Messari report: Is the Q3 DeFi “Old Cannon” Compound sent by COMP by mistake okay?
Note: The original author is Ryan Watkins, the following is a full text compilation.
Introduction to Compound
Compound, launched in September 2018, is a leading interest rate agreement built on Ethereum, enabling users to lend and lend assets from the collateral pool without authorization. It uses an interest rate model based on the ratio of loaned assets to algorithmically set interest rates for these assets, which is called utilization. Compound launched its V2 protocol in May 2019, which introduced additional assets, as well as functions such as a separate risk model and smart contract gateway for each asset. In April 2020, Compound replaced the protocol administrators with community governance, authorizing COMP token holders to control the protocol. In June 2020, Compound began to distribute COMP to users through a groundbreaking liquidity mining plan, retaining 42% of the total supply of COMP, which will be distributed to users in the next four years.
Compound Market-Macro Overview
After the market collapse in May and the subsequent economic slowdown, all indicators fell across the board, and activity rebounded sharply at the end of the third quarter of 2021. By the end of the quarter, Compound’s outstanding loans and deposits had reached a record high – if it hadn’t been for the withdrawal of approximately $3 billion from the Compound market after the COMP allocation error on September 30, this figure would have been even higher.
Outstanding loans increased by 57% this quarter, as the market recovered after the crash and depositors hope to gain more leverage again. An important driver of this growth is the increase in compound market liquidity in the past six months, which in itself has caused interest rates in all markets to fall to the lowest levels in history. Between rising collateral values, more favorable market conditions and attractive borrowing costs, borrowers returned in droves in the third quarter. Not surprisingly, most of these borrowing activities are denominated in USDC and DAI.
Including incentives for COMP borrowers, interest rates hit 0% when the market trough in July. It wasn’t until the second half of the quarter that interest rates began to rise as the utilization rate of Compound’s most popular borrowing market, USDC and DAI, increased.
As the market recovers, token prices rise, and as activity increases, new deposits are chasing higher returns. Unpaid deposits increased by 48% this quarter. W ETH , USDC, and DAI contributed the most to the growth in the third quarter, although the impact of USDC and DAI was underestimated in the final figures for the quarter due to the aforementioned withdrawal on September 30.
With the establishment of compound market liquidity, depositors now receive the least interest in Compound history. Although there are subtle differences in the situation in each market, the yield of stablecoins has rebounded substantially this quarter after reaching a low point in July.
This trend of depositor growth surpassing loan growth may be best reflected by the total utilization rate of Compound. Since the beginning of 2021, as depositors flooded the Compound market with liquidity, the utilization rate dropped from 58% to 38%, a 20% drop.
The historically low interest rates also caused Compound’s interest income in the first quarter of more than a year to be lower than the previous quarter. Although loans increased by 57% this quarter, interest income fell from US$96 million in the second quarter to US$78 million in the third quarter, a 19% decline. This mainly reflects the reduction in interest rates on DAI and USDC loans for most of the quarter. DAI and USDC are the biggest drivers of interest income.
Although Compound does not directly implement charges, it implements a “reserve factor”, which is the percentage of interest paid by the borrower, which can be used for governance or as an insurance against default by the borrower to protect all suppliers. The reserve factor varies from asset to asset. DAI’s reserve factor is the highest among all stablecoins on the platform (the most borrowed asset on Compound), at 15%. For this reason, DAI is the largest contributor to this form of agreement revenue, contributing nearly 50% of the agreement revenue. Therefore, with the borrowing rate of DAI and other stablecoins at historically low levels, despite the strong loan growth, agreement income fell for the first time in more than a year, from 11 million U.S. dollars to 9 million U.S. dollars, a decrease of 17%.
Despite the strong growth in loans and deposits, the amount of borrowings (disbursements) and deposits also fell sharply this quarter. Considering that activity only picked up at the end of the quarter as market conditions heated up, this is not surprising.
Similarly, this quarter’s liquidation volume dropped sharply, reaching its lowest level in more than a year. Considering that the volatility in the first half of the quarter was relatively small, and the market volatility in the second half of the quarter was one-way, after the extreme market volatility in the second quarter, the settlement volume in the quarter dropped from $333 million to 27 million. The dollar is not surprising.
Finally, one of the key drivers of all these activities, and the reason that finally started Compound market growth in June 2020, the COMP token incentives also declined during the quarter. This was driven by the lower COMP price after the May crash. Including the token rewards paid to depositors and borrowers, the interest generated by Compound has not exceeded the token rewards it paid.
Compound Market-Micro Overview
On the whole, the third quarter is a quarter with relatively small changes in the Compound market parameters; except for the LINK market, no changes have occurred in other markets. However, Compound added four new mortgage assets during the quarter, including MKR , AAVE, SUSHI and YFI. Below we will outline Compound’s five largest markets.
