Compound Labs

  • Cryptoasset Report
  • April 9, 2019

The Compound protocol is an Ethereum based open-source element of DeFi tooling that enables users to earn interest on their ERC-20 tokens and facilitates over-collateralized borrowing.

Overview

The open-source Compound protocol is built on the Ethereum network and provides users opportunities to earn interest and take out loans on their ERC-20 tokens via their browser – providing Metamask or a similar extension is used. Similarly to other decentralized finance initiatives, the Compound Protocol enables a number of business opportunities for innovative users: users can leverage positions on assets, short suspected overvalued tokens (providing they can sell them elsewhere) and quickly borrow tokens for usage on other platforms without having to wait for a matched order and transaction settlement.

Compound’s CTO has extensive technical competency and experience developing blockchain infrastructure having started building an Ethereum client in the Elixir programming language, called Exthereum; the result of seeking a more complete understanding of the Ethereum protocol technical specifications and also motivation from a perceived inelegance in the entire ecosystem relying on one interpretation (as represented by a client) of the protocol.

Protocol Details

Compound is a decentralized finance initiative aiming to allow money markets to function with algorithmically determined interest rates based on a pool of tokens adjusting in response to changes in supply and demand. A specific type of ERC-20 token (i.e. WETH, Dai etc.) supports each and every money market. Such a pool, the number of tokens it holds, the associated transactions and history of interest rates offered are all publicly auditable. Each time a transaction occurs, a globally stored ‘interest rate index’ (the market specific interest rate history) is updated, taking account of the change in supply and demand including any interest accrued during this time.

Users can withdraw their tokens from the Compound protocol’s smart contracts at any time. When borrowing against a token, should the value of the underlying collateral decrease below the stated Collateralisation Ration (150%), then any holder of the associated asset on the network is eligible to purchase the assets and incentivized to do so with a liquidation discount. For instance, if a user’s supply (in say, WETH) is equivalent to $150, then they must maintain a total value of borrowed assets (WETH, REP, DAI, BAT, 0x) equivalent to $100 or less; else, should the value of the borrowed assets exceed $100 without a corresponding increase in supply, the underlying assets will be sold to a network of arbitrageurs incentivized by a 5% discount.

Sine the Ethereum token is not itself compatible with the ERC-20 token standard, which proliferated after Ether, users must convert their ETH into wrapped Ether or WETH before interacting with the compound protocol. As of the time of writing, the compound web-app featured the following tradable tokens: Basic Attention Token (BAT), DAI, Augur’s REP token, 0x and WETH.

Compound offers 0.22% APR interest paid to users providing the protocol with a supply of WETH; and a 6.67% APR for users borrowing against their supply. Such borrowing is available provided one locks 150% of their requested borrow amount in the associated Compound smart contract; making the protocol similarly expensive from a capital perspective to MakerDAO CDPs. The Compound smart contract has ~30 thousand ETH equivalent locked up as of Feb 24th 2019.

Asset Details

Compound raised $8.2 million in a seed funding round in May 2018 alongside a $0.5 million SAFT raise.