Volatile interest rates are a constant challenge for DeFi borrowers. A single spike in borrowing costs can quickly erode the profitability of many on-chain strategies. Hyperdrive’s Fixed Borrow addresses this pain point by helping borrowers effectively “lock in” a portion—or all—of their borrowing costs at a fixed rate. Below, we explore how Fixed Borrow works, why it’s important, and how it’s essentially a Short position under the hood.

Why Fixed Borrow Matters

When users open variable-rate loans on DeFi lending markets, their interest costs can rise dramatically if utilization rates climb or market conditions shift. This volatility can create serious problems for:

• Institutions and portfolio managers needing to hedge rate uncertainty.

• Advanced DeFi traders using leveraged strategies that rely on stable borrowing costs.

• Long-term investors who prefer predictable interest payments over the term of their loans.

Step-by-Step: Using Fixed Borrow to Cap Your Borrow Rate

A borrower who is paying a variable rate in a lending protocol (e.g., Morpho) can open a Fixed Borrow in Hyperdrive. By doing so, they pay a fixed cost upfront to earn the supply rate from that same lending market, offsetting partially or totally their borrowing cost.

1. Open a borrowing position

   Imagine you borrow on Morpho’s USDe/DAI market at a variable rate. The rate you pay can rise if utilization in the market increases.

   Morpho loan: 10,000 DAI borrowed at 14.81% annual rate.

   No hedge: You would pay 1,481 DAI in interest over one year.

2. Pay a fixed cost upfront

   Using Fixed Borrow in Hyperdrive, you pay a one-time upfront fee (in this case,11.08% of the borrowed amount). This effectively “locks in” your borrowing cost at that level.

   You pay an upfront cost of 11.08% (1,108 DAI).

   After paying this cost, you effectively have 8,892 DAI left to use as you wish in DeFi. However, your coverage (the hedge) still applies to the full 10,000 DAI.

3. Offset your borrowing costs

   By opening this Fixed Borrow position, you earn the variable supply rate on the full 10,000 DAI from the lending market, offsetting the interest you owe on Morpho.

4. Protect against rate spikes

   If the variable borrow rate climbs above 14.81%, the supply rate generally goes up as well. This means your Fixed Borrow position earns more, compensating you for higher borrowing costs and keeping your net borrow rate close to the upfront fee you paid.

5. At maturity

   Once the Fixed Borrow position matures, you’ve accrued variable interest on 10,000 DAI. That interest helps reduce or offset what you owe on your Morpho loan. Your net borrowing rate effectively stays near the fixed rate you paid upfront.

Three Hypothetical Scenarios

Scenario 1: Variable Rate Stays at 14.81%

• Interest earned via Fixed Borrow: ≈1,481 DAI (10,000 × ≈14.81%).

• Upfront cost: 1,108 DAI.

• Net benefit from Fixed Borrow: 1,481 - 1,108 = 373 DAI in one year.

In this case, although you owe 1,481 DAI in interest to Morpho, your Fixed Borrow position earns you the same 1,481 DAI in interest. Your only real cost is the one-time 1,108 DAI payment, effectively capping your net borrowing rate at 11.08%.

Scenario 2: Variable Rate Rises to 17%

• Interest earned via Fixed Borrow: ≈1,700 DAI (10,000 × ≈17%).

• Upfront cost: 1,108 DAI.

• Net benefit from Fixed Borrow: 1,700 - 1,108 = 592 DAI in one year.

Now your Morpho loan costs 1,700 DAI in interest. However, you also earn 1,700 DAI from the Fixed Borrow position, completely offsetting the increased loan cost. Again, your only net cost is the 1,108 DAI upfront fee, keeping your effective borrowing rate around 11%.

Scenario 3: Variable Rate Drops to 10%

• Interest earned via Fixed Borrow: ≈1,000 DAI (10,000 × ≈10%).

• Upfront cost: 1,108 DAI.

• Net benefit from Fixed Borrow: 1,000 - 1,108 = -108 DAI in one year.

In some cases, the average borrowing rate over the full term may end up lower than the fixed rate paid upfront. If variable rates drop instead of rising, the supply rate earned from Fixed Borrow will also decrease, reducing the hedge’s effectiveness. As a result, the borrower may end up paying more than they would with a standard variable-rate loan.

Important: Closing a Fixed Borrow position does not automatically repay or close your original variable-rate loan on Morpho. You remain responsible for settling that debt separately.

Fixed Borrow is Essentially a Short Position

In practice, a Fixed Borrow position leverages the same mechanism behind Shorts:

• Shorting hy[Tokens]: By “going short” in Hyperdrive, you pay a fixed upfront cost and acquire the variable yield on the entire hy[Token] principal.

• Offsetting your borrow cost: This variable yield you gain in Hyperdrive can directly counterbalance the variable interest you owe on your loan.

Closing a Fixed Borrow Position

The fixed rate’s duration is tied to the underlying Hyperdrive market. Your rate protection will stop once your position expires, at which point you can open a new Fixed Borrow position under the new market conditions to continue protecting your borrow rate.

Just as with Short positions, you can close a Fixed Borrow early. You may get back a portion of your opening costs, depending on current market conditions. Your underlying loan will not be affected, but it will no longer have any fixed borrow coverage.

Key Advantages of Fixed Borrow

• Predictability: Plan your borrow strategy without worrying about massive rate spikes.

• Flexibility: Choose your term length; close early if conditions change.

• Simplicity: Hyperdrive automates the offset by allocating the supply yield to your Short position.

• No middleman: Transactions are transparent and settled on-chain.

Conclusion

Hyperdrive’s Fixed Borrow is a powerful innovation for DeFi borrowers who desire predictability without sacrificing the agility that on-chain markets provide. By functioning as a Short position in the Hyperdrive ecosystem, Fixed Borrow taps into variable yield streams to offset a portion—or all—of your borrow costs. This means you can lock in a rate ceiling on your loan, mitigating one of the biggest risks in DeFi: unpredictable variable interest rates.

For institutions, portfolio managers and individual traders alike, this capability opens new doors for advanced risk management and cost control. As the DeFi ecosystem continues to evolve, being able to convert volatile borrowing rates into something more stable can be a game-changer.

Get access to Fixed Borrow by clicking here. Since opening a Fixed Borrow is effectively a Short position in Hyperdrive, it also earns Hyperdrive Miles.

Short traders receive 1 Mile per $1 per X on the Shorts’ multiplier per year, with rewards weighted by position duration.

All open Shorts earn Miles from Feb 1 – Apr 30. Stay active to accumulate Miles and secure a stake in the new token—5% of the total allocation goes directly to Miles holders. Search for your address and check your allocation here.

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