In the third quarter, USDC became Compound’s largest loan market and the largest driver of loan growth this quarter, increasing from US$1.1 billion to US$2.4 billion, an increase of 101%. This far exceeded the deposit growth in the quarter, and the utilization rate rose from 50% to 85% at the end of the quarter. This resulted in the USDC market’s interest rate rising sharply from 2.7% at the beginning of the quarter to 7.6% at the end of the quarter.
Despite the $1.3 billion loan repayment after the COMP allocation error on September 30, USDC still accounted for 43% of all Compound loans by the end of the third quarter.
DAI was the second largest driver of loan growth this quarter, from 1.6 billion US dollars to 2.1 billion US dollars, an increase of 27%. Similar to USDC, this growth rate far exceeds the deposit growth rate this quarter, and the utilization rate at the end of the quarter has risen from 69% to 83%. This also caused the interest rate in the DAI market to rise from 3.4% at the beginning of the quarter to 4.7% at the end of the quarter. Compared with USDC, DAI’s interest rate curve is slightly favorable, which results in lower interest rates at a certain level of use.
On September 14, 2021, Compound Proposal 059—a proposal to compensate users affected by the unexpected increase in the price of DAI on Coinbase Pro to $1.30 on November 26, 2020—was passed. A total of 6,817,798 DAI from the 16.4 million DAI reserves in the market at that time were used to compensate users (see the governance section for more details).
WETH is Compound’s largest outstanding deposit market and the biggest driver of deposit growth this quarter, increasing from 2.5 billion US dollars to 5.5 billion US dollars, an increase of 119%. About 40% of the increase was due to the price of ETH rising from $2,275 to $3,000 during the entire quarter, an increase of 32%.
ETH accounts for 39% of Compound’s outstanding deposits.
In the third quarter, the situation of USDT was basically similar to that of DAI and USDC. Outstanding loans increased by 89% during the quarter, from US$341 million to US$645 million. Similarly, the utilization rate at the end of the quarter rose from 57% to 86%. This also caused the interest rate in the DAI market to rise sharply from 3.0% at the beginning of the quarter to 5.6% at the end of the quarter.
During the quarter, WBTC deposits increased from US$1 billion to US$1.8 billion, an increase of 78%. Similar to ETH, about 45% of this increase was driven by the price of BTC rising from $35,047 to $43,825 throughout the quarter, an increase of 25%.
Governance & important events
COMP allocation error
On September 30, members of the Compound community reported that after the implementation of Proposal 062, there was an abnormal activity in the distribution of COMP, which was about the division of the distribution of COMP rewards. In the next few days, an address called drip() on Compound’s Reservoir, triggering 202,472.5 COMP (approximately $68 million) to be sent to Compound Comptroller. According to Yearn’s core contributor Banteg, about a quarter of COMP may be depleted, although after this transaction, the exact amount of COMP depletion has not been confirmed by the Compound Lab team.
After the COMP allocation error, the community passed a proposal to temporarily prohibit the distribution of COMP rewards. This change will prevent further COMP assignments until the correct logic is restored.
September 27, 2021-Split COMP reward distribution and bug fixes (Proposal 062)
On September 16, 2021, Compound Proposal 062-proposed to change the logic of the Comptroller, so that each market has two different COMP allocation rates-the borrower (compBorrowSpeeds) ratio and the supplier (compSupplySpeeds) ratio. This change enables governors to change the ratio and more effectively incentivize, develop, and maintain the market. The proposal also includes a bug fix for the distribution of COMP rewards.
September 16, 2021-Dynamic Risk Parameters (Proposal 061)
On September 16, 2021, Compound Proposal 061 – a grant to Gauntlet for continuous market risk management to optimize yields, capital efficiency and reduce depositors’ losses – was passed. Supported risk parameters include collateral coefficient, liquidation coefficient, loan upper limit, reserve coefficient and liquidation incentives. As part of this collaboration, Gauntlet will also build a risk dashboard and API for the community to provide key insights into risk and capital efficiency. This dashboard will focus on the system-level risks of Compound and the market risks at the individual collateral level.
September 16, 2021-Whitelist of addresses for submitting proposals (Proposal 060)
On September 16, 2021, Compound Proposal 060—establish a whitelist of contributor addresses, and these contributors will be able to submit Compound proposals regardless of the number of COMP entrusted to them—passed. The whitelist will be managed by the multiple authentication of the community. The proposal will maintain the 65,000 COMP threshold as a good spam defense, but will reduce the burden on core contributors so that they have enough COMP to entrust them to make proposals.
