Robert Leshner: Compound – An Automated Money Market for Ethereum Tokens (#295)

Transcript

[Music] this episode of epicenter is Gracchi by cosmos cosmos is building the intent of of blockchains an ecosystem where thousands of blockchains can interoperate creating the foundation for a new token economy if you have an idea for adapt visit cosmos network slashed epicenter to learn more and to get in touch with the cosmos team and by valle Toro the gold hedging platform for the crypto community trade gold - bitcoin instantly and securely starting at just one

milligram go to volt or gold slash epicenter to get early access to the v2 platform and to start trading welcome to epicenter I am free to began and I have my head Roy and this is episode number 295 we have a short announcement to make there will be a conference in Berlin during Berlin blockchain week this summer it's called DEFCON you can find it online at DEFCON dot IO it's August 21st to 23rd and there is a discount code for epicenter epicenter listeners and the discount code is epicenter Def Con 2019 and it gives you a 20% discount several

of the hosts will be at that conference and will moderate pennis m and we will also record a second edition of epicenter life with sunny Sebastian and myself and just from the feedback that we got that the last one at the interchange conversations was super cool so you're one of the organizers for that corn right rhetorica yeah so gnosis gnosis is organizing it and it's a proud member of Berlin blockchain week so ton of a ton of other things are happening in Berlin at the same time or just before after so there's the web 3 summit and there's East Berlin there's Dow Corning meta cartel and it'll be a super

interesting we starting in starting August 19th so if you can make it to Belen absolutely to come and Berlin is also a fantastic place to be particularly in summer yeah I regret I won't be able to be there but it seems like an exciting conference mmm-hmm yeah now moving on to our guest this time around we are going to chat with Robert from the compound protocol he's one of the he's the founder of the compound protocol I'm sure many of you know about compound but it is a money market on the helium protocol you can furnish your assets that are just sitting there like ISA died back to compound and earn and interest rate and

then you can also do collateralized borrowing so if you have supplied assets to the compound protocol you can borrow against those assets as well it is a super interesting use case because there is there's no way of earning interest currently or no no major way of earning interest on on crypto assets that people hold and it was a much needed building block of the DFA ecosystem and caught on amazingly quickly so without further ado we'll give you the interview that we had with Robert leshner the CEO so today we have Robert listener who's the founder

of compound compound is this fascinating money market protocol in Hana cerium that allows people to make interest on the Eastern dye 0x bat and other tokens Robert welcome to the show thank you excited to be here so I'm curious to know your story dog born of how you entered the cryptocurrency space and what led you to build a money market purple so I've had a slightly long journey so I rigidly know this Bitcoin in about 2011 while I was working at first a bank and then a wealth management business as an interest rate analysts and economists and I was dismissive at first I said oh you can't create money this will never

work and my first attitude was one of hostility but as it began to prove itself in the wild for a while I eventually became interested in actually mining and participating in the growth of Bitcoin I learned a lot I was lucky to probably have broken even on my mining hardware but it got me interested in what cryptocurrency was possible to create then when etherium came out I was also initially dismissive I thought that it was an order of magnitude more complicated than Bitcoin and couldn't work either and so I you know stopped paying attention to it for a while until the DAO hack immediately caught my attention some ways I thought it was a

positive that you could create an organization on top of aetherium even while Slav and even while you know having issues it proved that there was something possible that we could create decentralized autonomous organizations financial markets assets and entirely new economic functions and I was immediately hooked and then like a money-market protocol there are not too many entrepreneurs working on money market protocols so why why money markets well in the real world you know money markets one of the most boring financial instruments but I think when you know it comes to crypto they're one of those interesting financial markets simply because it unlocks so many more applications in use cases I'm

just having a boring liquid short term risk-free rate well it's not sexy it's fundamentally important as a composable structure for other use cases so when when did you start creating compound so I started creating compound in the late summer of 2017 I began raising capital and hiring the team really with the idea of exploring whether this was even technically possible and feasible at the time you know not many applications had launched on etherium of significant complexity and I wasn't even confident that we'd be able to technically create a protocol like this interesting so and can you give us a brief overview of what

compound isn't how it works so compound is what we think of as a liquid-cooled money market where there's an interest rate set by market forces and anyone around the world can participate in this market by supplying assets to it and earning initial trade we're borrowing asses from it and paying an interest rate the market is designed to replicate the equivalent of an overnight break-in that it's designed to have no credit risk and it's designed to be liquid and it's designed to fluctuate relatively frequent just for reference could you explain to us how money markets work in the traditional financial ecosystem so in the

