ON–033: DeFi (Part 2)

Coverage on Aave, Balancer, Compound, Lending Rates, and Set Protocol.

Aug 7, 2020

  • Gas prices have been high on Ethereum over the last few months and this has adversely effected Set Protocol as minting a Set is usually a costly transaction. In saying that, the distribution of Set holders by dollar value is still incredibly healthy with the vast majority of addresses holding anywhere from <$100 to $10,000 worth of Sets.

⑤ Compound

Contributor: Nick Martitsch, Business Development at Compound

  • Assets supplied to the Compound protocol have risen nearly 14x since the launch of the COMP governance token, with supplied assets increasing from $124mm on June 14th to $1.84B at the time of publication. DAI is currently the largest market on the protocol, with $1.1B of supply volume. DAI now represents 62% of all assets in Compound, and marks the first time that any single asset has risen above the billion-dollar mark. ETH makes up 23% of the supply liquidity at $421mm and USDC is next with 9% and $172mm. (Source)

This graph shows a breakdown of which markets have earned the most COMP over time. Early on in the COMP distribution cycle, USDT was the largest market on Compound, as its wide availability and 0% reserve factor made it a popular choice for liquidity miners. After a community vote on June 25th, the reserve factor for USDT was raised to 20% to account for liquidation default risk.

After the USDT reserve factor increase, BAT became the most popular market due to its aggressive interest rate model, and the COMP that would be distributed as a result of the high borrowing APY. A COMP distribution patch was passed through the governance system on July 2nd, which removed the borrowing interest rate from the COMP distribution model and replaced it with the USD value of borrowing demand. This patch led to DAI becoming the largest market in the protocol, due to its lower level of borrow APY at higher utilization rates. (Source)

  • Ownership of Compound has been fully handed over to users of the system (COMP holders). Community members, stakeholders, and developers are all encouraged to play an active role in governance by voting on proposals, delegating their voting power, or creating their own proposals. To date, 18 protocol upgrades have been proposed in the governance system, with 15 passing 2 failing, and 1 cancelled. Below is a summary of the changes that were voted on by the community. (Source)

    • Proposal 1 added support for USDT

    • Proposals 2, 12, 18 updated the DAI interest rate model

    • Proposals 3, 4, 5, 6, 15 deprecated SAI

    • Proposals 7, 10, 11 dealt with COMP distribution

    • Proposals 8, 9 increased the reserve factor for USDT, BAT, ZRX, and REP

    • Proposals 13, 14, 16 sought to increase the WTBC collateral Factor

    • Proposal 17 deprecated REP ahead of Augur V2

  • The table below shows the average economic activity for users of the Compound protocol. By taking the weighted average supply APY (3.18%) and multiplying it by the average supply amount ($55,411), we get an average interest revenue of $1,763 per user. This same basic formula can be applied to the borrowing side of the protocol, where the weighted average borrow APY is 3.0% and the average borrow amount is $31,462, which gives us an average interest expense of $1,887 per user.

    The COMP portion of the economic calculation is based on a market price of $137 on Coinbase at the time of publication. This data can be a good reference point for applications, wallets, exchanges, or custodians who choose to integrate Compound and take a cut of the economics as revenue. For example, a 10% profit margin would lead to $791 of extra revenue per integrated user, per year. (Source)

About the editor: Spencer Noon is Head of Investments at DTC Capital.