government backing, stable returns, and serve as the 'bottom line' for all investments.
However, the crypto market has long lacked such a benchmark until @Treehouse Official set its sights on Ethereum.
First, let’s talk about why Bitcoin doesn’t work.
Although Bitcoin mining has a fixed reward that looks like it could represent an interest rate, it relies too much on external costs such as mining machines and electricity, similar to how gold mining is affected by labor and equipment. This makes it impossible to form a unified, independent benchmark, and naturally, it cannot represent a risk-free asset.
Ethereum's PoS mechanism is different.
It is like a 'decentralized small country', with its own 'currency rules' (gas fees) and 'governance system' (staking votes).
Users stake ETH to maintain network security and earn stable returns. This process does not depend on external factors, and for Ethereum, PoS is crucial for survival; without staking, the network cannot operate. This logic is very similar to how U.S. Treasury bonds underpin national finance.
Currently, the annualized staking return for Ethereum is about 3.5%, and this number can serve as the risk-free interest rate for ETH.
For example, if you want to lend ETH to a friend, regardless of who you lend to, the interest must exceed 3.5% to be worthwhile. Lending to someone with high risk would require charging even higher interest, thus establishing a baseline for DeFi returns.