Steps Towards Radical Management: DeFi Giant Compound Hands Over Control to Token Holders

Hello Defiers and happy Friday! Here’s what’s going on in DeFi:

Compound rolls out decentralized governance
Gnosis Protocol and 0x’s Matcha are latest to join the crowded Dex party
Atomic Loans Tutorials: How to get a leveraged long position on Bitcoin in a trustless way, and how to lend Dai or USDC to get at least 5% returns

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Compound Cedes Governance to Shareholders and Team

Compound Finance on Thursday announced holders of its new COMP token are taking over the platform’s governance system, deciding on everything from what assets the platform will supported to system’s parameters. The move is the latest in an ecosystem-wide push to make DeFi truly decentralized.

Compound, which holds over $90m of assets in its smart contracts, is following a similar model to MakerDAO’s, DeFi’s biggest platform. Holders of MakerDAO token MKR are able to vote on all governance decisions in a system where 1 token = 1 vote. Some of DeFi’s biggest projects are also moving in this direction, with Kyber Network about to roll out a governance system for KNC token holders, while Synthetix doing the same with SNX.

COMP token distribution:

24% (2,396,307 COMP) goes to shareholders of Compound Labs Inc. Investors in Compound include a16z, which led its $25m series A round, and Coinbase Ventures, Bain Capital, Polychain Capital, which participated in its seed round.
22% (2,226,037 COMP) goes to the project’s founders and team, subject to 4-year vesting.
3.7% (372,707 COMP) is reserved for future team members.
50% (5,004,949 COMP) is reserved for users of the protocol.

Compound hasn’t released details on how and when users will be able to access COMP tokens, other than saying, “until the decentralization process is complete, COMP will not be available to the public.”

The San Francisco-based project wants it to be clear COMP isn’t being distributed to raise money, and that it’s not a speculative token, but strictly a vehicle for its community to participate in the governance process.

Image source: Compound Finance

Governance mechanism:

COMP, an ERC20 token, allows the token holder to vote or to delegate voting rights to the address of their choice.
Coinbase Custody yesterday announced it will support COMP tokens and Compound’s governance system. The exchange’s custody arm is also supporting MakerDAO governance.
Anybody who owns or has at least 1% of COMP delegated to their address can propose a governance action, according to a February blog post.
Proposals, which are meant to be executable code, are subject to a a three-day voting period. If the majority of votes and a 4 percent quorum approve a proposal, it can be implemented after 2 days, the Feb. post said.
Compound will use “Discrete Voting,” according to engineer Max Wolff. The number of COMP holders own or have delegated to them at the time a proposal is created determines their votes’ weight. This is different from MakerDAO’s “Continuous Approval” system, which determines votes’ weight by the number of tokens the holder has at the moment they vote.
The complete history of all proposals, voters, COMP token usage, and governance metrics are available to you in the Compound Governance Explorer.

New Dexes in Town Are Bet on DeFi Going Mainstream

Two of the oldest projects in the Ethereum community, Gnosis and 0x, this week announced the launch of their own decentralized exchanges, Gnosis Protocol and Matcha. This comes about three weeks after non-custodial market maker Balancer also joined the fray.

They’re coming to a relatively crowded space with over a dozed DEXs competing for a reduced pool of volume —DEX trading is at around $17 million on a good day right now, according to Alethio data. Of course, there’s room to improve on user experience, liquidity, speed and price, and these newcomers are betting they’ll do at least one of these things better than the rest.

But rather than taking market share from competitors, these recent DEX launches are likely betting on the pie getting bigger. This can happen as an increasing number of crypto traders switch from centralized exchanges to non-custodial platforms and as crypto adoption increases and the number of overall token holders rises.

