Compound Finance (COMP) has seemingly suffered a token distribution bug after introducing and passing a recent governance vote that addressed rewards distribution, Proposal 62. Shortly thereafter, Compound reported in a tweet that there was unusual behavior regarding COMP distribution following the vote, but that “no supplied/borrowed funds are at risk.”
The funds that are in jeopardy due to the bug sit only in the Comptroller contract, which means that there is a total cap of 280,000 COMP tokens that are at risk. However, that’s still a hefty number, worth over $80M USD at the time of publishing. One transaction was reportedly as high as nearly $30M alone.
Let’s Get Movin’
With governance often comes the lack of immediate action. As Compound Finance CEO and Founder Robert Leshner noted in a tweet discussing the events at hand, “there are no admin controls or community tools to disable the COMP distribution; any changes to the protocol require a 7-day governance process.”
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The Compound team quickly rolled out the initial governance process with Proposal 63 up for review, which temporarily disables COMP distribution rewards while the team and community address the fix for the protocol.
Leshner adds that while Proposal 63 is up for review, “a patch to restart the distribution is in development.” While this gives the team time to address the issue, Proposal 63 does note that all ~280,000 tokens will be at risk.
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While the recent Compound bug showed immediate price impact, buyers quickly came back to market and the COMP token has still showed long-term resiliency. | Source: COMP-USD on TradingView.com
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Leshner has since gone on Twitter asking recipients of mistaken distributed COMP to return it, with the below tweet:
If you received a large, incorrect amount of COMP from the Compound protocol error:
Please return it to the Compound Timelock (0x6d903f6003cca6255D85CcA4D3B5E5146dC33925). Keep 10% as a white-hat.
Otherwise, it’s being reported as income to the IRS, and most of you are doxxed.
— Robert Leshner (@rleshner) October 1, 2021
He took a bit of heat for the tweet, and followed up by stating that it was a “bone-headed tweet / approach” and that his intentions lie in “trying to do anything I can do to help the community get some of its COMP back.”
Smart contract specialist Kurt Barry noted just how costly small errors in code can impact blockchain projects:
Smart contracts are unforgiving of the tiniest errors…COMP bug is a tragic case of “>” instead of “>=” (in two code locations). Two characters, tens of millions of value lost.
— Kurt Barry (@Kurt_M_Barry) September 30, 2021
Truly a tough set of circumstances for the Compound Finance community, however many have shown approval of Leshner’s response.
The move is not the first mishap in the rapidly growing world of DeFi. Last month, the Poly Network suffered a hack that cost over $600M USD. In a bit of a bizarre set of circumstances, the Poly hacker returned most of the stolen crypto back to the network. And in the last week, cross-chain DeFi protocol pNetwork lost over $12M USD in tokenized Bitcoin to attackers.
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Decentralized finance lending protocol Compound has unveiled a new blockchain that will enable cross-chain collateral.
It is the latest move to mitigate expensive operations on the Ethereum network and enable more interoperability in the DeFi ecosystem.
The new Gateway chain, announced on Mar. 2, has been described as a cross-chain interest rate market that allows users to borrow assets that are native to one chain, such as Ethereum, with collateral from another chain, such as Polkadot or Celo. Compound Finance originally announced the platform in December 2020 when it was called ‘Compound Chain’.
Compound aims to alleviate current fragmentation in the DeFi industry across different blockchains with Gateway and has chosen the next-generation blockchain architecture, Substrate, to do so.
Substrate, which also powers the Polkadot network, is a modular framework that enables developers to create purpose-built high-throughput blockchains. Compound founder Robert Leshner explained the choice of blplatform in the blog post:
“We chose Substrate so that we could focus on building application code, instead of inventing consensus algorithms; it’s a modern framework built on a modern language, Rust.”
To complement Gateway, Compound is planning to build ‘Starports’ which would function as on, and off-ramps, to the new blockchain for users to borrow or deposit an asset as collateral. Leshner elaborated that Starports are the “glue” that connects a blockchain to Gateway, and they can be mixed and matched in various combinations for different networks.
Gateway will also have a native unit of value called CASH which will standardized value across various disparate assets and be used to pay transaction fees. CASH will also be earned by liquidity provision and network validators.
Gateway is currently running on Ethereum’s Ropsten network as a testnet, and audits will be carried out before the mainnet launch, though no date was specified for this.
