Solving the Cold-Start Problem in Fixed-Rate Lending

This article is an excerpt from our research report on fixed-rate lending, "Market Structure and Protocol Design," highlighting emerging design approaches in this sector.

Why Fixed-Rate Lending Is Needed

Today, the active loan volume in the lending sector stands at $28.5 billion, with nearly all demand coming from floating-rate lending. This works well during stable periods; however, during stress events, as utilization curves shift, borrowing rates can skyrocket. Sharp interest rate hikes force some borrowers to exit or deleverage, making the overall credit market inefficient.

In fact, DeFi money markets have solved a problem that traditional credit cannot: near-instantaneous borrowing through collateral.

But one issue remains unresolved: you cannot know your debt cost before the loan ends.

This is precisely where many products are currently focusing their efforts: shifting toward fixed-rate, fixed-term credit products. In such a market, lenders earn a fixed yield, clearly knowing how much their deposits will generate; borrowers also know exactly what they will pay.

Demand for these markets can be broadly categorized into three types of participants:

Term-matching borrowers: Funds, treasuries, RWA issuers, and basis/carry trading desks need debt maturities that align with asset durations, redemption windows, or strategy cycles.

Certainty-seeking borrowers: Users engaged in perpetual leverage loops, leveraged yield farming, and traders may not care about exact maturity dates but require stable borrowing costs to prevent margin compression.

Lenders/curators: Vaults, market makers, and allocators want to autonomously choose terms, collateral, and returns rather than passively accepting outcomes dictated by utilization.

Early iterations of fixed-rate lending faced three major issues:

Liquidity fragmentation: Fixed-rate markets slice liquidity by maturity, rate, collateral, and term, making matching significantly harder than in a single floating-rate pool.

Inability to exit early: Once a loan period begins, lenders struggle to exit before maturity unless secondary liquidity, withdrawal channels, or another buyer exist. This isn't an issue in floating-rate lending.

Cold-start problem: Lenders are reluctant to lock up collateral without earning yields just to wait for a counterparty to appear.

As more institutional capital enters, along with more complex strategies like perpetual leverage loops, the user base has evolved, driving growing demand for fixed-term markets. One of the main issues in on-chain lending is floating-rate uncertainty; with fixed-rate lending, users know their yields and costs from day one. Furthermore, it enables a better user experience, as protocols are forced to directly price terms, collateral quality, exit liquidity, and refinancing risk.

In this article, we will examine the designs adopted by several established floating-rate lending protocols, including Morpho, Jupiter, and Kamino. Collectively, these three hold $6.83 billion in active loans and, armed with the above awareness, have recently entered the fixed-rate and fixed-term markets.

Morpho Midnight and Tenor Finance

As a veteran protocol in floating-rate lending, Morpho launched Morpho Midnight in July. It is an intent-based zero-coupon bond lending protocol where lenders and borrowers express their intents, and their positions are represented as Debt Units (representing an obligation to repay one lending token per unit before maturity) and Credit Units (representing a claim on repaid lending tokens). Midnight's solution makes loans tradable, providing term flexibility and predictable underwriting for institutions. Interest rates are determined by the traded prices of fixed-term Credit Units and Debt Units between borrowers and lenders.

In Midnight, lenders and borrowers publish "quotes" without locking funds, instead expressing borrowing or lending intentions at specific prices, maturities, and collateral allocations within designated markets.

Funds are only called upon at settlement (match), solving the cold-start problem. Lenders only deploy capital after a match is executed, improving capital efficiency. This also helps attract more liquidity, as the Morpho team stated:

"By allowing users to earn floating rates on protocols like Morpho Blue, you eliminate the opportunity cost typically incurred while waiting for quotes to be matched, and create more incentive to post quotes, increasing the total liquidity available to users."

Another challenge fixed-rate markets face is fund fragmentation, as each maturity, collateral type, and rate band could become an independent market. In Midnight, funds aren't tied up during the intent phase, allowing users to post cross-market quotes: "Since the same funds can be quoted across multiple markets simultaneously, the total liquidity a single market maker can provide to users = available capital × number of markets."

Since its launch in July 2026, active loans on the Midnight market have reached $3 million. Although still small, the team expects this to change soon because "it also inherits Morpho's existing network effects and ecosystem. For example, Morpho vaults currently hold over $4 billion in capital. Once the vault adapter is released, these funds can begin quoting on Morpho Midnight and play a crucial role in building deep liquidity."

The most interesting problem Midnight solves is early exit. In older or less liquid fixed-term markets, borrowers and lenders often have limited exit options before maturity. Midnight improves this by making positions fungible: lenders can sell Credit Units, and borrowers can buy Debt Units to reduce outstanding debt.

While Midnight can be understood as the underlying architecture for fixed-rate loans, an access layer has already been built on top of it: Tenor Finance. DeFi Frontier refers to Tenor as "HIP-3 for Midnight."

Tenor essentially inherits all functionality from the base layer Morpho Midnight and builds additional features on top:

Auto-renewal and fallback options: Tenor introduces position auto-renewal to prevent liquidations upon expiry. It utilizes independent keepers to roll loans into new fixed-term tenors before maturity. If no fixed-rate match is found, it can seamlessly fallback to the floating-rate pool on Morpho Blue.

