Compound is a DeFi project that enables users to take out loans or provide loans by locking their assets via smart contracts. It was built on the Ethereum blockchain.The amount of interest received by borrowers and lenders is determined by the supply and demand of each Cryptocurrency asset.
Compound provides a decentralized finance protocol built on Ethereum. The platform allows borrowers and lenders to lock their Cryptocurrency assets into the protocol and earn interest rates that are determined by the supply and demand of each asset.
Compound's native token, cTokens, allow users to earn interest on their money as well as transfer, trade, and use that money in other applications. For example, cUSDC has been integrated into the popular DeFi dapp, TokenSet, which allows users to reap the benefits of algorithmic trading.
In late July of 2020, it was announced that Compound would be implementing its own decentralized oracle solution that will support the project’s lending system. Initially, Compound will just use signed price data from exchanges like Coinbase Pro. The solution uses the on-chain Uniswap V2 price feed as as a form of insurance that the data is correct.
How is compound different from traditional finance?
Compound behaves similarly to a bank but it is more easily accessible. To use Compound, users are not required to provide personal and private information. Anyone with an internet connection could sign up for Compound and start interacting with the protocol. All they need is some crypto assets stored on a crypto wallet like Metamask.
In addition, the return rates for Compound are more attractive compared to traditional banks. For example, if you store money in a savings account, it will only generate a measly 0.05% APY. On the other hand, Compound would offer up to 4% APY depending on the assets supplied.
Do note that the higher interest rate offered is due to the additional risks incurred by using the Compound smart contract.
Also known as cTokens, Compound are ERC20 tokens that represent the funds a user has deposited in Compound. When a user deposits ETH or another ERC20 like USDC into the protocol, they get an equivalent amount of cTokens. For example, if a user locks up USDC in the protocol they will recieve cUSD–tokens which automatically earn interest. At any time, cUSDC can be redeemed for normal USDC in addition to the interest paid in USDC.
cTokens were created in two original types: CErc20 and CEther. CErc20 wraps an underlying ERC-20 asset, while CEther simply wraps Ether itself.
As of December 11, 2020, users can participate on the platform with the following currencies: Ethereum, USD Coin, Dai, Tether, 0x, Uniswap, Augur, Wrapped BTC, Basic Attention Token, Sai (Legacy Dai).
Why does COMP have value?
To distribute its operations, Compound is programmed to reward users with COMP tokens.
Anyone who owns COMP tokens can participate in decisions affecting the Software, voting on proposals for the rules that govern the platform’s use.
A COMP holder can also assign their voting rights to someone else to vote on their behalf. This means that someone who is not a COMP holder — like a legal expert — could be asked to vote on behalf of COMP holders when a particular issue arises.
Of note for investors is that new COMP tokens are issued by the network each day. As of 2020, some 2,880 COMP tokens are given out daily to lenders and borrowers, meaning anyone who uses Compound can earn COMP tokens, proportional to the amount lent to the protocol.
On June 15th, 2020 Compound made their governance token called COMP available for distribution. Compound began distributing 1,116,310.81 COMP across ETH, DAI, USDC, USDT, BAT, REP, WBTC and ZRX markets, proportional to the interest being accrued in each market. The proposal, which was passed by the community on June 14th, states:
"Within each market, half of the COMP is allocated to suppliers, and the other half to borrowers. Whenever an address interacts with a Compound market, it receives all COMP earned in that market, should it exceed a 0.001 COMP threshold"
After only a single day of trading the COMP token became the largest DeFI (Decentralized Finance) token by market capitalization overtaking MakerDAO's MKR token after rallying over 60%. On June 16th, 2020 Compound’s market cap hit nearly $740 million. At the time of writing COMP was the 20th-ranked crypto asset overall by market capitalization.
The surge caused the founder of Synthetix, Kain Warick, to admit they underestimated the platform:
"I didn’t see how you could build a strong community without a token to bootstrap it, but even then some kind of value capture was needed, governance was not enough. I can see a very strong community emerging around COMP now given the wide range of people earning it [...] it’s the new lenders flowing in over the next weeks and months that will really make a difference,"
Shortly after the release of the token, the total value locked on Compound rose from $100,000,000 to $600,000,0000. Yield farming followed shortly after, as investors began to see staggering earnings from the governance token. From there, the total value locked continued to grow while maintaining stability. On the weekend of July 10, the token, which had reached over $933 million in loans, jumped an additional $70 million, reaching over $1 billion in loans.
When community governance first went live, the team explained how the total supply of COMP tokens would be allocated. Out of 10,000,000 total COMP, they reserved 775,000 tokens “for the community to advance governance through other means — which will be announced at a future date.” In September 2020, the team explained how those tokens are being distributed to the community:
In June, the team designated up to 500,000 COMP for distribution through Coinbase Earn. COMP tokens will be available through Coinbase Earn until November 2021, at which point Coinbase will transfer all remaining tokens to the Compound protocol’s Reservoir contract .
