Basis points, spreads, and how lenders think about price

A basis point is one one-hundredth of a percent. 100 basis points equals 1 percent, 25 basis points equals 0.25 percent, and 1 basis point equals 0.01 percent. The shorthand is "bps," pronounced "bips."

The word exists because credit pricing happens in fractions of a percent, and saying "0.25 percentage points" out loud, repeatedly, in a meeting, gets old fast. Saying "25 bips" doesn't.

A spread is the gap between two rates, expressed in basis points. Lenders quote almost everything as a spread over a reference rate: SOFR plus 350, Treasury plus 275, base rate plus 425. The base rate moves with macro conditions. The spread captures everything else, which is mostly the lender's view of the borrower's risk.

How lenders actually price a loan

Loan pricing has two layers stacked on top of each other.

Layer one is the base rate. In US dollar credit, that's usually SOFR (Secured Overnight Financing Rate), the post-LIBOR benchmark. In stablecoin lending it might be a protocol-driven utilization rate, or a short-term Treasury yield. In crypto, it's whatever rate represents the cost of money in that ecosystem at that moment.

Layer two is the spread. The spread bundles together everything specific to the deal: how risky the borrower is, how liquid the collateral is, how long the loan runs, how much work the lender did to underwrite it, how much capital the lender wants to earn back.

Add them together and you get the all-in rate. SOFR at 5.30 percent plus a spread of 350 bps gives an all-in rate of 8.80 percent. If SOFR drops to 4.00 percent and the spread holds, the all-in rate falls to 7.50 percent. The borrower's credit didn't change. The macro did.

This decomposition is why lenders quote spreads instead of all-in rates. The spread is the part the lender controls and competes on. The base rate is given.

Why spreads tell you what the lender actually thinks

Every spread is a priced opinion. When a lender quotes 350 bps over SOFR for one borrower and 700 bps over SOFR for another, they're telling you the second borrower is meaningfully riskier in their model, by roughly twice as much in compensation terms.

That information is more legible than a raw rate. If both loans happen to price at 8.80 percent because SOFR shifted between the two underwritings, the spread tells you what stayed constant: the lender's view of the deal.

Spreads also widen and tighten as the market moves. In a tight credit market with capital chasing few deals, spreads compress. In a stressed market where capital is scarce, spreads widen. The change in spread is often more informative than the change in the base rate, because it reflects what private credit lenders, specifically, are willing to take on, separated from the macro forces that move benchmarks for everyone.

This is why credit professionals talk in basis points. "The market widened 50 bps last quarter" carries more information than "rates went up half a point," because it specifies which part of the rate moved and what that movement says about risk appetite.

Where this shows up in institutional crypto-backed lending

In on-chain credit markets, the same decomposition applies. A vault might quote a target return that breaks into a base utilization rate plus a credit spread for the specific collateral being lent against. When crypto-collateral lending gets bundled into a diversified pool alongside real-world credit, the curator allocates across deals partly on spread. The question is which exposures earn enough basis points above the floor to justify the risk and the operational cost.

For deeper reading, see Credit risk math.