DeFi platform Compound approves interest rate upgrade in historic vote

DeFi just got a bit more decentralized.

Following Compound’s shift to community governance earlier in April, DeFi bank Dharma submitted the second-ever Compound Governance proposal, which sought to change the interest rate model for DAI exchange.

It marks the first time a major DeFi product has approved an upgrade proposal conceived and developed entirely by users of the protocol and not the core development team or a supporting foundation.

Compound is a decentralized money market that sets interest rates based on supply and demand used to power a variety of DeFi applications. The proposal was submitted on April 27 and passed April 30 with 97% approval. To cast their ballots, voters must own Compound’s COMP tokens, and the largest single voter was Polychain Capital, a Series A investor in the platform.

Before the upgrade, DAI capital suppliers earned no interest until more than 90% of available DAI had been borrowed. Apps like Dharma distribute this interest on deposits to their own platform, a major part of the appeal of using such services. The new model is intended to provide a better user experience to capital suppliers, with minimal impact to borrowers.

Under the approved proposal, interest rates for borrowers will rise on a linear curve to approximately 2% up to 90% utilization, then follow the steeper curve from the previous design with interest rates up to more than 13%. 

“Historically, platforms jeopardize the applications built on top—cutting off access, changing fees, etc. Many startups have been felled by Twitter, Facebook, Google et al changing an API or business model,” Compound founder Robert Leshner told Decrypt.

“Dharma's proposal to upgrade Compound marks the beginning of a radical reversal, and demonstrates the hidden superpower of DeFi and distributed governance; the ecosystem can together control the destiny of the platform. Compound governance proposal 002 demonstrated that the community can upgrade Compound entirely on its own.”

Dharma has been at the leading edge of DeFi innovation in 2020, releasing a targeted L2 scaling spec for their application in March and crypto stablecoin Social Payments to Twitter earlier in April. The recent proposal is another exciting example of how DeFi is rapidly advancing to offer governance, transparency, and returns superior to those offered by traditional financial systems.