Gnosis Protocol

Enables ring trades, which are order settlements that share liquidity across all orders, rather than a single token pair
Traders can place limit orders, which means their order will get executed only at a specific price or better. This is noteworthy for a dex, as few have this feature
System batches trades to optimize for best price, compromising on speed
Fully permissionless, which means administrators don’t have the power to change or upgrade the protocol. Anyone can list tokens and build on top of the protocol

0x’s Matcha

0x has relied on other teams building dexes on top of its protocol for peer-to-peer exchange of digital assets. Matcha is the first Dex built by the 0x team on the 0x protocol.
The dex, which launches in Q2, uses 0x APIs to aggregate DEX liquidity, including from Uniswap and Kyber, to improve prices.

The following two tutorials focus on Atomic Loans, a platform to take out BTC-backed loans on Ethereum, which launched this week.

The first one, by Liquality’s Simon Lapscher, will guide you through how to take out leveraged long Bitcoin positions in a trustless way — read, without having to give your information or funds to a centralized exchange.

The second tutorial by the Etherean who goes by the online name of DeFi Dad, will teach you how to lend USDC and Dai, which are currently yielding 5% APR and 8.2% DAI respectively.

Atomic Loans Tutorial 1

Trustless Bitcoin Leverage is Now Possible

by Simon Lapscher, Liquality cofounder

With the recent releases of Liquality and Atomic Loans’ public betas, it is now possible to go 1.5-3X long on Bitcoin in a trustless way from your own wallet, without having to go through a centralized exchange or give up custody of funds. This is accomplished through cross-chain atomic lending and swaps, which use non-custodial escrows based on Hash Time Locked Contracts.

Leverage, also known as margin trading, allows the user to open positions larger than their own capital. Leverage is used when wanting to go long on an asset, expecting that it will increase in value more than the cost of obtaining the leverage or loan. Using native BTC as leverage, as is the case with Atomic Loans + Liquality, provides the security benefits of the Bitcoin chain, without the liquidity constraints that Bitcoin pegged/wrapped tokens have.

How to get trustless Bitcoin leverage? Watch this walkthrough video

Get a stablecoin loan by locking up your Bitcoin on Atomic Loans
1. Choose to borrow stablecoins by locking up your Bitcoin
2. Decide which stablecoin (DAI, USDC) by locking up Bitcoin and define terms
3. Provide proof of funds and deposit your BTC funds using your Ledger
4. Receive your stablecoin loan
Swap stablecoin loan back to Bitcoin on Liquality
1. Choose assets (stablecoin you borrowed to BTC) and get a quote
2. Connect your wallets (Ledger, MetaMask) and initiate a swap
3. Once escrows are confirmed, claim your Bitcoin

Let’s walk through an example:

I borrow $2,000 of USDC with 200% collateralization in Bitcoin, 0.6 BTC or ~$4,000, at 10% APR for a month using Atomic Loans
- 10% APR means that, at the end of the month, I’ll owe $2,015 - the principle of $2,000 plus $15 in interest
- Current Bitcoin price at time of writing is ~$6,725
I swap the $2,000 USDC loan to BTC (0.3 BTC) using Liquality, meaning I now have ~$6,000 of BTC (0.9 BTC) in my control, 1.5X of my original $4,000 (0.6 BTC)
Over the past month, Bitcoin has gone up ~46%. If over the next month Bitcoin goes up 20%, Bitcoin’s price will be at ~$8,100 and my 0.9 BTC will then be worth ~$7,300
At the end of the month, I convert the 0.3 Bitcoin, now worth $2430, back to USDC using Liquality and pay back the $2,015 I owe at Atomic Loans. I am left with $415.
My 0.6 BTC locked up is now worth $4,860 thanks to the price increase. Plus my leverage profit of $415, I now have $5275. This is a ~50% increase in profit compared to just holding my initial ~$4,000 or 0.6 BTC

About Liquality and Atomic Loans

Liquality is a peer to peer exchange network. It enables two people that might not know or trust each other to easily exchange value peer-to-peer across multiple chains.

Atomic Loans is the first Bitcoin-native solution for decentralized finance. Their protocol and user-facing platform enable a two-sided marketplace for Bitcoin-backed lending. It works by allowing users to lock their Bitcoin in a non-custodial escrow, and receive an Ethereum stablecoin (DAI or USDC) in a loan.

