New Iteration Introduces Segregated Base Assets
One of DeFi’s oldest lending protocols has launched a major upgrade.
Compound Finance, one of DeFi’s oldest lending protocols with $2.72B in total value locked (TVL), deployed Compound III on Aug. 25 following a successful governance vote.
The biggest change in the new iteration of Compound is that instead of being able to borrow any asset from a pooled set of assets, users will only be able to borrow one “base asset.”
Compound III will not pay interest on deposited assets, save the base asset. In this initial deployment, USDC will be the base, or borrowable, asset.
As of Aug. 26, the USDC deposit yield on Compound III is 2.32%, far higher than the 0.75% offered by Compound V2.
Compound governance will decide on future deployments with different base and pooled assets, according to founder Robert Leshner’s post in the protocol’s Discord.
With Compound III, users’ assets will also be segregated in the sense that no other users will be able to borrow them from a shared pool as they can when using Compound’s previous iteration.
The primary upshot of Compound III’s design change is that it theoretically protects users from the danger of depositing their assets in a pool with one “bad asset.” In the shared pool model, if one asset crashes, the pool’s value can fall under the value of the debt borrowed against the pool, leaving the protocol with bad debt. Cream Finance lost $23M in one such exploit.
“Current lending protocols are as safe as the weakest asset supported in the collateral pool,” tweeted Chandresh Ahawar, CEO of another lending protocol called Unilend. “A single bad asset can drain the complete protocol like we have seen in the case of the UST collapse.”
COMP Down 7%
Down 7.3% to $47.73 in the last 24 hours, Compound’s COMP token has fallen with the rest of the market despite the launch of Compound III.
COMP Price, Source: The Defiant Terminal
With its $2.72B in TVL, Compound is the ninth largest DeFi protocol, according to DeFi Llama. Like all of the top five protocols in TVL terms, Compound has seen the value locked in its smart contracts drop by more than 25% on the year as prices have dropped.
Compound III’s emphasis on simplicity and safety may reinvigorate the borrowing market in DeFi as the bear market grinds on.