Compound Aims To Create Money Markets For Cryptocurrency Holders

FinTech, Innovation, Investing, News | April 10, 2018 By:

Albert Einstein once called compound interest the eighth wonder of the world. “He who understands it, earns it,” said Einstein. “He who doesn’t, pays it.”

Fast forward to today. San Francisco startup Compound is developing a protocol for cryptocurrency money markets that will allow digital currency clients to frictionlessly earn interest on cryptocurrency assets.

The Ethereum protocol establishes money markets for cryptocurrencies with algorithmically set interest rates based on the supply and demand for ERC-20 tokens. When it goes live, users will supply tokens to a money market to earn interest without trusting a central party or can borrow a token (to use, sell, or re-lend) by using their balances in the protocol as collateral. Compound token-holders maintain the protocol and earn the economics of the system.

The ability to seamlessly hold new assets (without selling or rearranging a portfolio) will give new powers to dApp consumers, traders and wallet developers.

Compound is now in the final stages of testing the protocol and expects it to lead to a working money market by the year’s end. Founder Robert Leshner, who’s also co-chair of San Francisco’s Revenue Bond Oversight Committee, talked with Block Tribune about the project.

BLOCK TRIBUNE: You’re testing your project right now. How’s it going so far?

ROBERT LESHNER: So far it’s going phenomenally. We have a version of our protocol that’s running on ethereum Testnet and we’re interacting with a number of different crypto-funds and developers who are right now testing out the protocol and interacting with sample money markets. We’re going to be testing for another four to six months before we deploy to main net and have a full release of our protocol but right now the early testing is actually extremely fruitful.

BLOCK TRIBUNE: Do you have any interim results you can share?

ROBERT LESHNER: You know, this is personal opinion, but I think any interim results don’t mean anything yet because the assets are simply Testnet assets, anyone can create unlimited value on a Testnet for themselves, you know Ether isn’t worth anything, it’s free and so numerically I don’t think the results apply as much, but we are seeing usage from a number of developers who are testing our protocol.

BLOCK TRIBUNE: Do you have any projected interest rates or yields to discuss, or no?

ROBERT LESHNER: Yeah, actually after this call I’ll send you over a snapshot of what our interest rates look like today just from on the Testnet, I mean these are all [inaudible 00:01:40] interest rates but it gives a good representation of where we think the market will exist and will settle.

BLOCK TRIBUNE: Okay, fair enough. Walk me though how this works once it’s up and running.

ROBERT LESHNER: It’s actually extremely simple. The way it works is anybody at any time can supply a token into its money market. So we on the Testnet set up five different money markets, one for ether, one for ZeroX, one for Basic Attention Token, one for Dragonchain and one for OmiseGO.

Anybody can simply supply a token or an amount of tokens into any of these markets, so when they do, they’re going to earn an interest rate that is essentially the best possible interest rate. Every single supplier of assets earned a spot interest rate.

This interest rate fluctuates in real time according to supply and demand and so just like in traditional markets like for US dollars, the interest rate is variable, it changes, in the US it’s set by, generated by the Federal Reserve, which propagates throughout the entire eco-system. In our money markets, the interest rate is algorithmically derived and so the interest rate is a function of supply and demand for an asset based on how many people are supply it and how many people are borrowing assets and so that interest rate fluctuates. It works very similarly to how a central bank adjusts an interest rate in a lot of ways.

BLOCK TRIBUNE: The algorithm, what will it be monitoring specifically?

ROBERT LESHNER: It monitors the relationship between supply and demand. Those are both directly set by members of the community how interact with the protocol. When users supply assets, we track the quantity of assets supplies, when users borrow assets, we track the quantity of assets borrowed. Those are the two perimeters that decide the interest rate and it’s the relationship between supply and demand.

BLOCK TRIBUNE: This is a protocol. You’re depending on adoption by a number of sites, correct?

ROBERT LESHNER: We are dependent on adoption by users and so far we’ve been speaking to a number of different crypto head firms and crypto investors and we see a large amount of early interest in adoption but it is a marketplace like any other and it requires that we have people who are supplying us assets and require us and there are people who are desiring to borrow assets for these money markets to invest.

BLOCK TRIBUNE: Okay, you as the creator, how are you going to be making money off this?

ROBERT LESHNER: We are charging a small and variable fee in each of our markets. Over time, we think that the fee structure will look a lot like traditional financial products, in which we’ll be earning a few basis points on large sums of money. We have the ability to have a very small amount of fee in each market.

BLOCK TRIBUNE: Okay, if all goes well in this and it’s a success, how will it transform the market?

ROBERT LESHNER: We think there’s going to be major impacts to the market. First of all, right now, most markets don’t have the ability or don’t have any adoption in the borrowing of assets for use in short sale and one of the things we’ve seen is that the markets are because investors can only buy or not buy an asset and they don’t have the ability to borrow an asset, which is what’s required to sell it short, most assets are over-valued.

A lot of crypto assets and especially [inaudible 00:05:52] tokens are trading in valuations that defy all logic. You have projects that haven’t even launched that are worth 500 million dollars, simple because people have no mechanisms to be able to short these projects and so by opening up borrowing markets we anticipate that it will create more efficient prices for the asset that we support. Second, we think it’s going to provide a tremendous amount more stability in the form that when people have an interest rate that’s positive or an asset by supplying then they’re less incentivized to sell the asset or to move it around. Right now, most crypto assets have philosophically a negative yield in that it costs you time and security risks to hold the asset. You don’t earn anything in time by holding most assets and it’s difficult and cumbersome and costly to you as an individual to store assets really anywhere.

If it’s not an exchange of the risk of the exchange going down, we see this making time, if you’re doing it personally, you don’t only have the risk of theft of [inaudible 00:07:00] but you have the cost of security procedures that you put in place and so when there’s freely earn-able interests on crypto, the likelihood that people hold it for longe periods of time goes up. There’s actually value to holding it in ways that don’t exist today and so we think it’s going to create a lot more stability for the markets that we support. We think prices will have less volatility and will be more fair.

BLOCK TRIBUNE: Ether has been withering lately. Does that effect any of your plans going forward?

ROBERT LESHNER: It doesn’t. We’re agnostic to the prices of any assets. We are most optimistic about new assets being created that aren’t as volatile, such as government currencies being [tokenized 00:07:52] we’re huge fans of the MakerDAO project, and the base point project because we think that this is where a lot of the growth and crypto tokens will come from, our less volatile assets, but the price movement of anything doesn’t matter to us. We’re excited for the day when there’s more stability and there’s assets that aren’t as price volatile.

BLOCK TRIBUNE: Do you have ICO plans?

ROBERT LESHNER: No, we do not. We’re different from most projects in this space, I personally think most ICOs are cash grabs on the part of the team and I think that they’re projects being built for the wrong reasons, mostly to raise money. Our approach is actually completely different, which is we’re looking for launch protocol and not to have an ICO. 

BLOCK TRIBUNE:  What is the difference between what you are creating and a lot of the peer-to-peer networks that are popping up all over the place. 

ROBERT LESHNER:  One of the things that’s important to highlight about the Compound protocol is that interest rates are algorithmic, it doesn’t require a counter-party to a trade. We’ve seen 30 to 40 lending products pop up and all of them are peer to peer systems and this is the first system that is going live that the protocol users can interact with directly without having a counter-party, so it means that you can instantly supply or borrow from a market without relying on any other users wanting to take the opposite side of that activity. Means you don’t have to negotiate interest rates and duration and collateral and risk perimeters, you can simple choose to interact with the protocol when and how you see fit.