The market value broke into the top 20 within a week of its launch, and Compound developed the DeFi ecosystem through borrowing and mining
Comments from the Pao Finance Blockchain Research Institute:
Comments from the Pao Finance Blockchain Research Institute:
2020 can be regarded as the first year of DeFi. Especially recently, the total collateralized assets of DeFi have continued to rise to nearly 1.5 billion US dollars, and the total market value of DeFi projects has continued to hit a new high of nearly 6 billion US dollars. Among the DeFi projects, Compound is the most popular. In just one week, its token COMP rose from $20 to $300, an increase of more than ten times.
The reason why Compound is popular is mainly because it has opened the "borrowing is mining" model, and its incentive direction is consistent with the project's ecological growth goals. Through this model, users can not only meet their own loan needs, but also get token rewards. As a result, the platform has obtained sufficient liquidity.
However, users need to pay attention to: the current amount of funds borrowed is not generated by real demand, and there is a certain FOMO sentiment; the current market circulation of its tokens is low, which cannot represent the real market value of the project.
Compound is different from the traditional lending market. It is not a peer-to-peer market, but a market with liquidity pools. This model makes it closer to the traditional bank lending model. At the same time, its operation is based on smart contracts, which makes it have the characteristics of no threshold, openness and transparency, and market-determined interest rates.
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Compound speaks for DeFi
The concept of DeFi finally exploded in 2020. It is generally understood as decentralized finance, that is, a financial system built on a distributed network, especially represented by some well-known financial projects in the Ethereum ecosystem. Compound is currently a leader in the DeFi field. project.
Compound is a decentralized asset mortgage protocol based on Ethereum. It belongs to the DeFi type of DApp. Users can lend or borrow on the platform by mortgaging their digital assets.
At present, Compound supports multiple currencies, including ETH, USDT, DAI, BAT and other mortgage loans of 9 assets. The developer has built multiple fund pools at the same time. Each fund pool corresponds to an ERC20 pass. Assets are used to borrow tokens in the fund pool, and the lending rate is determined by the relationship between supply and demand.
Because DeFi products run on the blockchain network, all product codes are open source, and anyone can view the specific content of the DeFi products you use in the blockchain browser, so its core advantage lies in the user There is no need to trust any intermediary organization, and it has certain advantages in preventing malicious inflation of the subject.
The disadvantage of DeFi products is that the code security requirements are very high, because once there are code bugs or logical loopholes in DeFi products, hackers can also use the loopholes to attack it openly. The smart contract security company Zeppelin conducted a test on the Compound platform in 2019. A security audit. The results of the audit report did not show that Compound has serious vulnerabilities, but this security audit exposed some common risks in DeFi projects, including the risk that platform assets may be stolen and manipulated by hackers, and unreasonable Vulnerabilities in smart contracts may allow users to generate malicious attacks.
With the popularity of the DeFi concept, the financial industry has become a key application direction of blockchain technology. Finance is the core of the modern economy. It can be divided into four categories: monetary and financial services, capital market services, insurance, and other financial industries. The corresponding financial intermediaries are banks, securities companies, insurance companies, and trust companies. Compound corresponds to It belongs to the bank lending business, and the market scale is huge.
As of June 23, 2020, Compound has become the king of asset lending protocols in the DeFi field. Its locked assets are close to 600 million U.S. dollars, and its total loan amount is as high as 300 million U.S. dollars. Its token COMP has grown from 20 U.S. dollars since its launch on June 16 It rose to a maximum of 306 US dollars. The rise of COMP attracted many users to learn about decentralized lending products, and made many people understand DeFi. It can be said that it has become the spokesperson of DeFi.
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Compound project features
The two most common models in the field of DeFi lending are one is the mortgage lending model represented by MakerDAO, and the other is the lending model with a capital flow pool represented by Compound. Because this business is very similar to a bank, it is also called Compound is a "DeFi bank".
Different from banks, Compound is based on Ethereum smart contracts, which can be queried and used by anyone. Compound sets interest rates for each token according to an algorithm. Both borrowers and lenders get what they need on Compound, and Compound only charges a part of the interest as Handling fees are expected to achieve self-regulation and code as law in the future.
