On-Chain Markets Update by Lucas Outumuro, IntoTheBlock
DeFi is gearing up for broader adoption. Currently most DeFi protocols are looking at layer 2 scaling solutions or a multi-chain approach to be able to make transactions more affordable and scalable. While this reduces new users’ barriers to entry in terms of cost, they still have to go through a steep learning curve to set up and be ready to use applications on layer 2. Having users skip this learning process altogether is a promising alternative to benefit both users and token holders.
With the announcement of Compound Treasury, users of FinTech companies — as well as these institutions themselves — will be able to start using DeFi with the same convenience. Mobile banking company Current already announced that it will be offering its 3 million users access to Compound’s fixed 4% APR on deposits. This is likely to be the first step towards building a symbiotic relationship between FinTech companies and DeFi protocols.
This is the first notable integration of DeFi protocols inside a FinTech app. Although the details are still not clear, this should facilitate the user onboarding into DeFi. Given that “high-yield” traditional savings accounts like Marcus offer 0.50%, user deposits into Compound are expected to increase significantly as a result of the integration with Current.
Also, traditional institutions will be able to deposit into Compound treasury without having to go through the learning curve. Daily deposits into Compound already average around 600 million and are likely to grow significantly once Compound Treasury is released.
As supply into Compound increases, yields to depositors on the platform are likely to drop as they dynamically adjust. However, Compound founder Robert Leshner tweeted that rates for Compound Treasury will remain at 4% with the difference between yields coming as a marketing expense.
The increased deposits resulting from Compound Treasury should benefit borrowers. This is the case as the additional liquidity supplied should lead to lower borrowing rates. In turn, this incentivizes greater borrowing activity from the protocol. This could help reverse the recent decrease in the amount borrowed from Compound.
Since Compound’s revenues stem from the interest paid by borrowers, revenues have dropped significantly as demand for leverage dries up. Along with borrowing activity, revenues should also pick up as a result of the increased liquidity.
Due to COMP’s liquidity mining, this creates a symbiotic relationship benefiting both users and holders, as well as FinTech and DeFi. As FinTech users (or companies) deposit into Compound Treasury, the increase in liquidity is able to serve borrowers with lower rates. This then incentivizes borrowing activity, which leads to higher revenues, thus increasing the potential value capture for COMP token holders. Finally, this creates demand for COMP, which should reflect in even more deposits.
Ultimately, this highlights how a mutually beneficial relationship is likely to come out of this convergence of FinTech and DeFi. While it is still early to tell, Compound Treasury is certainly a promising next step in DeFi’s journey towards mass adoption.