On-chain OTC protocol: Tenor enables users to request quotes and broadcast customized over-the-counter offers. These quotes can be shared with whitelisted counterparties, allowing direct negotiation.

Organizational tools and access controls: Tenor provides role-based permissioned organizational accounts for institutions. Through such accounts, they can deploy custom, access-controlled credit markets that restrict who can borrow or lend based on compliance or KYC requirements.

Tenor reduces expiration friction by adding auto-renewal and fallback options, allowing fixed-term positions to roll over more smoothly as long as matching liquidity exists or fallback conditions are met. With customizable features, it is more institution-friendly; in the long run, the team anticipates the platform will be used by users with "asset managers on one side and enterprises on the other."

Jupiter Offerbook

Jupiter Exchange's Jupiter Offerbook entered public beta in June 2026, roughly coinciding with the release of the Morpho Midnight whitepaper. Jupiter Lend, launched last year, was Jupiter's first attempt at entering the lending space with a floating-rate product. Now, through Offerbook, they are moving into the fixed-term market.

Offerbook is an intent-based lending protocol characterized by the absence of price-based liquidations, supporting fixed-term lending for long-tail assets.

Loan terms on the platform are short, typically ranging from 1 to 30 days. At maturity, if the borrower fails to repay, the lender directly claims the collateral, avoiding liquidations. This market allows the use of any long-tail collateral, whether NFTs, RWAs, or any asset lacking active price discovery, as long as the lender is willing to underwrite. This is a unique approach because it replaces continuous price-based liquidation with maturity-driven collateral transfer and helps create specialized markets for assets that were previously hard to support.

On Offerbook, users can post intent for lending or borrowing requests, which appear in the application; when quotes are accepted, liquidity gets matched. Since users only commit upon acceptance, they can freely deploy capital elsewhere until the matching order executes, solving the cold-start problem. This creates opportunities for both lenders and borrowers to earn yields while searching for matches that perfectly align with their terms.

Since its launch, active loans on Jupiter Offerbook have reached $450,000. While their model is unique, proving its market viability and generating demand is difficult, as its scalability is constrained by lenders' willingness to directly underwrite collateral.

Kamino

Kamino recently published the whitepaper for its fixed-rate lending protocol. Instead of building a standalone fixed-rate market, it adds fixed-rate reserve pools directly inside Kamino Lend. The advantage of this layout is distribution capability: borrowers see clear term structures, while lenders can quote specific rates and terms without fully exiting the floating-rate system, making fixed-rate lending a supplementary feature.

Each reserve pool on the platform is defined by interest rates and terms: for example, borrowing USDC at different rates and terms. All these varying rates and terms form a grid.

Through this grid, Kamino enables borrowers and lenders to express desired trade positions across two dimensions: price and time. Borrowers post borrowing intents, specifying collateral, size, maximum rate, and term. Lenders post conditional liquidity, specifying the rates, terms, and amounts they are willing to provide. The grid serves as the execution layer: borrowers pull available fixed-rate liquidity from predefined combinations of rates and terms.

Lenders don't match directly but instead quote on a structured grid of predefined rates and terms (e.g., 4.5% for 1 month, 5% for 3 months, etc.), building visible term structures and yield curves for different assets. Leveraging Kamino's infrastructure, borrowers can post intents waiting for matching liquidity or directly pull available fixed-rate liquidity from the grid. Furthermore, if liquidity permits, Kamino can automatically roll loans to the next term, similar to Tenor; if no fixed-rate liquidity is available, it can fall back to floating rates. This resolves maturation issues and supports loan continuation, reducing the need for borrowers to manually manage each expiry.

For exits, lenders must use a withdrawal queue. If a lender cannot exit immediately due to deployed liquidity, they enter a first-in-first-out queue and get repaid when loans in that reserve expire. This design ensures a lender's maximum wait time is capped by the reserve's term.

Although matching occurs peer-to-peer, funds are not idling. They continue earning yields from the floating-rate reserves, helping to address the cold-start problem.

Conclusion

Fixed rates do not eliminate any risks exposed by floating-rate lending over the years, but they make debt costs explicit.

This is exactly what DeFi credit has always lacked.

Floating-rate pools are powerful because they make borrowing instantly accessible, but they compress everything into a single utilization curve. In contrast, fixed-rate markets allow borrowers to price for term, lenders to select term and collateral risk, curators to allocate capital across terms, and applications to package more predictable credit products. We are already beginning to see preliminary iterations of predictable credit products, such as Aave's Stable Vaults launched in July.

This is important because DeFi lending is expanding. It now supports perpetual lending, basis strategies, treasury management, RWA-linked assets, and consumer-facing applications. These users need more than just liquidity: they need clear and fixed financing terms.

We expect competition in this space to intensify, with more novel solutions emerging to scale fixed-rate lending.

Current adoption rates remain relatively low, with floating-rate lending still dominating the market, but the goal is to enlarge the pie, as these products can serve many use cases that current DeFi lending cannot address.

Moreover, these products aim to solve issues faced by early protocols in the field, and they benefit from stronger distribution capabilities since corresponding floating-rate lending products are already mature. For instance, capital in floating-rate markets can be quoted in fixed-rate markets while still earning yields and maintaining efficiency.

As these products mature, we should see quite a few strategies previously impossible to execute, as well as new flywheels in the lending sector.