(COMP - $452,08) - April 2021
The market for cryptocurrencies and digital blockchain assets has developed into a vibrant ecosystem of investors, speculators, and traders, exchanging thousands of blockchain assets.
Unfortunately, the sophistication of financial markets has not followed: participants have little capability of trading the time value of assets. For blockchain assets, two major flaws exist today:
Borrowing mechanisms are extremely limited, which contributes to mispriced assets (e.g. “scamcoins” with unfathomable valuations, because there’s no way to short them)
Blockchain assets have negative yield, resulting from significant storage costs and risks (both on-exchange and off-exchange), without natural interest rates to offset those costs. This contributes to volatility, as holding is disincentivized.
Centralised exchanges provide for the trading of assets on margin but are limited to certain customers and mainstream assets.
Current peer-to-peer protocols that facilitate loans force significant costs and frictions onto users.
Compound introduces a decentralized system for the frictionless borrowing of Ethereum tokens without the flaws of existing approaches, enabling proper money markets to function, and creating a safe positive-yield approach to storing assets.
Compound is a protocol on the Ethereum blockchain that establishes money markets, which are pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset.
Each money market has interest rates that are determined by the supply and demand of the underlying asset; when demand to borrow an asset grows, or when supply is removed, interest rates increase, incentivizing additional liquidity.
Suppliers (and borrowers) of an asset interact directly with the protocol, earning (and paying) a floating interest rate, without having to negotiate terms such as maturity, interest rate, or collateral with a peer or counter party.
Individuals with long-term investments in Ether and tokens (“HODLers”) can use a Compound money market as a source of additional returns on their investment.
For example, a user that owns Augur can supply their tokens to the Compound protocol, and earn interest (denominated in Augur) without having to manage their asset, fulfill loan requests or take speculative risks.