Introducing Compound, the Money Market Protocol

tl;dr: We’re developing Compound, an Ethereum protocol that establishes money markets with algorithmically set interest rates; users and dApps will be able to earn interest on Ether and tokens, and borrow Ether and tokens to invest, use, or short-sell.

You deserve more crypto

As an enthusiastic blockchain investor, I’m often asked what to do after purchasing cryptocurrencies. As it currently stands, just about the only thing you can do is move your assets off of exchanges (where they are vulnerable to hacks & losses) and into your own control. And then…wait until you’re ready to sell.

Through history, across every currency (from brass rods to dollars), interest rates have existed as the “price” of money, which bridges the gap between people with a surplus of money, and people with productive uses and investments for that money. Trading the time value of money benefits both parties, and creates non-zero-sum wealth.

So why doesn’t your surplus crypto generate interest and that sweet non-zero-sum wealth? Why, if the number of blockchain assets has exploded to 1000+, have financial markets not caught up?

Enter Compound

Last summer I formed a company to evaluate the projects contributing to blockchain financial markets; assess the capabilities of the Ethereum blockchain; and develop solutions to make blockchain assets more rewarding, easier to use, and more efficient. Joined by an extraordinary team of engineers and blockchain enthusiasts (Geoff Hayes, Art Peel, Torrey Atcitty, Mason Fischer, and Calvin Liu) and the generous support of our friends and investors (much ❤️) we’ve been hard at work; here are some of the things we’ve learned so far:

Borrowing markets for cryptocurrencies do exist. They’re just really bad.

  • Centralized exchanges with margin-lending systems require you to trust that the exchange won’t get hacked or abscond with your assets. For most people, the incremental return just isn’t worth the risk.
  • Peer to peer lending protocols are cumbersome; funding loans is slow and asynchronous, market density is low, and outcomes are unpredictable. Also, it’s a lot of work.
  • Both systems match your funds to specific loans; this reduces your liquidity, making your funds unavailable until your loan matures.

In addition to the time value of money being out of reach of the average investor, it helps to explain why a lot of crypto assets are mis-priced (e.g. “scamcoins” with unfathomable valuations), because there’s no way to borrow them for a short-sale.

Ethereum is hard. Like, really hard.

The Ethereum virtual machine is Turing complete, which means that in theory you can build systems of infinite complexity; practically, building financial applications on the blockchain is staggeringly difficult:

  • The lack of floating point numbers / math makes calculating compound interest incredibly difficult, expensive, and slow. Our team spent months analyzing different approaches — many of which “blew up” the EVM when simulating real-world scenarios.
  • Contracts can’t call themselves or schedule external events — yet (we’re working on an EIP for this); this makes financial instruments imprecise.

It’s no surprise to us why existing on-chain systems have all opted for fixed-duration instruments with simple interest.

How to build the future

Our mission is to establish properly functioning money markets for blockchain assets, because we believe that when every blockchain asset is borrowable, investors will share a larger economic pie.

After considerable research, we’re proud to unveil the first step in that direction; Compound, an open-source, decentralized Ethereum money market protocol that addresses the flaws of existing borrowing platforms:

  • Rather than directly funding loans, users supply assets to a shared liquidity pool. Assets are never locked up in a term-based loan; you can withdraw them at anytime.
  • Users and dApps can instantly borrow from a money market, based on their available collateral supplied to the protocol.
  • The protocol algorithmically sets interest rates, based on supply and demand within each money market.
  • There are no arbitrary maturity dates; the protocol is low-work (and therefore, low-cost); users can “set it and forget it”.

Change the world with us

We’re building Compound for the Ethereum community, and we’d love for you to play a role in our development.

From all of us at Compound, 📈