Money markets have been around for ages in the traditional finance world – now the crypto world has one of it’s own called Compound Finance.
Compound is an Ethereum-powered decentralized money market network that allows users to earn interest on deposits and borrow against collateral for interest rates that are based on supply and demand. It does require some technical skill to reap all of the benefits though.
For newer users there are a few handy graphical wallets that can make the process easier.
Join us as we go over the basics of Compound Finance and how to get started earning and borrowing.
Compound Finance: The Basics
You can think of Compound Finance as a big pool of money that operates on a set of transparent rules. Anyone can participate by depositing Ethereum assets like ETH or any compatible ERC-20 token. Because it’s completely decentralized and automated, there are no KYC checks or application rejections. Anyone with an Ethereum wallet can interact with Compound either directly or through a compatible app that offers integration with the platform.
Here’s how it works…
When you deposit crypto into the pool, you immediately start earning interest after each Ethereum block (about every 15 seconds).
The interest you earn comes from people that borrow from the pool and pay a higher interest rate that you earn by depositing.
Unlike with a bank account, deposits made into Compound are turned into a new type of Ethereum token called a C token.
For example, if you deposit USDC, you will receive cUSDC in return – a different ERC-20 asset. cUSDC is designed to proportionally increase in value as interest is accrued in the pool.
Since your deposit is completely under your control at all times, you are free to either cash out your deposit at any time to claim your interest. Or, you can directly sell your cUSD (or other C token) on compatible exchanges.
Borrowing assets on Compound Finance is more complicated than just making a deposit but it uses the same core principals. First, you’ll need to deposit your collateral just like you would to earn interest. All loans on Compound are over collateralized. That means if you want to borrow WBTC for example, you’ll need to deposit a larger amount of another crypto asset such as ETH or DAI. Since you have more on deposit than you are borrowing, depositors have some protection in the event that a borrow can’t or doesn’t’ repay their loan.
Interacting With Compound Finance
There are many different ways to get started using Compound Finance. One popular choice is to use the platform’s native web app. It’s available at app.compound.finance. Once you’re on the site, you’ll need to connect a compatible Ethereum wallet.
The default choices include Metamask, Coinbase, Ledger and Wallet Connect. You can connect either through a browser add-on or by scanning a QR code with a mobile app.
Once you’re connected you can begin interacting with the network and make deposits. Much like with other websites that interact with an Ethereum wallet, you’ll need to approve each transaction separately.
If you’re looking for a more simple and graphical experience, several wallets offer built in Compound Finance integration. One example is Exodus, a highly popular graphical desktop and mobile wallet. Using any recent version of Exodus, simply click on the Compound Finance button.
From there, follow the on-screen instructions to begin earning interest with DAI. While using Exodus is much easier than other options, currently the wallet only supports interest earning deposits with DAI. Other assets are currently not supported. Loans are also currently not supported.
Another choice for those seeking a simpler experience is Argent wallet. Argent now supports Compound Finance and allows a wider array of assets than Exodus. It does appear that Argent also does not currently support loans.
How Much Can You Earn With Compound?
Interest rates for both earning and borrowing on Compound depend entirely on demand. If many people want to borrow an asset, depositors will get higher interest rates. Conversely, if there isn’t much demand from borrowers, interest rates on deposits will be lower. The same is true for borrowers but in reverse.
The current interest rates for supported assets can be found at app.compound.finance, as well as through any wallets or apps that have built-in Compound integration like Argent or Exodus. During our research we found that the best rates for earning interest were for TUSD at just over 17%.
DAI, another stable coin, was trailing behind at just over 5%. However, other big name crypto assets like ETH and Bitcoin (in the form of WBTC, an ERC-20 token) were severely lagging behind and well under 0.20%. Looking at 30-day averages for these assets, these interest rates appear to be well within the normal range.
Comparing these income interest rates to other DeFi apps and platforms, the offerings on Compound are not at all competitive. On the flip side, the amount of interest available for TUSD deposits is top-tier. Interest rates for other ERC-20 tokens were typically between 1% and 5%. This means that Compound Finance may not be the be-all, end-all destination for all your DeFi deposits. Instead, you’ll need to look at the actual income rates and figure out what makes the most sense for your plan.
