What is interest rate risk?
Interest rate risk is the possibility that the rate you actually earn or pay differs from the rate you expected when entering a position. This applies to both fixed-rate and variable-rate markets on Fira, though in different ways.
What can happen
Fixed-rate markets (BT/CT positions)
The rate is only "fixed" if you hold the position to maturity. If you exit early, you're selling your Bond Token (BT) on the secondary market at whatever price the AMM currently offers — which depends on current demand, available liquidity, and how much time remains to maturity. You could realize a higher or lower effective rate than your entry rate. In thin markets, the slippage can be significant.
Variable-rate markets
Variable rates are driven by utilization: borrowed liquidity divided by total supplied liquidity. If a large lender withdraws or a wave of new borrowers enters, utilization spikes — and borrowing costs can rise sharply in a short period. There is no cap on how high the rate can go, and rates may stay elevated until conditions normalize.
How Fira mitigates this
Fixed-rate markets concentrate AMM liquidity around reasonable rate ranges to reduce slippage
Variable-rate markets use curator-managed parameters designed to moderate rate volatility
Rate information is displayed clearly in the interface before you confirm a transaction
What you can do
For fixed-rate positions: only commit capital you can hold to maturity if you want rate certainty
For variable-rate borrowing: set rate alerts and monitor your position regularly; have a plan for repayment if rates spike
Treat displayed rates as indicative — they reflect current conditions, not guaranteed execution prices
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