traditional financial ecosystem money markets are really a set of instruments which have very limited credit risk and that have interest rates that closely mimic the short-term interest rates and it's really just a series of assets that collectively generate an interest rate that's overnight in nature for the end users of it and so like what kind of entities need a money market so every entity in some sense needs a money market so whether you realize it or not large amounts of wealth are deployed into money markets when they're not being more productively used

elsewhere you have these you know long-term capital investments in economies where capital is invested for long term goals and then you have the excess the things that aren't actively invested the things that are between investments the things that are mostly cash sitting in accounts these are the assets to find themselves in a money market earning the best possible rate even though it's not going to be a high rate but it's a way that wealth is passively deployed very frequently so how does it work in practice so say I have five ether sitting in my account what would I do with it so what you would do with five ether is you would send it to the compound protocol um you don't specify a duration that you're supplying it for and you

don't specify an interest rate that you're willing to accept you're simply supplying it and earning the prevailing interest rate whatever that might be and it might be a very low interest rate if there's not a lot of demand for ether it might be a high interest rate but there's a lot of demand for ether but you're basically passively accepting the prevailing terms of the market and then essentially there are a bunch of users that are supplying ether to the protocols so this is some kind of pool of ether that is held by the protocol and then the protocol lends it out to other money market borrowers that's exactly right and the key word that you mentioned is pooled you're not actually lending assets to another user it's not

peer-to-peer and that way it actually ensures that there's additional liquidity because you don't have to wait for another user to directly repay what they borrowed so in essence there's there's a subtype and then me as a borrower I can borrow from that supply pool and the the interest rate that I am being charged is determined by what exactly it's determined by market forces which are enshrined in an interest rate model so philosophically there's really two ways in interest rates can be set they can be set by user specifying the terms that they're willing to participate in or they can be set algorithmically you know given the complexity of developing an on

chained system we actually opted for the second approach which is setting interest rates algorithmically and the compound protocol uses an interest rate model to determine the interest rates at a given time and fundamentally it's based on supply and demand when demand to borrow an asset is low interest rates are low and when demand to borrow an asset is high interest rates are high and at any given point in between given the preferences of the individual users you get an equilibrium interest rate if it's too high people stop borrowing and it goes down it's too low people are attracted to the market and it goes up so would it be fair in your opinion to say that that compound to money markets is very much like uni swap to exchanging tokens in that there's an algorithmic

the governed automated market maker for for the interest rate or the exchange rate and there's not really someone who's actually making setting the rate other than that automated market maker that's exactly right yes it's extremely similar to you know swap in a lot of ways and that the system functions without an order book at all you know you know swap functions without an order book for trading the compound functions would have an order book or interface but that doesn't it also mean that the I am never guaranteed a set interest rate neither as a lender nor no as a borrower I can I can only know what the current interest rate is but it could change

either way after even a few blocks that's exactly right yes so that's the one thing that you're giving up control of when you use compound versus a system that has duration in some sense you're basically because there's no duration to their participation not saying I'm gonna lend for 30 days we're gonna borrow for 30 days you're basically taking the best prevalence terms every 15 seconds and so this can fluctuate as the markets get larger and have our supply and borrowing in them the interest rates become significantly more stable but in the short-term it is a little bit unpredictable I think over time this will continue to improve and we've seen tremendous stability increases as the protocol has existed

for longer amounts of time but you're right there's no guarantee do you think this limits the number of use cases in some sense because you wouldn't for instance I wouldn't use it for financing my house for instance right correct um it's less useful for certain use cases and more useful for other use cases so it's less useful if you're making a long-term purchase or investment it's just a terrible way to find out something just like you know in 2008 you know people who are using variable rate financing for their mortgages you know were dismayed when the interest rates changed variable rate financing is not great for long-term uses it is great in the short-term and it is great for machines and other smart

contracts and applications so we actually think that having this short-term interest rate that's interactable with smart contracts is actually great because smart contracts are very bad at managing time they're very bad at saying do something for 30 days but they're very good at saying do something and then stop doing something and so we actually think that the ideal users aren't necessarily humans but it's gonna be other applications the idea here would be that whenever there is a smart contract application that has some access to assets for a or some period of time they should by default just let it out to compound and make some return on those those assets exactly a smart

contract is able to say I have extra assets that I'm sitting on proverbially I want to earn the prevailing short-term risk-free rate and as soon as I need the assets back you know I create the function call to retreat them you know with an indeterminate amount of time it's really designed from a application first use case yeah so in the future there might be some kind of library that I as a smart contract developer just import and all of this functionality all of this interest is automatically made for me for me or the smart contract from Kampala exactly and a lot of her focus going forward is going to be creating those easy application hooks so that you know different smart contracts and

