Decentralized Finance (DeFi) is one of today’s most compelling crypto narratives and Compound is one of its most prominent examples.
As ZenGo adds support for Defi services, our research team has taken a deeper look into one of the most intriguing aspects of the Compound protocol, the Liquidation process.
Today, ZenGo releases a white-paper that presents a step-by-step technological explanation and financial survey of Compound’s Liquidation process. The white-paper offers a learning opportunity on a prominent DeFi project, relevant for both experts and beginners.
Read the full report, or continue to scroll for the summary.
The initial promise of cryptocurrencies was to make transferring money cheaper and more efficient while minimizing (or eliminating altogether) the role of intermediaries. DeFi takes this promise and extends it to more sophisticated financial services, such as lending and exchanging.
To do so, DeFi projects are mostly developed on the Ethereum blockchain, leveraging its smart contract functionality. Smart contracts allow developers to define protocols, create products and have them executed on the blockchain.
DeFi products and protocols are made possible by having the ability to code the rules of financial interactions into blockchains.
Compound liquidators: Fish of the third kind
Compound is one of the most prominent examples for DeFi. Compound creates markets for Ethereum based assets, that allow users to become suppliers and borrowers. However, on our report, we had inspected the third player in Compound’s ecosystem – the liquidators.
To better understand the role of liquidators, we can think of financial systems as ecospheres. For example, an aquarium.
In centralized environments, there must be an aquarium keeper, in charge of keeping everything clean and tidy. However, in a decentralized environment, there is no keeper. The ecosystem must be self-stabilizing in order to sustain itself.
In Compound’s ecosystem, the suppliers and borrowers are two types of fish feeding off each other. Liquidators are the third kind of fish – the cleaner fish, “eating away” bad borrows and maintaining the health of the system so it can continue to thrive.
In this report, we celebrate Compound’s unsung heroes and gain some important insights on Compound’s ecosystem.
Key Findings and Predictions
Below are the main takeaways described in our research:
- Supplying Liquidity on Compound is easy and is a very viable option for both beginners and experienced crypto holders to earn interest on their crypto.
- In contrast, borrowing and liquidating on the protocol are currently relevant for experts only, as they require technological, operational and economical skills and resources. We predict that borrowing and liquidating will serve as building blocks for other DeFi products that can be consumed by less sophisticated users.
- During 2019, $10,375,064 were repaid by liquidators using Compound version 2, resulting in a total of $518,752 profit for liquidators.
- The innovative incentive-based liquidation process seems to work, as mostly all of the risky borrowings are quickly liquidated once they cross the liquidation threshold.
- We have observed some sophisticated DeFi users that combine several DeFi solutions together to create new functionalities. We predict that it is a precursor for the next generation of DeFi products and services to be built upon the existing DeFi services.
To read the full paper, click here.
Compound on ZenGo
Integrating Compound into ZenGo will offer our users another opportunity to easily earn interest on their crypto assets. We plan to offer more earning opportunities for the benefit of our users.
Our research into Compound’s liquidation process showcases how and why our users would benefit from the simplicity and ingenuity of the Compound ecosystem.
Stay tuned for a new and exciting user experience!