Academy Industry Analysis Article

AMA Recap: A revisit to exploring DeFi with Compound

2020.05.22

On May 21, we were beyond excited to have Calvin Liu from Compound for an Ask-Me-Anything (AMA) discussion on various subjects including core benefits and main barriers of DeFi, what makes a DeFi project high-quality and how Compound protocol works.

Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications. Calvin, as the Strategy Lead at Compound, is heading up all business development and growth initiatives.

This AMA is divided into two parts after a brief introduction of Calvin, then he was asked to share his opinion on DeFi and its future, followed by an incredibly passionate live Q&A in our group.

Introduction

[email protected]: Everyone please welcome Compound Strategy Lead, Calvin Liu!

Calvin Liu: Hi everyone, pleasure to be here, thanks for inviting me.

[email protected]: We feel great to have you in AMA today. So, before we kick it with the AMA. Could you tell us a little more about yourself? And how did you step up to crypto industry?

Calvin Liu: I’m excited for your questions! Yes of course. I’m the Strategy Lead at Compound. I’ve been there for 2.5 years, since the company first started. I work on anything business-related: fundraising, operations, growth, and adoption. I live in San Francisco, CA where our company is based. I first got into crypto in late 2013; I worked for a consulting firm that had clients including Coinbase, Ripple, Kraken, Bitstamp, Gemini in San Francisco, and they introduced me to Bitcoin. I bought a little bit,but was not extremely active in the crypto industry until late 2016.

[email protected]: Wow, great to know that you are an early adopter of crypto too.

Calvin Liu: yes, and i’ll probably be in crypto the rest of my career.

Part 1: Twitter Q&A

1. [email protected]: We have prepared 10 questions from the Twitter users as well. Lets start with this one: “Now what are the core benefits of DeFi?” by @SPADE_1

Calvin Liu: Thank you for sending in questions everyone! DeFi has many benefits, but I will focus on three key benefits that differentiate it from traditional finance:

1 – DeFi is completely open access. You don’t need an account, you don’t need to register; for most of these DeFi products anybody can access them as long as they have access to the Ethereum blockchain. This is very different from traditional banks, where it is very difficult to access different type of financial opportunities – for example, think how much effort it takes to get a loan from your bank!

2 – Transactions are transparent. You can view the activity that is happening on the project, just by looking at on-chain data. This is extremely powerful; in most traditional financial products you have no idea what is happening with your money.

3 – DeFi is programmable; it can be integrated into other systems easily. It is simply software, that doesn’t rely on people, ideally. This means you can access them like you access software – through your phone, or your laptop, at any time. You never have to visit a bank, fill out forms, negotiate contracts, or call customer support.

I think those are 3 of the most important benefits.

2. [email protected]: Great to know that Defi is more accessible compared to traditional bank. Here is the question no.2 by @Yoosinoona : “You are an expert, can you think about a beginner in cryptocurrency, what are the barriers to accessing Defi?”

Calvin Liu: Today unfortunately it is not very easy to begin using DeFi yet, but it is getting easier every day! Consider the state of DeFi 1 year ago – it barely existed! First, you have to find an exchange that lets you deposit fiat money from your bank account, and convert it to Ether (Ethereum). Next, you can use an Ethereum wallet like MetaMask or Ledger and supply it with Ether. Finally, you have to visit each DeFi project’s website (for Compound it is https://compound.finance) and learn how to use that application.

We hope that in the future more applications and exchanges like OKEx will integrate projects like Compound to make it easier for their users to access DeFi projects. For OKEx, it would eventually be possible for you to deposit crypto into your OKEx wallet, and click one button to earn interest from Compound from your OKEx wallet.

3. [email protected]: Great to know that. Its impressive for earning passive income. The question 3 by @cody123: “With the increasing demand for DeFi products and projects on DeFi, So how to identify quality projects and what gives the market an advantage?”

Calvin Liu: Oh yes, it’s exciting. There a The most important thing to remember is to focus on the quality of the team, and to understand how committed they are to keeping your funds safe. re SO many new projects every day now! Really really exploding with opportunity. Since Day 1 of Compound, safety of funds has been our #1 priority, always. We have had 12 security audits, and have a $150,000 bug bounty if anyone discovers a bug. We have NEVER had a single user lose funds – funds are safe at Compound 100% of the time. I think commitment to security is the #1 way to identify a strong project. It means they really care about their users, and it means they’ve thought very hard about what they are building, so it can be safe.