different off chain platforms can interact with compound so compound is not risk-free though right for you would you say that compound is risk-free or do I incur some risk when depositing an asset with compound well it's designed to be an approximation of the rest of it so as with any smart contract platform there's always the risk of code vulnerabilities the protocol has been audited the code was went through formal verification but as with anything involving smart contracts there's nonzero risk our goal is to minimize that to zero as much as we can but it is you know nonzero it took you know probably close to ten

years for people to say that bitcoin is safe fundamentally at a protocol level and I think it's gonna take the same thing with something like compound where you know one month after launch you know there's questions about its code integrity one year after launch is going to be significantly fewer questions ten years after launch it's going to be almost assumed that it works and it's been battle tested this episode of epicenter is brought to you by cosmos the Internet of blockchains cosmos is live and we couldn't be more excited to see so many projects already building on it blockchain technologies are evolving fast and development shouldn't be one size fits all that's adapt developer you need the tools that will allow your dad to scale grow and evolve over time the cosmos SDK

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epicenter they have two ways in which loaning money or tokens can in principle go wrong right so easy you need to collateralize those borrowers so this is something that we haven't talked about yet so you need to put up in excess of a hundred percent of the thing that you about 100% of the value of the thing you're borrowing in in some other token and so what actually happens if this falls below a certain threshold is my first part of the question the second part being and if I actually lend out my money on compound so if I'm a supplier am I always guaranteed that I can get back my tokens at any point in time that's a great question so there's

really two pieces are the first one is is there the risk of a borrower defaulting so the way the compound protocol works is you have to maintain excess collateral in order to borrow from the protocol um anyone who's gonna borrow from the protocol puts up a multiple of what their borrowed it's similar to how make or die backs make naked Outbacks die it's similar to how a lot of other systems work and that creates a significant risk buffer to prevent users from at any point having borrowed more assets then they have collateral in the system company one ran from September of 2018 to present and didn't have any events where a user

defaulted on their borrowing on the excess collateralization at least over the past year was enough of a cushion such that even if the value of when someone has borrowed has gone up or if the dog for collateral has gone down on the system itself is still completely saved there's always the risk that you know the market doesn't liquidate them fast enough we've created an incentive mechanism where the community is incentivized to rapidly liquidate users if they have once they have less collateralization and is required and that system works relatively effectively we've seen a variety of thoughts and software packages and different users participate in liquidation process but

it's incentive driven it's not it's not a guarantee and it's worked flawlessly for the past year but it's not a guarantee that it always works in the future and second piece of your question was is there the ability to always get my assets back so that goes to liquidity so the compound protocol incentivizes but also does not guarantee liquidity so it's possible theoretically for every single token in a market to be barbed and when you want to withdraw your supply every single token has already been barred that's theoretically possible what the protocol does to prevent this as it uses this interfaith model and the interest rate model says

the less liquidity there is the higher the interest rate is and the more liquidity there is the lower the interest rate is and when liquidity becomes scarce interest rates go up attracting new supply and incentivizing the repayment of borrowed assets and we've seen this play out again and again and again in the markets from v1 to present whenever there begins to be a scarcity of assets interest rates go up and it attracts new assets I mean it it's a really elegant and beautiful process to watch when there's a short-term spike due to borrow demand over time the interest rate returns right back down to the equilibrium where it is intended is their flow and the cap for the interest rate there is so the interest rate model does have a minimum

and a maximum parameter to it it's basically a straight line between the two and there is a cap so a smart contract can feed on chain exactly how the interest rate model works and it is defined you know in smart contracts and at any point in the middle it's defined by the liquidity and utilization of the market what's the flow and what's the cap so it varies by asset so right now for dye the interest rate to borrow ranges from 5 percent to 17 percent and for ether it ranges from I believe it's 2 percent to 30 percent and all the other tokens are 2 percent to 30 percent with the exception of u.s. DC which is

much closer to the dye interest rate model so how do you set these minimum and maximum interest rates and what's what's the rationale behind that so long term the process is going to be handed off to the community our goal is for each community to govern its own interest rate model so you know in compound version two we've created this concept called C token so we haven't gone into what RC tokens and how do they work yet but the very simple story is when you supply an asset to compound you actually get back a token that denotes your balance and these are also going to be governance tokens so over time all of the different suppliers have any given acid are going to be able to govern the

