Compound Updated Review (Ethereum)

in #compound9 months ago


This is an updated review to a previous review that I had published around 7 months ago. Since the writing of that review, there have been some under the hood changes to Compound that have made it much more flexible, whilst being relatively transparent to the user.

Compound is currently one of the featured dApps on State of the Dapps (also found on Steem as @stateofthedapps) which are compatible with the My Ether Wallet (MEW) interface for the Ethereum blockchain. Currently standing at #210 in the listing of dApp rankings across multiple blockchains (Profile here).


Screenshot 20191105 13.24.05.png

On the basic use and driving rationale behind Compound, very little has changed since my earlier review. Compound remains on the main dApp platforms to provide liquidity and lending/borrowing services to users on the Ethereum blockchain.

As you can see, at the moment, there is a great deal more liquidity providers (lenders) in comparison to borrowers, which means that the interest rates are going to be a touch in the lower range. It is incredibly strange that ETH is the largest pool in the market, as it is also one of the LOWEST interest rates! Personally, I think your ETH is better off doing something else rather than providing liquidity here.

On the borrowing side, the Stablecoins (DAI and USDC) are the most requested and sought after assets for loans... and thus attract the highest interest rates for the lenders.

Screenshot 20191105 13.24.08.png

What I find especially interesting is the fact that crypto assets are attracting a very low interest rate in comparison to the stablecoins, this seems to reflect the sentiment that over a long term, the crypto assets will appreciate... thus being able to finance the original loan relatively easily.

As you can see from the above screenshot of the various assets available for lending and borrowing, the crypto assets attract a less than 1% return whilst the stablecoins attract a much healthier return at around 4%. Likewise, Wrapped Bitcoin is also attracting a slightly higher interest rate, reflecting a larger demand in comparison to supply... all of which point perhaps to an expectation in a general rise in altcoins as BTC/DAI/USDC are the trading pairs for most of these coins. However... who really knows?!?!?!?

Screenshot 20191105 13.11.39.png

Unlike Uniswap, there are no user templates for listing your own tokens or creating your own market. Listings are kept on a tight leash, whilst all the borrowing and lending is handled via an Ethereum smart contract. Using an Ethereum interface like MyEtherWallet (MEW) or Metamask is required... also keeping in mind that sending transactions (including signing smart contracts) costs Gas in the current Ethereum ecosystem.

Compound v2

Screenshot 20191105 13.12.05.png

Around May 2019, v2 of Compound went live on the Ethereum mainnet, bringing with a completely redesigned way of representing your stake in the liquidity pool. It meant that all the users of the v1 Compound had to re-sign contracts and migrate to the v2 version... a temporary and once off annoyance, but it was more than worth it.

The major change was the introduction of cTokens... with each liquidity pool having a different denominated cToken. When you added liquidity to the lending pool, you would receive in return a number of appropriate cTokens at a particular exchange rate. This exchange rate grows slowly over time to represent the growth of the liquidity pool via the interest rate charged to borrowers.

This meant that cTokens became like other ERC tokens on the Ethereum blockchain and could be traded independently of the liquidity pool. In other words, you could trade your stake in the liquidity pool in exchange for goods and services... rather than just have the assets completely locked up and unable to be used without withdrawing them completely.

This is a model that Uniwap also uses... well, actually implemented first in it's unique take on a decentralised exchange (DEX). It is a much superior model to the completely locked and non-tradable first version of Compound... and it is interesting to see that the idea of exchangeable stake tokens start to be rolled out across a wide number of other lending platforms.


So, as far as updated review go... this was pretty uneventful. Compound worked pretty well in it's first incarnations (which was reviewed by me here)... a simple fire and forget dApp platform for liquidity providers... and an easy place for borrowers to find a large liquidity pool with known interest rates and conditions.... don't fix what wasn't broken.

However, that said, there was the problem that liquidity providers would have their assets locked up completely during the duration of the pool provision. This was a little bit undesirable, and didn't really make for a huge improvement over traditional loan models. The upgrade of the Compound dApp to V2 and the introduction of cTokens solved this problem, with the cTokens (the ownership of pool stake) being freely tradable as an ERC-20 token on the Ethereum Blockchain. This allowed liquidity providers to continue to leverage their locked up assets, via the cToken which would be the proof of ownership of those assets.

Can Compound improve further?... quite possibly, but right now, I believe that they have taken a wise decision to limit the number of asset pools and to improve access to liquidity providers to locked up assets. However, the larger exchanges have started to roll out lending and borrowing protocols, time will tell if these giants will step over the decentralised model or if dApps like Compound will survive and prosper.

5 out of 5 stars!

Useful Links

Compound Website
Compound dApp

Compound FAQ
Compound WhitePaper
Compound GitHub

Compound Discord
Compound Medium
Compound Twitter

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