4. [email protected]: Awesome, seems the Compound really put a lot of efforts in protecting their users’ security. “What will prevent Defi from developing and what barriers can this be overcome? Where do you see the future of Defi in 20 years?” question 4 by @SPADE_1

Calvin Liu: Great question. We’ve really just begun with DeFi. Two years ago, it basically didn’t exist. One year ago, Compound was probably one of 5 projects. Now there are like 100 projects in DeFi. It’s fantastic. The most important things we need are even MORE projects (and developers/engineers), and we also need more investor interest in the space. By next year, hopefully there are 1000 DeFi projects. Each new project makes the entire DeFi industry more interesting and useful. Also, as the price of Ethereum and other crypto assets go up, there will be more interest in DeFi capabilities, so I hope also the market is strong. In 20 years, I think DeFi can be a part of every single financial application on your smartphone. It can be part of daily life. We have spoken to huge global banks about DeFi. One day they will adopt it too. it will jsut take time!

5. [email protected]: Now we know the Compound is one of the pioneers in DeFi industry. Our question no. 5 is “How does the Compound protocol work?” by @SPADE_1

Calvin Liu: Spade asked good questions. Easiest place to understand how Compound works will be to visit our blog or our documentation. You can find our blog on Medium and our website is compound.finance. But I will explain here too. Compound lets users supply crypto to earn interest. You can earn interest for any amount of time — 15 seconds, 15 minutes, however long you want – and then you can withdraw your funds and interest. Compound also lets users borrow crypto. If a borrower supplies collateral to Compound, they can instantly borrow crypto from Compound whenever they want, for whatever length of time they want. So Compound is a very flexible platform for earning interest on crypto or borrowing it – it supports ETH, WBTC, DAI, USDC, USDT, REP, ZRX, REP today and will support many more in the future. Suppliers are putting crypto into a “liquidity pool” and borrowers borrow from the “liquidity pool” – it is not “peer to peer”.

6. [email protected]: Great to know the flexibility of Compound adoption. The question No.6 is “MakerDao platform issues DAI. Now with Compound Finance, there is a “cToken” that issues cUSDC. How does that work?” by @Ferlee

Calvin Liu: Ah yes. this gets a little deeper into how Compound works. When you supply assets to Compound, Compound gives you back a specific cToken. For example if you supply Ether, Compound gives you cEther. The cEther is a token that can be exchanged for the Ether at any time, including the interest that you earned. You can think about it as a “claim receipt” that you can take back to Compound anytime to get your Ether back. Except it is ALSO a token that you can transfer around or trade on certain exchanges.

7. [email protected]: That’s cool. Question No.7: “Do you see more opportunities in lending collateralized USD than staking any coin?” by @agu3000

Calvin Liu: Yes, currently that’s the most attractive option if you just want to earn interest. Today the main use case for borrowing in the cryptocurrency market is actually to buy more crypto! To get more leverage and exposure to crypto. Therefore most people want to borrow stablecoins (collateralized USD) and then trade it for BTC, ETH, or any other asset on exchanges like OKEx. This means the interest rate for suppliers of stablecoins is usually higher than the interest rate for other coins. Everybody wants to borrow stablecoins; very few people want to borrow other crypto currencies. So yes, in this case the interest rate for borrowing stablecoins (collateralized USD) is usually higher than the interest rate for other cryptocurrencies.

8. [email protected]: Alright. Many investors in the group might be interested with the following question: “What is role of Compound token in Compound project ecosystem?” by @typhucrypto

Calvin Liu: Yes, this is a huge initative we have coming out in the near future. In the coming weeks/ months, the COMP token will be distributed to the public – mainly the users of Compound. It is a governance token, and can be used to propose changes to the Compound protocol, such as what the interest rates for each market should be, or what markets should be added to the protocol. It can also be used to vote on these proposals, and implement them into the Compound system. More details will be coming out in a few weeks/months. But in the future everyone who uses Compound will receive COMP!