interest rate model for their market so all of the suppliers are either are going to be able to set the ether interest rate model and all of the suppliers who died are going to be able to set the die interest rate model we're planning to start to deploy this system closer to the end of the year but until then they are essentially centrally set by our team they're designed to be relatively immutable we're not changing the model we basically set it at two launched compound v2 and now it basically runs on autopilot until decentralization but you know the model was designed by the developers and they looked at compound as a supplier and this was a while back it was very attractive to supply dye but not so attractive to supply auger or bad why do a particular assets behave that way why

does dye usually attract a greater interest rate but other assets don't very question and it's one that we've been constantly asking ourselves and we've started to do a little bit of data analysis on this um it turns out that stable coins are fundamentally the most desirable assets tomorrow they look the closest to money and if you're going to borrow something you want to be able to borrow something where you know how much you're gonna owe any year if you borrow ether if you borrow longer if you borrow a token of volatile value it's uncertain how much you're gonna owe any year and so stable coins are just much more attractive to borrow than other assets are and it also goes to the use cases people are borrowing died and

USD C in order to make purchases make purchases of other crypto make purchases of real-world assets I'll just make purchases whereas borrowing a token the primary use case is right now to short some of the tokens so you know you haven't seen too many people borrowing augur to create prediction markets that they wouldn't otherwise be able to afford to create you're seeing it mostly for earnings limited short sale use cases so in a way when you buy die in a way short sell die you're going long ether right so I mean basically it's it's is that a sign of the of the bond market or did you see that in the bear market as well

so we actually saw that there's some interesting correlations between borrowing demand on compounds and the price of assets when you know and it goes to sentiment a lot you know when people think that it's a good time to buy borrowing spikes and when people think that you know it's and by supply I mean it's a good time to spend the borrowed ass and it's a good time to spend die or spend USD coin you see borrowing demand go up it's the same thing for when an asset seems overvalued if for example 0x seems overvalued you'll see people borrowing 0x and sending it off to coinbase or their favorite exchange to sell it it's when people think

something is overvalued they borrow it knowing that the liability goes down in the future relative to other things and so it's the same thing for a stable coin when everything else looks cheap the stable point looks expensive and that's when you see Barrington man start to spike super interesting so um what was the rationale between not actually putting the base rate at zero so I mean what why is there why is there a couple of percentage Flora implemented because if it sounds like you guys are big believers in the markets and this seems like something that in principle the market should be able to fix no yeah you you would think that the model

should theoretically start at zero percent but we know that the model 10 today is designed to find an equilibrium and the model doesn't have to start at zero the model can start at two percent for most assets knowing that there should be some nonzero cost to borrow the asset otherwise incentive to actually start to break down a little bit the other way if there's you know if it's too easy to borrow an asset eventually it creates perverse incentives and so we wanted there to be some floor in general for borrowing costs just cuz we think at least a healthier model but when the community takes over the interest rate models we'll see people potentially set the floor at zero that'll be exciting to watch yeah that'd be super interesting so I mean if you look at if you look at

the legacy banking world currently at least here in Germany if you take out a loan against a house you're actually you're looking at an interest rate on the order of one percent fixed for ten to fifteen years or so and so why are the interest rates you see on compound larger than what you see in the legacy word that's a great question um I think it comes down to the fact that compound fundamentally allows you to borrow assets using other crypto assets as collateral and this opens users up to non bank lending and it really is a great service for people who aren't currently a part of the normal banking world who don't have access to one percent more than just to borrow houses

are very known and understood high-quality collateral crypto is not considered to be that high-quality yet so the interest rates are going to be higher and it's also because it's and it's open to users who otherwise wouldn't even be able to borrow if not for the crypto that they have that's a great pitch but do you think that actually refer that that is informed by the people who are currently using compound are those people who wouldn't be able to get a mortgage on a house well it's people who want to be able to take out a mortgage on Krypto um if you're buying a house and yes you know you know it's very easy to finance a house because a house has you know a very predictable value but Krypto is not there yet and so it's people who are

using crypto to be able to purchase theirs to borrow assets to purchase other assets with and so it's a much higher velocity borrowing it you're not locked into a 10-year mortgage it's extremely short term and it's based on the value of your crypto and so I think it's definitely a different user base in a different use case than mortgages let's get into these C tokens so what are these compound tokens and ye do implement such a such feature great question so see tokens are really a tokenized fungible representation of the balance that you've provided to compound so when you supply an asset let's just call it die to the protocol you received AC token that represents