September 14, 2021-Compensation Plan 2 (Proposal 059)
On September 14, 2021, Compound Proposal 059-a proposal to compensate users affected by the unexpected increase in the price of DAI on Coinbase Pro to $1.30 on November 26, 2020-passed. A total of 6,817,798 DAI out of the 16.4 million DAI reserves in the market will be used to compensate users. This amount was determined by applying an 8% liquidation penalty to 85,222,475 DAI repaid on November 26, 2020. The proposal was made after the first compensation plan proposal for the liquidation event on November 26, 2020 was rejected.
August 24, 2021-Turn Guardian into community multi-signature (Proposal 057)
On August 24, 2021, Compound Proposal 057 – a proposal to transfer the ownership of “Suspend Guardian” from Compound Labs to Community Multi-Sig – passed. The proposal aims to further decentralize and ensure the security of the Compound protocol. The suspension guardian is an emergency function used to suspend supply, lending or liquidation in the Compound market. Multi-Sig requires 4 out of 6 signers to approve any transaction, currently including @TennisBowling, @arr00, @blck, Compound Labs, Dharma Labs (@0age) and @jared.
August 16, 2021 – Increase in collateral (Proposal 056)
On August 16, 2021, Compound Proposal 056-a proposal to set initial collateral coefficients for recently supported assets-was passed. This vote enables LINK, MKR, AAVE, SUSHI and YFI to be used as collateral for Compound. The initial collateral ratio was set as: Chainlink (LINK) 50%, MakerDAO (MKR) 35%, Aave (AAVE) 50%, SushiSwap (SUSHI) 40%, and yearn.finance (YFI) 35%.
August 2, 2021–Add AAVE, SUSHI, YFI (Proposal 054)
On August 2, 2021, Compound Proposal 054 – a proposal to add AAVE, SUSHI, and YFI as supporting assets to Compound – was passed. The initial parameter settings are as follows. The reserve factor for each market is 25%, the upper limit of AAVE’s borrowing is 60,000, and the upper limit of YFI’s borrowing is 1,500.
August 1, 2021–Add MKR (Proposal 053)
On August 1, 2021, Compound Proposal 053-a proposal to add MKR as a backing asset to Compound-was passed. The initial parameters of MKR are set as follows: a collateral factor of 0%, a reserve factor of 25%, and a borrowing limit of 25,000 MKR.
July 12, 2021-Lower the proposal threshold to 65,000 COMP (Proposal 052)
On July 12, 2021, Compound Proposal 052—a proposal to lower the threshold of governance proposals from 100,000 COMP to 65,000 COMP—was passed. The proposal was made after Compound governance moved to its new governance contract, Governor Bravo, in March. Governor Bravo has introduced many new ways to modify the governance process for the Compound community, including the ability to change the threshold of proposals. The proposal is inspired by the observation of many CAPs (Compound Autonomous Proposals). Even with clear community support, it is difficult to reach the threshold of 100,000.
July 12, 2021-Contributor funding: Getty Hill (Proposal 051)
On July 12, 2021, Compound Proposal 051-a proposal to create a mobile COMP grant for Getty Hill as the coordinator of the Compound Agreement price gift-was passed. In the past 6 months, Getty Hill has been working hard to improve Compound’s oracle system. He has coordinated Compound Proposal 047, a months-long effort to strengthen Compound’s price feedback. Getty applied for funding for his previous and future efforts to coordinate oracle development.
July 5, 2021–Close the abandoned market to save gas (Proposal 050)
On July 5, 2021, Compoun Proposal 050-a proposal to reduce the cost of obtaining COMP from multiple markets and allow abandoned markets (SAI, REP) to be liquidated-was passed. The proposal optimizes the claimComp function. By combining all rewards into one transfer, the gas cost of claiming COMP from multiple markets at a time is greatly reduced.
Compound Finance COMP rewards
On August 2, 2021, “getty” published the idea on how to better build the community and distribute the COMP of the Compound fund bank on the forum. He proposed five ideas, among which the three most popular ideas are as follows:
- Separate the COMP rewards of the supplier and the lender-transfer the rewards to the supplier to better distribute the COMP and increase the liquidity of the agreement (this was passed as a separate proposal).
- Expand the size of the funding program-establish a full-time team to run the program and play a more active role in the development, while increasing the budget.