In Compound, developers build multiple asset pools at the same time. There is only one type of ERC-20 token in different pools. Users mortgage the encrypted assets to borrow tokens in the pool. The lending rate is determined by the relationship between supply and demand. The advantage of this model is that the algorithm of the interest rate depends entirely on the relationship between supply and demand in the market, and all lending transactions are directly implemented on the agreement rather than peer-to-peer transactions.
Like MakerDAO, Compound has also set up a set of rules for risk prevention and liquidation in order to maintain the stable operation of the system.
The Compound protocol imposes a rule that each account must have enough balance to repay the loan amount, called the mortgage rate. Each account cannot do anything that will make the "balance/loan amount" lower than the "mortgage rate", such as borrowing more money or withdrawing the balance of the mortgage.
If a user's collateral, divided by the amount they borrow by their line of credit, falls below the collateralization ratio, then their collateral can be purchased and sold for the current market price minus the liquidation discount. This mechanism will motivate arbitrageurs in the system to quickly reduce the shortage of loan assets that borrowers cannot repay, thereby reducing the risk of the agreement.
Compound is out of the circle with "borrowing is mining"
What really made Compound known to the public is that the distribution mechanism of its governance token COMP adopts the "loan-to-mining" model. Users can obtain COMP tokens by performing mortgage lending operations on the Compound platform.
The official distribution rules are as follows, more than half of the total of about 10 million COMP is allocated to users who use Compound:
That is to say, about 4.23 million COMP tokens will be produced through the method of "borrowing and mining". Currently, 2,880 COMP tokens are produced every day. Due to the launch of this model, many users have been attracted to "mining", which is also the reason why Compound has been out of the circle recently, directly reaching the top of the market capitalization list of DeFi projects.
It should be noted that the amount of funds borrowed on the Compound platform has also been greatly increased due to the "borrowing is mining" model. The real demand for loans may not be so much. At present, due to the high entry threshold, more ordinary users I will choose to use traditional lending products to meet my own needs, so the current value of COMP is not the most realistic and reasonable valuation.
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Compound's "borrow-to-mine" model is not sustainable
Although Compound has brought a lot of traffic and funds to itself and the entire DeFi ecosystem, we believe that this kind of gameplay does not have a sustainable support for currency prices, similar to various "behavior is mining" models as early as two years ago It has already existed, from the earliest FCoin exchange to various imitators later, all have been beneficiaries of this model.
But looking at their endings, almost without exception, when early users get enough benefits and start to quit, user enthusiasm gradually cools down, people will find that there are not so many real user needs, this kind of demand created out of thin air because of benefits , will also dissipate because of the benefits. Although the founder of Compound has always emphasized that COMP is not a means of financing or an investment tool, there is indeed FOMO sentiment in the actual performance of users and the market.
Ethereum founder Vitalik Buterin tweeted his thoughts on the Compound project on June 21.
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Summary of Benz Finance:
We believe that Compound, as a decentralized lending protocol, has the following advantages:
1. Universal use, no user discrimination, all users face the same market interest rate, and there will be no better preferential treatment for users with large funds in traditional banks.
2. In traditional lending platforms such as banks and P2P platforms, funds are stored on the platform and there is a risk of being abused, so they need to be supervised, while Compound does not need to be supervised by regulatory agencies, and the flow and address of all funds are open and transparent , whose behavior is supervised by code instead of humans.
3. Compound is governed by the community, and COMP tokens are the warrants for its governance. All users use COMP tokens to vote to decide Compound’s governance proposals.
While having some advantages, Compound also has some disadvantages:
1. First of all, the "borrowing is mining" model launched by Compound. Although this model has brought great benefits from the current point of view, it has truly brought great exposure and traffic to DeFi products, but the It is listed as a defect because it is like a stimulant. After a short period of glory, there is a high probability that it will bring some negative effects to itself, such as how to support the value of COMP tokens in the future, and how to increase user demand in a reasonable way.
2. Compound has certain limitations, and the future expectations may not be as good as people imagined. Because it is currently running on the Ethereum network, the efficiency of Compound also depends on the performance of Ethereum, and the currently supported assets are all ERC20 tokens, the usage scenarios are too single.
3. The common defect of DeFi projects is code security. This problem requires the project party to have a strong enough technical reserve and strict enough product testing. It is necessary to cooperate with third-party code audit companies to conduct security audits on product code and logic to protect users. Asset security. So far, Compound has not had any security-related issues.
