Buying and selling crypto remains a risky venture, no doubt. What could be riskier than that? A crypto loan market.
Compound Labs, a startup in San Francisco, is banking on just such a thing catching on. Whether you’re hodling, or flipping tokens every day, the company believes there’s a place for you to earn money on its Ethereum-based “money market protocol.” But only if your crypto wallet is thick enough.
The company launched its web3 interface for its protocol last week. Compound’s CEO Robert Leshner says it’s intended for “sophisticated market participants.” Individual users, financial institutions, and decentralized applications can use it to loan or borrow ether and Ethereum-based tokens. The protocol’s algorithm sets publicly available and non-negotiable interest rates for each token, which appears to be part of its unique appeal.
And while much has been made about the new “quick and easy way to borrow and short-sell ether,” there’s quite a bit more to Compound than that.
You could be forgiven for thinking this is just another way for crypto trader bros to turn a quick token. Leshner has previously labelled “almost every crypto asset” as “bullshit and not worth anything” (and who could blame him, really?), and he tells Decrypt that Compound is definitely geared, at least in part, toward the “prosumer trader” who’s looking to bet that Ethereum is overpriced.
Get past the trader speak, and the short-selling aspect of Compound is pretty easy to understand. Say you’re a trader who’s certain ETH won’t hold its current price. You can use Compound to borrow some ETH and sell it quickly at that price. Then, sit back, relax and wait for the price to tank. When it does, buy it back, repay your lender his ETH, and count your profits (minus interest and Compound’s 10 percent cut).
Ethereum doomsdayers can have themselves a romp, great, but what about the true believers supplying the coin?
In August, Compound announced a partnership with 26 “high-frequency trading firms and market makers, OTC trading and lending desks, and multi-strategy hedge funds” that have each committed to $100,000 in tokens to fund the initial lending pool. Compound says it wants to become the “interest-rate layer for token assets,” and the company appears to be flying out of the gates with this kind of coin already in the mix.
These crypto hodlers use the protocol to supply the fund and create a “money market” for each unique ERC-20 token (such as Brave’s BAT, Auger’s REP, and 0x’s ZRX tokens). For as long as these suppliers keep their tokens in the money market, they earn interest at a rate based on the supply and demand of that specific token. (For example, the highest interest-earning token at the moment is BAT at 0.12 percent.)
The idea here is, in a weak market, big money HODLers don’t have much incentive to stay the course. Storage and security costs can add up. So, much like banks incentivize savings to maintain liquidity, Compound aims to incentivize HODLing by enabling their suppliers to earn interest.
The whole thing may sound riskier than hell to the wary whales. Just ask the brothers Lehman what happens when people start playing fast and loose with lending policies. And to be sure, Compound itself cautions that the protocol is “extremely experimental.”
“This is the first public release of the Compound Protocol, and should be considered extremely experimental technology — use of the protocol should occur only after reading the source code for yourself, and making your own determination of it’s safety.”via Compound’s Sept. 27 Medium post
Nonetheless, Compound insists that its money-market participants have little to worry about beyond the inherent risks involved with crypto and, you know, after reading the protocol’s source code.
First, all loans are collateralized—meaning, if you want to borrow some BAT, for example, you’d have to put up one of the other supported assets. Second, the protocol differs from a peer-to-peer exchange, since it’s not entirely decentralized. All of the funds are aggregated and Compound claims to offer its users “complete liquidity.” Suppliers are able to “withdraw their tokens at any time, without waiting for a specific loan to mature,” according to the company’s whitepaper.
While there’s no doubt that the ability to short-sell ETH will have a certain cynical appeal for Ethereum haters, Compound says it plans for its protocol to have a variety of uses. Leshner says Compound will soon list a stablecoin and other additional tokens, and the company’s whitepaper foresees a time when the protocol is used to borrow financing for ICOs (never mind what the SEC may have to say about this) or rent tokens for “computing power” on networks such as Golem.
In a way, by encouraging whales and big money institutions to HODL down the crypto fort, Compound may actually help to grow the ecosystem. And if that doesn’t get your juices flowing, you can always hop on and short-sell shitcoins into oblivion. Compound gets its cut either way.