The capital markets, including crypto, may be a train wreck at the moment. That hasn’t stopped DeFi protocols from seeking deeper integration with the financial world, and vice versa.
In the latest indication of this melding, Compound Treasury, the institutional fixed-yield product, has received a B- credit rating from S&P Global Ratings, one of the Big Three credit ratings agencies along with Moody’s and Fitch Group.
Junk Bond Rating
Ratings agencies play a critical role in establishing the risk-reward ratio at the heart of the global credit markets. This development constitutes the “first institutional decentralized finance offering to be rated by a major credit rating agency,” according to Compound Finance, the lending protocol from which Compound Treasury partially derives its 4% yields.
Compound Treasury, launched last June, converts U.S. dollars to USDC, a stablecoin, which are then deposited into Compound Finance to earn yield as people borrow USDC.
At B-, Compound Treasury’s rating is the same level as a junk bond, which means it’s riskier than an investment grade credit. Yet the very fact that the Treasury product received a rating represents a significant step in the cross pollination of DeFi and TradFi. To provide a rating at all, S&P Global Ratings did a deep dive on the risks and mechanics of the DeFi protocol.
“The ratings process involved months of education about DeFi, stablecoins, the Compound protocol, the Compound Treasury product, and the operational risks associated with the product,” Robert Leshner, the founder of Compound, told The Defiant.
The yield for lending USDC on Compound is 0.97%, meaning there’s a negative margin which Compound Treasury needs to supplement to meet its 4% commitment. Leshner told The Defiant that Compound Labs, the company set up to support Compound the protocol, pays the difference.
Change the Outlook
Of course, Compound Labs, which is funded by VC money, can’t subsidize the difference forever. “Compound Treasury will limit new customers if the margin remains negative for an extended period,” Leshner said. The founder thinks rising interest rates are likely to increase rates in crypto as well, which would shrink the margin between Compound Treasury’s offering and USDC’s lending rate, or even push it positive.
For now, Leshner will live with the B- rating. “Over time they will continue to surveil the product and potentially change the outlook or rating,” Leshner said of S&P. “It’s definitely starting from somewhere, not the end-state.”