Compound has become one of the biggest smart contract, currently holding 431,000 eth, worth some $80 million.
Only tokenized eth (weth) beats it, with that having some 1.9 million and a total of 450,000 transactions.
You’d expect DAI to be above it, with 1.5 million eth locked there to give the dollar pegged token a market cap of $82 million.
There are different ways of designing a smart contract and how its assets are held, however.
You can have, for example, each account or address be its own smart contract with its own holdings that are subject to the rules of the main smart contract, which is what DAI does, or you can have the smart contract itself keep accounts and holdings, which is presumably what Compound does in regards to eth and each token.
Each asset in Compound seems to have its own smart contract, instead of each address/account, so concentrating their holdings to the point their eth smart contract ranks higher than some exchange’s holdings.
Meaning this is quite a popular dapp for a number of reasons starting with the fact you can earn interest by trusting their smart contract to hold your eth or token/s.
Almost everything is interesting about the above image, including that DAI and USDC seem to be almost on par in holdings with the latter being just a bit cheaper, but as much in demand.
That makes it very interesting as with DAI there’s a cost to its creation, while USDC is kind of free. You just add a C to USD on Coinbase. So an interest rate of 5.7% for lending it seems to be extremely competitive even with the stock market.
The Compound of Confound
If you’re not aware, Compound is a smart contract audited and scrutinized by actual haxors who did find a bug which was addressed without any losses or anything, with this running for now about a year.
Conceptually the idea is somewhat simple. If you have eth, but you want BAT, you can put down in eth 1.5x of the value of 1 BAT.
You get interest on this eth you put down regardless of whether anyone wants your eth – although of course just how much people do or do not want it sets the amount of interest you get.
That aspect is interesting itself, but you don’t actually have to borrow anything, you can just park your eth there, or maybe arbitrage by turning it into some other token first, and so earn interest.
The risk if you borrow is of course how this 1.5x moves because if eth goes down and BAT goes up, the eth put down suddenly becomes 1x the value, which means it’s sold off. You only lose that 0.5x value, however, you still keep the 1x, with the recommended amount being 3x of the amount you want to borrow.
While if you don’t want to borrow, just lend, then the risk is some bug, but at a 6% interest rate for the Coinbase/Circle dollar, it’s not clear how that risk is bigger than a stock market crash.
What is difficult to grasp here is that Compound kind of allows you to print money, but you don’t actually print money.
You don’t print money in as far as someone has to lend you the actual token with which you can do whatever you want. Yet you do print in as far as your 1.5 eth now automatically at your command has a BAT to it.
You have to pay back this BAT, but someone for example borrowed a cool 3.12 million 0x (ZRX), worth about $1 million.
The obvious assumption here is that he is gambling because if you have some eth for example, you borrow zrx, sell it, buy more eth, borrow more zrx, and repeat with this on the surface being a short because if zrx’s price falls, you buy it lower and pay it back.
Yet if you are called, as in if you borrow too much or price moves against, you lose only the amount lost. That’s saying that if in the above example, that 1.5x becomes 1.49x, you only lose 0.01x, minus fees obviously.
Meaning there’s a ton of potential calculations here not for gambling, but for arbitrage, while of course bearing in mind that one has to account for the unpredictable price.
So in this case ZRX has a lower lending or savings interest rate than USDC or DAI. The rest are 0.02% or whatever, with it so happening this DeFi-er is playing with those three 1% plus assets.
We haven’t looked at what exactly he’s doing, but instead of borrowing eth to borrow ZRX and repeat that, you can borrow eth then ZRX and with that borrow DAI with which you borrow USDC and you add to the lending bit and you basically arbitrage every little penny minus fees both onchain and the compound fees.
The unpredictable here is how much lending or borrowing demand might rise or fall for any given token or eth, but the algorithm is open so the difference may be speed in addition to price movements.
That’s for the native ones. For things like WBTC, you add “physical” friction as that’s a custodian tokenized bitcoin, but for the rest you’d think some sort of natural equilibrium would be reached close to instant (or 15 second blocks) whereby you can borrow something at the cheapest rate available and lend it too at the highest rate with the latter because bots would arb it within and outside the Compound system.
Meaning this can be a quicker way of gaining greater efficiency, but for now it is probable this is still quite primitive because it’s far too new.