9. [email protected]: Great to know the COMP will be used for the decentralized governance purpose. “We all know DEFI is a brilliant addition but their security breach in the past raises eyebrows. How do you plan to strengthen security given your integration with DEFI?” Questioned by @Papiboulder

Calvin Liu: Yes, as mentioned earlier security is our #1 focus since the beginning of Compound, and always will be. We will continue getting code security audits regularly going forward (We have hade them done by Trail of Bits, Certora, Open Zeppllin), and continue getting stress tests done by research scientists on the economic security of Compound (We have had them done by Gauntlet Networks). One thing to note is that Compound is actually quite simple; you can supply crypto, withdraw crypto, borrow crypto, or repay crypto. The system is not complicated. Many of the systems that have had bugs or security breaches are far more complicated, with many more features than Compound has. Simplicity helps with security. As I said, Compound has always been 100% safe – no user has ever lost money due to a mistake in the system. Compound has always worked 100% as intended – safely!

10. [email protected]: Finally, our last question in part 1 : “Where else can I access the Compound protocol?” questioned by @oidiotso

Calvin Liu: Ah yes, please try Compound! You can try with $1, you can try with $10, or $10 million, it takes just a few minutes to try it. Our website is https://compound.finance. You can use our application at https://app.compound.finance. You can also try Compound through applications like Dharma or Argent (mobile applications). Finally you can also build your own application — check out our developer documentation at https://compound.finance/docs and email me if you are interested to build on Compound: [email protected] ([email protected])

Part 2: Live Q&A

Q#1: In the tokenization strategy implemented in the Compount Project you use “cTokens” which allow that the balance of every depositor increase! Can you explain in more detail how cTokens work to make this possible and what role do they play in the interest stream?

Calvin Liu: When you supply crypto, lets say USDT to Compound, you get back cUSDT, a different token. Compound lets you trade cUSDT back for USDT at any time. It tracks the exchange rate of cUSDT:USDT every 15 seconds. The exchange rate of cUSDT:USDT increases based on how much interest the USDT is earning in Compound. So let’s say you supplied 100 USDT and you got back 50 cUSDT. The exchange rate is 2 USDT for 1 cUSDT. Let’s say your USDT earned 10% interest and is now worth 110 USDT. Still you have only 50 cUSDT. But now the exchange rate is 2.2 USDT for 1 cUSDT. Compound tracks this exchange rate so one year later you can trade 1 cUSDT for 2.2 USDT instead of just 2 – it grows alongside the interest rate.

Q#2: What is the cost charged by the compound platform to borrowers and Flash loans? Can you explain your service fee structure?

Calvin Liu: 10% of the interest that borrowers pay, is collected into “Reserves” which acts as an insurance fund for all users of Compound. Besides that there are no fees — it is free to use, free to build on. We don’t have a publicly announced business model today. Our goal is to make the protocol as widely used and popular as possible. In the future we may plan to build new businesses on top of the protocol, but for now we are focused just on making this core technology successful.

Q#3: What price feeds / oracles do you use? Are you happy with them? How can they be improved?

Calvin Liu: Currently we use an oracle that is maintained by our team – it uses prices from top centralized exchanges. However we are currently in process of crerating a more decentralized oracle — the Open Oracle System. In this system any one can submit prices, and then projects can decide whose prices they want to use. So far Coinbase is contributing prices to Open Oracle. Compound is as well. It is something we are discussing with OK Group team as well 🙂 so in the future hopefully there is an on-chain price oracle with prices supplied in a decentralized way from many leading exchanges.

Q#4: Most projects even those that have been live for months, years only have a handful of users who purchase tokens for utility rather than speculation. How will you ensure compound acquires utility users rather than just speculators?

Calvin Liu: Slow and steady. Everything we do we do carefully, cautiously, and with the support of the community. We have been working on Compound extremely hard for almost 3 years. We are in no rush. Our goal is to build a system that lasts for 100 years, and that is key infrastructure for a new, decentralized, huge financial system.

Q#5: A major disadvantage in DeFi is low liquidity. What’s your view on this, and how do you think we can get this solved?

Calvin Liu: Compound currently has ~$130 million of crypto in the liquidity pool, and $20 million is borrowed. THere is not really a liquidity issue for most of our users! There is still $110 million of crypto you can borrow – https://compound.finance/markets.

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