for balanced C die and the interest that you earn is actually represented by the see token increasing in price relative to the underlying asset so when you supply died to compound we give you C die and over time that C die that you hold in your wallet becomes worth a slightly larger amount of die and you know over time whether it's a block an hour a day a week a month seven point four hours that cd-i is convertible into more underlying die this also unlocks tons of other news cases so it allows us to have a governance token for you to market right at the gate so that C die is also going to be the governance token to control the interest rate model for

die and it's also a transferable asset you know the example we like to use is you know it allows you to take your balance and do more with it in the original version of compound you know once you supplied an F to the protocol that's it you couldn't do anything else you just sat there you had a hot wallet connected to the internet and you just had to you know keep it that way with these C tokens it unlocks more use cases one is you can actually send them to cold storage so this is my personal favorite use case you can basically interact with a smart contract you know supply an asset to a market or if you earn interest and then take that representation with your balance and send it to a cold storage offline

address that's never interacted with the internet before and you can fundamentally be earning interest from cold storage and that's super powerful it'll knots more programmability from other smart contracts and other applications other smart contracts can control compound balances which they couldn't do in version one and it just opens up like this entirely new basket of opportunities that we haven't even conceived of yet we think this is the biggest upgrade from do you want to be too so basically in the Trish in a word when you know now it's something and the thing that you're loaning out is gone right so someone else has it and now on compound when you get back you know compound whatever you land you lend out you actually have a fungible token that

you can still use so it's it's it's like you only lend out part of what you had because basically the seed I or see ether whatever you have now um is still transferable and it's worth something and that to me sounds like a fundamental game changer do you feel the same way and if so what do you think will be the effects of this well we do think it's a game changer I I think it's so early we only launched compound be to less than a month ago I think it's actually almost a month to the day actually um and we're just starting to see developers experimenting with see tobits um I think in a couple months with him start to see fabulous new applications built that we couldn't

even conceive of today and I'm just eager Lea waiting watching will error the community goes with us me personally it seems that we are almost going to this like Internet of composable risks almost so you know if when I have ether I can put the e set up into maker and I will get a derivative asset which is the thigh now of course the thigh has some additional risk on top of these her because now this die is now dependent on the maker system the well functioning of the maker system now I have this die I can put it into compound and I can get compound the I out of it but now compound die is exposed to the risks

inherent in maker as well as compound right and now maybe imagine like this future version of true--but or some some system like that where I want to let's say run a verifier some some kind of node and I put compound die as my stake in that node and then I run that node that no one makes me some interest in in a system like in an off chain system and so when I do that I could issue the third acid which is like staked compound die so now if you think of staked compound die it's like this composite acid with three risks the four risks almost like the a risk of ether risk of

maker the risk of compound and the risk of whatever staking solution you are using to to stake compound die so you have like you know like composed four risks together you have like and you have like multiplied those forests into an acid and you're earning in like returns on all of those four assets at the same time but you're also exposed to the risk of all of those four assets so it almost feels like we are moving into this world where risks effortlessly composed together and create like synthetics that represent all of those risks as a bundle and all of those returns as a bundle absolutely I mean I I think that each of

these layers when compose together can either add or remove risk right so you're adding the risk of each platform individually when you create the system that you described you have the risk of maker and there's risk associated with maker you have the risk of compound and there's risks associated with compound there's the risks of true--but and there's you know associated ones but they can also offset each other in interesting ways where it's possible that two layers in conjunction weren't actually a better asset with less risk than either of them individually a great example would be you know if there's a layer that's just buying insurance it's possible that that insurance is waste of money and you know the event never

occurs but by combining it with compounds there's income that offsets the cost of insurance it's possible to net product of those two layers is less risk and more upside and I think all of this is in such an early chapter that we're gonna see you know a thousand new experiments composing different layers together and experimenting with the use cases that come up with systems that are fundamentally creating value and that's gonna be really exciting to watch do you think this will change the concept of what money is because basically to us money is something that's fungible right something that has no inherent value but something that you can exchange for a lot of other things but now that you can

actually lend against anything for anything else more or less or at least I guess that's the future vision do you think this somehow makes money as a fungible thing obsolete I don't think it makes it obsolete I definitely think that you know we still think of money as a sort of like base unit right where we still think in terms of euros and dollars fundamentally and even if we're like using crypto assets to exchange value I think in the back of our minds you know we still go back to euros and dollars and so it definitely creates you know more money like properties for every crypto asset you know eventually you know auger tokens are a little bit closer to money

than they were you know a few months ago but I don't think it truly puts them on the same footing as money it definitely just makes everything a little bit more fluid and liquid and you know easier to use many things are indeed much more fluid than than previously so basically if you if you borrow against something that you you run the risk that the interest rate on that actually changes substantially so am I warned in any way if I borrow an asset and the interest that I'm being charged just increases by um by a large amount so the base protocol is just a series of smart contracts and what's great about having an open protocol is

that anyone can build new experiences on top what you just described this an awesome product idea and I hope that someone in the community out there builds an application to interact with the compound protocol that does exactly that that builds in offline communication systems with you maybe through text message or email alerts it does something like this you know the base protocol doesn't it doesn't have this sophistication of product it's really just fertile ground for developers in the community to build experiences like that it starts off as very you know simple series of smart contracts and eventually will be you know a beautiful series of applications like you just described if you're holding a significant portion of your net worth in crypto you're probably