In September, they sent the remaining 275,000 COMP directly to the Reservoir contract.
In total, 5,004,949 COMP will be distributed to the community and this is over half of the total supply.
In September 2020, the Compound team released the list of actions that were taken since the distribution of COMP began in June:
15 governance proposals were created; 12 were implemented
A new interest rate model was developed by Dharma.io, and deployed for the DAI and USDT markets
The Augur team spearheaded risk management changes for REP, during the upgrade to REPv2
COMP token-holders voted to change the protocol’s price oracle to the Open Price Feed, an open-source project where a set of reporters sign price data which can be posted on-chain by any Ethereum address - and which doesn’t rely on the team
The community built an entirely new feature, market-level Borrowing Caps, to limit risk to the protocol
Autonomous Proposals were created, which allow anybody with 100 COMP to gather support for a Governance proposal
Coinbase Pro announced that they would be listing the COMP token on June 25th, 2020. The listing benefits the whole DeFi scene. Over 10% of the total supply of USDC, the stablecoin created by Circle and Coinbase, is locked on Compound. The amount of Tether (USDT) on Compound is up nearly 8,000% since June 11. The announcement caused the market cap of Compound to shoot around $2 billion dollars. After the announcement, but before the listing, the token price reached an all time high of $371.
In November 2020, when the price of DAI was raised on Coinbase Pro, it caused Compound to liquidate around $100 million, according to LoanScan. This includes the third largest COMP farmer, who was liquidated for $46 million. It appears that a malicious actor may have manipulated the price of DAI on the Coinbase Pro exchange, in order to trick the blockchain via its oracles into thinking that the current price of DAI had shot up. When the blockchain thought DAI had hit $1.30, it figured that many of the loans were undercollateralized and liquidated them.
Centralization and Vulnerabilities
Ameen Soleimani of SpankChain and cybersecurity researcher “samczsun" found that the smart contracts used in the protocol are under the the control of a centralized administrator. The cToken smart contract protocol is under the influence of the address, 0x8B8592E9570E961663 36603a1b4bd1E8Db20fa20, which is governed by a “Comptroller,” that is governed by a “Unitroller” running on the administrator’s address. It is worrisome that the protocol could be taken down by a single point of failure.
Founder Robert Leshner responded by saying:
"On smart contract security, we agree that it’s ‘legit’ but it’s still a constant focus for us, and we’re not going to rest. There are more audits coming, and we encourage the community to participate in ensuring the security of the protocol.”
Robert Leshner is the Chief Executive Officer and founder of Compound. He is an entrepreneur, investor, and tech enthusiast. Additionally, he is a Chartered Financial Analyst, former economist, and the founder of two software startups.
Robert is from San Francisco, California. He has a certificate as a Chartered Financial Analyst, issued by CFA Institute. He received his Bachelor of Arts degree in the field of Economics from the University of Pennsylvania.
Robert Leshner (CEO): Chartered Financial Analyst, former economist, and founder of two software startups.
Geoffrey Hayes (CTO): Maintainer of Exthereum, technology founder of two startups, led Core Services at Postmates.
Torrey Atcitty (Application Lead) : Led mobile development at Postmates, Kahuna, and Aha Mobile.
Calvin Liu (Strategy Lead): Previously analytics at Gusto, advisor to digital currency startups at Promontory, long-time crypto investor.
Coburn Berry (Senior Engineer): Experienced web stack engineer from The RealReal; previously an attorney.
Jared Flatow (Senior Engineer): Diverse background in distributed systems; previously Nokia Research, AdRoll, Caffeine, et al.
Jayson Hobby (Head of Design): Led product design for Coinbase Pro and Coinbase Custody; previously Otto / Uber Freight, agencies.
Jake Chervinsky (General Counsel): Lawyer. Twitter pro. Former litigator and compliance counsel at Kobre & Kim and Baker McKenzie.
Max Wolff (Software Engineer): Open finance enthusiast. Former co-founder of Marble Protocol. Economics at Stanford.
Mykel Pereira (Software Engineer): Full-stack engineer. Former co-founder of Marble Protocol and Haywheel (YC S16).
Kway Ohene (Head of Talent): Experienced team-builder and recruiting lead.
Adam Bavosa (Developer Relations Lead): Previously led developer relations at PubNub. Software engineer. Growth hacker.
Nick Martitsch (Business Development): Previously led business development and fundraising initiatives at Pantera Capital. Economics at UCSB.
Wayne Nilsen (Senior Engineer): Backend engineer. Previously at Poloniex. Quantitative finance derivatives pricing background.
Antonina Norair (Senior Engineer): Blockchain & Backend engineering, formerly at ConsenSys, OTCXN.
Compound raised a $25 million Series A funding round, which was led by Andreessen Horowitz. They also received $1 million in USDC from Coinbase’s “USDC Bootstrap Fund.” Coinbase Pro also contributed to an $8.2 million seed round in 2018.