Both projects are part of a broader cross-chain trend, trying to bring Bitcoin’s ~65% market dominance into DeFi’s explosive innovation and DeFi’s capabilities to Bitcoin. They are both built using the Chain Abstraction Layer, an open-source library that simplifies cross-chain application development.

Atomic Loans Tutorial 2

Earn +8% on Your Dai by Lending it on Atomic Loans

by DeFi Dad

Before lending to Atomic Loans, there are a few things you should know!

While Atomic Loans currently offers higher interest rates to stablecoin lenders, it's partially due to how it matches 1:1 borrowers to lenders with a fixed interest rate and fixed term, which is different than a more frictionless lending pool model like Compound, where you deposit and withdraw as you please.
As a lender on Atomic Loans, you have to commit to lending for a minimum amount of time so that matched borrowers have ample time to pay back their loan. Currently, borrowers have a maximum term of 4 months.
The earlier and longer your funds remain in the pool, the more likely they are to be matched to a borrower so you can earn interest.
Lending for less time can slightly reduce your chances of getting matched with suitable borrowers.
Once you lend USDC or DAI, you have to wait for your funds to be matched to a suitable borrower. For example, I lent 100 USDC a week ago, and so far 25% of the funds have been lent while 75 USDC remains idle, but my idle funds are automatically lent to Compound to earn interest until matched to an Atomic borrower.

The key takeaways are that you must be willing to commit your lent USDC or DAI to a borrower on Atomic Loans for a set amount of time, but in return for this commitment, you can earn a comparatively higher interest rate than the current variable rates in other DeFi lending pools. Also, lenders can still depend on BTC collateral to liquidate if borrowers fail to maintain a 140% collateralization ratio or fail to pay back the loan on time.

With that context in mind, here's how you can currently earn about 5% APR lending USDC and 8.18% lending DAI.

1. Go to https://atomic.loans/app and choose Lend.

2. Connect your MetaMask wallet in the top right.

3. Then, choose whether to lend DAI or USDC.

4. Set Terms for your lending.

How much USDC or DAI
Choose whether to have unmatched funds earning interest on Compound (yes or no).
Specify how long you're willing to lend until (remember, the longer, the more likely your funds are going to be matched to borrowers to earn interest).

4. Click the green Confirm button.

5. Next, you have to Initiate Autopilot by clicking the purple Deploy to Heroku button. This is required because in the background while you're waiting for your funds to be matched and lent to a borrower, a borrower has to prove they have BTC collateral to Atomic Loans. Once a borrower does this, your "Autopilot Agent" will automatically accept new borrow requests and potentially help trigger any liquidations if necessary.

6. A new Heroku page should open. Assuming you don't have a Heroku account, create your free account with an email and password. Keep the password safe as you may need to return to this in the future.

7. On Heroku, do the 3 following steps

Create an app name, ie defi-dad-approval
Copy/paste your app name into the field HEROKU_APP Required
Click the button Deploy app (not pictured below but scroll down to find it)

8. Heroku will show this screen below once the app has been deployed (about 90 secs).

9. Then, go back to Atomic Loans. It will detect the app (your Autopilot agent) deployed on Heroku almost immediately.

10. For the final Step C Send Funds, you should be connected to MetaMask already. Otherwise connect MetaMask, specify how much USDC or DAI to lend and you'll be prompted with a MetaMask transaction. I'd recommend checking the Eth Gas Station to set your gas price so the transaction easily confirms.

That's it! You should wait a few minutes for your transaction to confirm so that you see this screen below. Your funds have been deployed successfully so click on the "Continue to Dashboard" button.

You should then see a lending dashboard populate that looks like this!

For a more comprehensive guide, I recommend checking out the official Atomic Loans Step by Step Guide to Lending USDC or DAI with 24 steps, which I borrowed a few screenshots from at the end to create this much shorter guide having lent my own USDC to Atomic Loans. If you have more questions, there's a support chat box in the bottom right corner of the Atomic Loans application. Good luck!

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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.