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yeah so in terms of real raw numbers you know we host a dashboard at compound that finance / markets with all of the real-time information in the protocol and one of the best parts of a transparent series of smart contracts is that you can view this information on chain you can audit the information you can inspect it manipulate the data in any way you want because everything's available for you since launching a month ago the markets have grown in size there's currently as of this Monday morning forty two point three million dollars of assets in the protocol that have been supplied and there's about 10 point 1 million dollars of assets in the

protocol that are actively being borrowed the largest market is ether by far ether is most frequently used as collateral and the most popular borrowing assets are Dai and USD coin last night when I check this you could borrow dye for 13.5% right it's probably still similar if you actually take out a CD peon maker you're charged 16.5% stability fee why would anyone actually go to maker why don't people just borrow this on uncomfort well the advantage that maker has is that maker has a community of stakeholders to MK our token holders that are incentivized to

use maker and to grow the ecosystem and to Shepherd it along if you're an MK our token holder you would probably rather use maker and compound I know a lot of maker token all of us love using compound but you know I think there's a economic incentive to use maker and pay a higher interest rate than something like compound I'm at the end of the day and I think there's always going to be users who prefer to use the maker ecosystem they're the ones fundamentally creating dye and for a lot of users you know a small difference in interest doesn't matter they don't have to be a complete interest rate parity between the two systems you know maker could still be a little bit more expensive and I think the system still works what we have seen is that the interest rates on compound and

the maker stability if you do move relatively in lockstep it's not a perfect correlation but they're definitely positively correlated now interesting so currently you allow borrowing um against six tokens right so ether die you SCC and a basic attention token auger and zero X and B basically the soundness of the operation depends on on these tokens so basically if these tokens are of such a nature that they crush in price unpredictably or for instance if you list some sort of coin that is artificially inflated and

borrowed against and then the market collapses and the borrower defaults and I mean that that would be a bad situation right so busy we saw this recently on Polonia X there was a token listed called clam and clam was clearly pumped and borrowed against and then the market collapsed and the Bitcoin holder's pool took a severe loss on that one so how do you what what's your governance solution for deciding which markets are valid and which ones to support in essence on compound yes so there's really two pieces to this the first one is that in

compound d2 there's no longer a global standard collateral factor which represents how useful collateral is in the very first version of the protocol for simplicity and to be able to ship the protocol one of things we did is we said all assets were the same you can borrow against any asset in the similar fashion everything is equally useful as collateral this was a simplifying assumption which we knew was a starting point and so we only listed five of the largest and most liquid assets that were least likely to be you know pumped and then dumped in compound v2 we actually broke that simplifying assumption and what we did is we said that each asset has its own collateral factor that represents how

useful it is as collateral based on the liquidity and the volatility of the asset large liquid assets like ether or great collateral and clams which are extremely thinly traded low market cap assets are terrible clever but in compound v2 the protocol can actually support assets that aren't just the absolute largest and most liquid they'll just have a lower collateral factor so you know with ether you can borrow 75% of its value one day the protocol might be able to support something like clams and you might be only able to borrow five percent of its value because it's thinly traded the protocol can support every asset because of this variable usefulness of collateral factors and the

second piece of this is you know we're actually allowing the community to select which assets the protocol supports so we like to call this semi centralized governance at the end of the day you know the developers still control the multi-sig address which serves as the admin of the protocol but the important decisions of what occurs what assets are supported when how we like to give to the community to vote on so you know we initially held a vote for which stable point to list you know die came in first place us DC came second place by just a hair and everything else lost dramatically you know and we basically like allowed the community to express his views on what to support the same process is gonna hold going forward you know if the

community thinks that we should list clams for some reason all things are crazy but you know that's a very strong signal it doesn't mean that it has to be useful as collateral and you know an asset can even be supported without it being collateral at all we can create a market for clams you just can't use it as collateral you can borrow it there could be an interest rate you can theoretically actually you know have the colonial-style market but without the risk and that's something we're really excited about so that's what interesting so what's what's the current governance model so how does the community actually voice their opinion on which token should be listed or not listed so we actually have a page on compound it's slash vote we're going to be bringing it back shortly

