Compound Research Analysis: Betting on Gateway to be the next bombshell

On December 17, 2020, Compound Labs released a white paper on Compound Chain (now known as Gateway). Gateway is a Substrate-based blockchain, and has been running on the beta network since March 1 of this year. Functionally, Gateway is similar to the Compound protocol currently running on Ether, with the following exceptions.

币世界-Compound研究分析:押注Gateway成为下一个爆炸点

Gateway offers the ability to borrow any asset from any blockchain

Interest earned is paid in USD (stablecoin), using Gateway’s local unit CASH.

Gate’s risk engine is more robust. The risk rating is based on the volatility of the assets you use as collateral and the assets you borrow, with less volatile assets having higher capital efficiency.

Background

Compound is a leading cryptocurrency market protocol and one of the pioneers of liquidity mining, a liquidity steering mechanism that ignited the DeFi boom of the past 1 year. Compound allows users to borrow and lend assets from a pool of collateral and set rates algorithmically using a supply and demand based interest rate model. The utilization rate (U) for each market (a) unifies supply and demand into one variable.

币世界-Compound研究分析:押注Gateway成为下一个爆炸点

The market utilization rate is then used to calculate the borrowing rate. A general example for a given money market is shown below.

Compound Research Analysis: Betting on Gateway to be the next bombshell

While many popular DeFi resources tend to categorize agreements such as Compound, Aave and MakerDAO as “lending” agreements, they are more accurately referred to as “interest rate” agreements. In contrast to traditional lending, Compound requires that the loan be over-collateralized to ensure that the agreement is solvent if the borrower fails to repay his or her loan. As a result, there is no underwriting, no credit creation, and no real legal obligation. While these agreements do not mirror traditional lending, they have proven popular and meet an unquestionable need in the decentralized financial ecosystem.

Compound Research Analysis: Betting on Gateway to be the next bombshell

Cross-chain Lending

Gateway is a standalone blockchain whose entire architecture is built around cross-chain interoperability and provides similar functionality to THORChain in many ways. Gateway users can upload backed assets from various independent blockchains through its connected “peer” chain system. Each peer chain has a contract called a “starport” that can lock and unlock assets on Gateway.

Compound Research Analysis: Betting on Gateway to be the next bombshell

Source: Compound

Once uploaded to Gateway, users can borrow and lend assets between different blockchains. For example, they can use assets on Solana to borrow ethereum assets to their ethereum wallet, or use polka assets to borrow Celo assets to their Celo wallet, etc.

Replacing the encapsulation model

The main goal of the Gateway blockchain is to enable blockchains to interact directly with each other without token encapsulation. While encapsulating Bitcoin also enables the interaction of assets across chains, less than 1% of Bitcoin is currently ported to Ether due to the problem of untrustingly bridging Bitcoin to the Ether blockchain. Considering Bitcoin’s market cap of over $1 trillion, any way to increase Bitcoin access to DeFi is important.

To encapsulate tokens, DeFi users would need to use a third-party intermediary such as BitGo or Ren, but doing so would lose control of the private key. Gateway offers a unique solution for this, allowing Bitcoin users to interact with other chains without relying on a third party. The growth of WBTC has demonstrated that there is already demand for Bitcoin on Ether, but the idea that Bitcoin can be bridged in a cross-chain, non-custodial way is likely to appeal to Bitcoin maximalists.

Compound Research Analysis: Betting on Gateway to be the next bombshell

Although it will be some time before Bitcoin is available on Gateway.

Compound Research Analysis: Betting on Gateway to be the next bombshell

A cross-chain solution, not an extension solution

Compound may transition to Gateway, which will help mitigate Ether’s high gas fees, but Gateway is a cross-chain tool, not an extension tool. This runs counter to most other important DeFi projects that use L2 scaling solutions rather than cross-chain interoperability solutions.

On March 31, Aave announced that it will scale with Polygon, Ether’s sidechain. Since Polygon launched on Aave the week of April 18, Aave’s TVL has flourished and now surpasses Compound.