Interest rates change all the time. Once you’ve made your deposit, you’ll keep earning interest for as long as you hold your C tokens no matter what happens to the rate.
What are the Risks of Using Compound Finance?
Compared to other platforms that are on the bleeding edge of DeFi, Compound Finance appears to be a good choice in terms of trustworthiness from what we can determine. The platform claims on its homepage that it has been fully audited. The California-based company behind Compound also has an ongoing bug bounty program. So far, in its history Compound has not yet been the victim of any hack, theft, or other breach that we were able to find reports on.
One point to consider about Compound is not so much a technical risk but a legal risk. Since the company behind it is based in the US – a place that has been far from welcoming when it comes to crypto projects – it’s hard to say what the future of the platform is in terms of its interactions with major regulatory bodies like the SEC. So far there hasn’t been any friction on this front from what we can tell.
In terms of protection from market volatility, the platform has undergone what looks to be a robust examination by Gauntlet. In a 44-page report, Gauntlet notes that: “…the protocol, as currently parameterized, should be robust enough to scale to at least 3x the current borrow size as long as ETH price volatility does not exceed historical highs.” In other words, it would take an enormous, practically unprecedented black swan event to put Compound at any risk.
As with any DeFi project, it’s important to only invest what you are willing to lose. From our research, Compound looks like a safe bet. Make sure to do your own research and read up on the project before getting involved.
Is Compound Finance your DeFi platform of choice, or do you use something else? Share your experiences with us in the comments below.
Suitably named Opium Finance has released collateralized debt obligation products (CDOs) for Compound Finance’s automated lending markets, Opium Protocol founder Andrey Belyakov told CoinDesk in a phone interview Friday.
Investors can put up the Compound debt token cDai – and soon Uniswap LP tokens – to diversify exposure to DeFi lending markets. Opium’s product pays out structured returns to both a senior and junior risk tranche in exchange. The former tranche offers a 7% fixed return on dai (a collateral-backed stablecoin) at maturity, while the latter pool offers a variable rate paid out after filling up the senior tranche’s return, a blog post shared with CoinDesk states.
As depicted in Michael Lewis’ The Big Short, CDOs are infamous for their role in monetizing the subprime mortgage crisis that spurred the 2008 financial crisis. Warren Buffet even went as far to call CDOs and other derivatives “financial weapons of mass destruction” years before the financial downturn. CDO holders lost out on expected payments when mortgage holders defaulted en masse. Banks that were over leveraged on the then-worthless debt obligations began to default themselves, such as failed financial giant Bear Stearns.
It’s thought the transparent nature of blockchain-based financial applications could limit the downside of using these complex derivatives. Moreover, the risk profile of the average DeFi lending app is vastly different than the reasons CDOs became a household name over a decade ago. DeFi apps have little chance of becoming insolvent due to programmatic liquidation settings. Rather, the risk mostly comes down to software exploits which many poorly put-together DeFi apps experienced this past year.
Belyakov said risk tranching increases the efficiency of capital on lending markets – a poorly understood problem in young DeFi markets he thinks derivatives can help address.
It works as follows: A protocol issues a debt token representing a claim to funds deposited or “locked” on a DeFi app, such as cDai. These debt tokens allow those same deposits to gain exposure again on other markets. However, most DeFi investors let these debt tokens sit idle in wallets, re-invest them as collateral for other loans or put them up for yield farming. The problem is these bets often move in the same direction. Placing debt tokens into Opium’s CDO, on the other hand, acts as a categorical alternative to other forms of capital exposure, Belyakov said.
“What we did was look at the lowest-hanging fruit,” Belyakov said. “And we found that Uniswap LP tokens, Compound cDai and some others are just stored on a wallet; they are not being used as collateral or farming – you don’t utilize this capital.”
The derivative joins other early attempts to protect lenders from the software risks associated with decentralized finance. For example, Saffron Finance launched its unaudited protocol in November while little-known protocol Barn Bridge continues to build out an offering similar to Opium’s. The protocol also released a credit default swap (CDS) product for the tether stablecoin in September.
Opium is also jumping on the governance token bandwagon. The protocol released its opium (OPIUM) token Monday for decentralizing the protocol’s governance structure. The launch was preceded by a premine and a $3.5 million private sale including participation from venture capitalist Mike Novogratz, Galaxy Digital, QCP Soteria, HashKey and Alameda Research, among others.