basically what we're gonna do is we're gonna freeze at a certain point in time a list of addresses that were users of the protocol so when we start to vote we'll say these you know three thousand addresses were able to vote and then each one gets one vote and we basically allow them to vote on a list of assets you know similar to how some exchanges have let people vote for which asset to list and it's a very similar process people sign the transaction with their key basically saying you know I vote for this asset but the whole thing is productized in a very simple web interface where you just click a button in it signs the message and it says I vote for maker to be the next asset in many of the governance questions that aren't compound the emphasis is to have users vote like the holders of C tokens

can can vote and do something or the users of compound can vote to list assets why push these decisions on the users rather than let's say create a compound token and have the holders of that dough can be be responsible for these decisions are users the actually the best class of people to be making these decisions - fantastic question the answer is were not sure yet I mean it's still so early in governance I think maker is the first example of a widely held governance token that gets used by the community and we're just watching this really unfold I'm

extremely excited by maker and that governance token but we don't want to rush into determining the long term shape and form of the protocol until we have a lot of conviction on what it should look like you know in some ways yeah maybe the system would run better if there was a token but we we haven't made that determination yet so basically makers a formidable protocol and but it's well known that there are a small number of maker whales who who have a lot of sway in where where the ecosystem and maker in the ecosystem are going to navigate right it's your way of implementing this user

voting a way of safeguarding against that and do you hope that this will translate into network effects for compound right so I definitely think that it helps prevent against a concentration of power but it's also you know more advantageous because it allows us to actually change how we allow the community to express itself before deciding on any specific path you know once you have a governance token you know its distribution in its ownership the concentration of power is relatively permanent and you can't go back from that you know we'd like to start off with a much more set series of

lightweight approaches that we know can evolve that we know can change so that we don't wind up with something that's permanent you know the last thing you want to do is you know like distribute something of value or wealth and power and have to change the model later we'd rather you know conduct a series of experiments transparently you know hand-in-hand with the communities figure out what works and then eventually slowly begin to enshrine that in product and economics so currently one of the big governance acts that need to be done is the is the setting of the interest rate parameters right and this is done by your firm like the firm presumably controls some some multi signature

account and that is able to set these interest rate parameters that are used by the protocol yes that's right so we've designed the interest rate models that the protocol uses at launch these are going to be relatively rigid models until we hand off control to the community I would like by the end of the year to be very close to having each seat open control to own the interest rate model and so how does that work so you have a group of ever-changing token holders and they need to set essentially two parameters on the on the interest rate model which let's say it's like the floor and the ceiling of the interest

rate for approximation how does a group of ever-changing token holders decide on these two important parameters it seems like an unsolved governance problem it is that's why we want to be careful with it um the thing that gives me confidence is that the incentives are in place for the see token holders to set the correct interest rate model assuming that they're selfish you know if you're a supplier of capital you want the highest return possible and the highest return possible comes from the most amount of usage times the highest interest rate the interest rate is too high people won't use the product it's too low you don't make enough money and there's actually you know a an equilibrium to

even for the see token holders that they're incentivized to do this correctly I think the model can be simplified a little bit where they just have to express a single number what's the you know slope of the curve so to speak we can create it whether it's just a single parameter that they have to vote on and from there it could be as simple as a median it could be something more complicated but I think we can boil it down to a relatively useable experience and it can start off with just one market being governed by the community we might say augur has an interest rate model set by the suppliers of the token and you know continue to have the other markets using a you know semi centrally set interest rate model

can you envisage a situation where basically they're different ports with them different business logics as to which collateral to allow for lending out a certain a certain acid and I mean basically the interest rate will inform itself from that basically from knowing what the quality of the asset is that is permissible do you think there would be different with different substantially different interest rates that allow different crateros well we actually want to take it one step further so really long term in in the governance what we'd like to do is allow the see token holders themselves to say what's acceptable collateral to borrow from

their market so instead of having globally recognized collateral factors each market is going to be able to express what's acceptable collateral to borrow that asset and they're very incentivized to handle that correctly and so a great example of this is you know other stable coins could be even better collateral for borrowing you die then ether is just cuz there's more price volatility between ether and die might be that USD see is you know hyper good collateral to borrow die and other assets less so and so when you actually allow the community to express this granularity I actually think you get a more efficient system because each market knows how it works and they can set their own risk parameters and