Compound Research Analysis: Betting on Gateway to be the next bombshell

While Compound has big ambitions for the cross-chain future, it will only be clear once Gateway is launched whether building an entirely new blockchain is worth it compared to adopting an L2 solution like other major protocols. One thing that prompted Compound to choose to focus on cross-chain bridging on L2 extensions on Ether is the current lack of consensus on a single L2 extension solution. While Aave may be using Polygon, the largest DEX on Ether, Uniswap, has chosen to adopt the Optimism extension in its latest V3 upgrade. If two DApps choose two different L2 scaling solutions, they may not be able to combine with each other.

Cross-chain access to stable coins

Much of Compound’s success stems from the demand for stablecoins. In April, nearly 90% of Compound’s marketplace revenue came from stablecoin demand, while a small percentage of its revenue came from other ethereum-based assets available in the protocol. This is largely due to the fact that stablecoins are the most popular lending asset.

Compound Research Analysis: Betting on Gateway to be the next bombshell

While most stablecoins previously circulated on the ethereum network (nearly 70% as of the end of January), most Tether now circulates on Tron due to ethereum’s high gas fees. Blockchains such as Polkadot and Solana will soon be available on Gateway, but chains like Tron will eventually follow. As of April 30, the total supply of stablecoins currently stands at $80 billion and is still growing. Given that Tron’s network accounts for almost the entire remaining stablecoin market after Ether, a Tron starport could give Compound a greater advantage over competitors like Aave.

Compound Research Analysis: Betting on Gateway to be the next bombshell

CASH

CASH is Gateway’s local unit of account used to pay for transactions. It is created by borrowing, just like MakerDAO’s Dai. The total amount of cash in circulation will always equal the amount of cash debt. The initial CASH is set at $1, but can be used to track other indices through management decisions. While CASH primarily serves to protect the Gateway function, it also has the potential to be a significant competitor to DAI and USDC.

All CASH held by users and verifiers will receive an increasing interest rate (Yield) that is incremented by an interest rate index. This rate is calculated each time the interest rate changes, which occurs when the user/verifier casts, redeems, borrows, repays or liquidates CASH. The cost of borrowing CASH must always be greater than or equal to the interest rate to ensure that CASH is not borrowed and held unproductively. CASH debt is incremented by the borrowing index (Cost) as follows.

Compound Research Analysis: Betting on Gateway to be the next bombshell

Consensus and Governance

Unlike Ether, Gateway is a Proof of Authority (PoA) network, run by validators approved by Compound governance. Verifiers in a PoA network are selected based on reputation and trust. For block consensus to work properly, there is a maximum of 1/3 faulty nodes and block determination occurs when at least 1/3 of the nodes agree that a block is part of the chain. Validators receive a portion of the interest paid by the CASH borrower (Spread) from each block they write, as well as a transaction fee for asset transfers. The verifier fee may be shared with the COMP token holder for revenue sharing.

The PoA blockchain could be very beneficial for Gateway as it could enable institutions such as banks and centralized exchanges to become validators. Considering that one of Gateway’s main focuses is to prepare for the adoption of central bank digital currencies (and the expansion of stablecoins created by investment banks), these institutions may be incentivized to become validators.

One important issue that still arises with the PoA network is that it increases the degree of centralization. If the COMP community eventually decides that the PoA consensus mechanism is not the best fit for the blockchain due to the increased centralization, they can vote to change it to other mechanisms such as PoS through governance decisions. But for the foreseeable future, Gateway will be centralized.

COMP token holders will govern Gateway through the Compound governance system on Ether, which relays governance operations to the Ether Starport, where Gateway verifiers receive instructions. This can generate creation conditions and update the initial set of verifiers, backed assets, supply caps, collateral factors and CASH rates.

While Gateway will initially be a blockchain dedicated to creating cross-chain interest markets, the COMP community may choose to integrate other DApps on the blockchain, such as DEX, once it is operational. Overall, the new right to govern Gateway will greatly enhance the rights of COMP token holders.

Compound Research Analysis: Betting on Gateway to be the next bombshell

Conclusion

Compound is one of the most important interest rate protocols and has been proven to make big moves time and time again. With an eye on cross-chain interoperability, Gateway has the potential to revolutionize cross-chain lending. By adding starports, CASH and a new PoA blockchain that will be managed by COMP token holders, Gateway will also introduce Compound to entirely new markets outside of “lending”, such as cross-chain bridging and stablecoin issuance. Once on the mainnet, time will tell if Gateway’s vision can be realized.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/compound-research-analysis-betting-on-gateway-to-be-the-next-bombshell/
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