- Compound protocol usage fee reimbursement-start a project to help pay for fees related to the use of Compound to promote user growth
Deploy COMP on Arbitrum and Optimism
On July 5, 2021, “phosoup” published a protocol development idea on the deployment of COMP on Arbitrum and Optimism on the forum to make retail transactions cheaper. In response, Robert Leshner stated that he has contacted the Arbitrum team to add COMP as a supported asset, and believes that the community will be able to directly add COMP to Optimism through the bridge interface after the launch. In the developer conference call on September 8, a consensus was reached around a suggestion that the upgradeable COMP token on Optimism is deployed by Compound governance, and governance can directly upgrade the L2 token proxy contract. The initial function of L2 COMP will be a simple ERC20 function set, which will be controlled by the Optimism gateway to mint and burn.
Overview of funded projects
Since the Compound Funding Program (CGP) started in April, more than $750,000 has been allocated to more than 30 grantees. The committee funded a variety of things, including open source dashboards, analysis, hacking activities, and research. When the grant project ended in September, project leader Larry Sukernik expressed his views on what worked and what was not. What worked was a reasonable but generous funding scale, adding milestones to the funding, and betting on the actors. What does not work is that everyone is expected to apply for funds without guidance after the project starts, and promises to complete the turnover within 2 weeks. The funding team will use the experience gained from CGP 1.0 to design a better CGP 2.0.
Below are some of the most important grants by size since June.
ETH Global “Hacker Currency” Hackathon-USD 37,000
CGP is the top sponsor of the ETH global “Hack Money” hackathon. It also gave out $12,000 for bonuses and prizes for the hackathon.
Messari publishes research aimed at an audience of institutional investors. As part of the funding, Compound will be integrated into Messari’s research portal. Messari will also release 4 in-depth research reports on the Comound, including quarterly reports, to outline the status of the Comound agreement to the stakeholders of the Comound.
Rabbit Hole integration-USD 50,000
Rabbithole sends “protocol tasks” to users with the purpose of increasing the use and development of the project. As part of this grant, Rabbithole hopes to send tasks to users to provide and borrow assets on Comound. In the future, Rabbithole will send more complex tasks to its users (for example, protocol improvements).
Powerful Compound Dashboard-20,000 USD
As part of the second batch of funding, the Paperclip Labs team started work on an independent, open source dashboard to display various data on Compound. The team again began to make this dashboard more powerful. Based on community input, the team will add more data sources to the dashboard.
STATION is creating a peer-to-peer network centered on self-expression, contribution and value. STATION is solving these problems, creating profiles for individuals to express their work and discovering others, creating terminals for organizations (DAOs and agreements) to establish a central hub to attract and attract newcomers and contributors.
At the end of the second quarter of 2021, Compound Labs announced Compound Treasury, a product designed for companies and financial institutions that want to enter the cryptocurrency interest rate market. The company worked with Fireblocks and Circle to create a product that allows organizations to access USDC interest rates on Compound without worrying about complex issues related to cryptocurrencies, such as private key management and cryptocurrency to fiat currency conversion. The product guarantees a fixed deposit interest rate of 4% per year. Compound Treasury will bring more dollar liquidity to Compound and may make lending rates more attractive.
In order to prepare for more and more multi-chain worlds, on December 17, 2020, Compound Labs released a White Paper on Compound Chain-an independent blockchain, intended to serve as the infrastructure of the cross-chain interest rate market. Three months later, Compound Labs announced a prototype based on the document called Gateway-a Substrate-based blockchain managed by the holders of COMP tokens on Ethereum. Gateway’s goal is to provide users with the ability to borrow the native assets of another chain (ie Ethereum) with collateral from a different chain (ie Solana). Gateway will also introduce a new stable currency “CASH”, which is Gateway’s native account unit, created by the agreement through lending, similar to MakerDAO’s DAI creation. All interest on Gateway is earned and paid in U.S. dollars, using CASH.
In short, Gateway uses a connector contract called Starport as its core mechanism to connect and transfer value between different chains to achieve blockchain interoperability. Starports exists as a contract on a peer-to-peer ledger (such as an Ethereum smart contract) and has the ability to lock assets until they are released by the Gateway validator node.
Since March 1, Gateway has been operating as a testnet, connected to the Ropsten testnet of Ethereum.
Although the third quarter had a slow start against the backdrop of the economic slowdown in the summer, growth resumed in the second half of the quarter, bringing many indicators to record highs. Like most financial services, the Compound protocol always exhibits a certain degree of cyclicality in the process of continuous growth and adoption. The past nine months of 2021 is a proof.
The Compound community has many things to look forward to in the coming quarters, including the upcoming launch of Compound Chain, which is a key pillar of Compound’s multi-chain strategy, and Compound Treasury, which is a key driver of institutional adoption. Similarly, as the cryptocurrency market continues to heat up, Compound may continue to benefit from increased demand for leverage. All eyes will be on the fourth quarter.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/messari-report-is-the-q3-defi-old-cannon-compound-sent-by-comp-by-mistake-okay/
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