they're incentivized not to accept clams as collateral and so I think long term this goes hands in hand with just completely decentralized new governance and allowing each market to really control its own destiny I think there's a larger question here of whether people by and large care enough to make these decisions or whether it's it's it's fair to have this be a democratic process because for financial decisions it always seems to be the case that there are few people who care a lot and then a lot of people who don't really care yeah oh I agree and it's possible that we also you know take the lessons of other

governance approaches and have a delegated proof of state type model where people just vote for who would they want the chief economists in their market today we're the dive holders elect a chief economist on a sort of majority rules you know way and then that address gets to set the model maybe one day we'll see you know public elections held for the chief economist of each market there's going to be someone who's an expert at hugger there's gonna be someone who's an expert at die and you're gonna see you know experts start to control the models you know through a delegation of the seats welcome holders maybe it'll be exciting like that will say well that sounds great and so there's one last thing we haven't talked about yet in terms of of the the

protocol itself so there has to be a price feed right that actually informs the decision of whether liquidation can be forced or not how do you actually how do you obtain this price feed and is there way to manipulate it so basically I mean this is seen even in in legacy markets that you know you have pump and dump schemes to force liquidation through margin cards and I mean even even even in legacy markets that are tightly regulated we see this constantly so what's your take on this is this a back wall feature and it has compound a way of handling this in the short term the price feed is relatively simple um it takes a average of prices across

coinbase Polonia x bit rights and finance and post it on chain and there's some safety mechanisms hard-coded into the smart contracts to prevent you know extreme deviations in price in the short run unless there's human manual override and approval it's a relatively simple system it still requires there to be an organization which is ours that maintains a system but long-term you know our goal is to move to a truly robust decentralized perpetual on chain system that's not susceptible to really any real world flaws and you know in the next couple months we're gonna be

announcing the next generation of how we handle price feeds on chain we think that this is a great area for improvement because what we want at the end of the day is for us the developers to be able to disappear entirely and the system works it's perpetual as robust and it doesn't need any involvement whatsoever from any of our developers any comments on how this new price article system will work we're not gonna reveal it yet but just I will pre announce it here that something new and dig is coming soon mm-hmm so um house compound currently financed so so far compound is a venture backed

business we look like a very traditional Silicon Valley tech company in that there's venture capital firms that are providing us capital to develop this platform we have not gone the route of creating a token who are conducting an IC o---- and you know we're following a very boring path so far and I'm actually curious about sort of the network effects around the compound protocol so are there any network effects and what is the nature of those network effects well I think it's very early in this story of compound I I think you know it might take a number of years for us to truly be able to answer that question it looks like there's Network effects the bigger the markets the more stable the

interest rates and the more stable the interest rates the easier it is to use you know we'll see I think the biggest network effect is going to come into play when you know we have more markets and there's more utility that gets created by having different pairs of assets that you can use I think if there's 20 assets and the system works it'll have more of a network effect than if there's six assets and so I think it's early you know I'd love to come back to this question in the year and more you know compared to contrast today to them mm-hm and so what's currently your business model so right now our business model is to develop extremely widely used infrastructure for decentralized finance

and figure out the business model later you know one things we are really focused on is creating widely used dependable safe financial infrastructure with the com-pub protocol and you know our vision is that if you know this can power a trillion dollars of economic activity there will be a very big business model and it doesn't make sense to worry about it until we get there but my understanding is that the compound protocol does charges spread between the lenders and borrowers and that is what already constitutes a business model today yes that was the case in v1 so in v2 there's still a spread it's a percentage interest that set aside in 12 reserves but this

reserve is to further decrease the liquidity risks of liquidation it's basically a reserve that's just held by the protocol so there's still a spread there but that's not necessarily business well that's other lending protocols such as dy/dx and AMA how how would you say m compare it does compound compare to them well it's interesting because all of them are cousins all of us are exploring decentralized finance together all three products are fundamentally different you know one is a peer-to-peer lending protocol that all of the order matching is handled by an organization one is a margin trading

protocol that uses pooled borrowing and lending facilities very similar to compound but it's the foundations for a margin trading exchange and then there's compound which is probably the simplest of all trade and simplicity can be an advantage or a disadvantage we'll see but all it is is a pooled approach without exchange capabilities and so I think all three are very different products they think very different approaches I think compound is you know really exciting because it's so simple I think it makes it easier to integrate into other smart contracts but we'll see you know what this looks like in Europe have you ever had the pressure to be four and your interest rates to be

competitive against the other protocols for example Levi's dx9 be offering a slightly higher interest rate than compound and then you needing to change your parameters to accommodate that so our models are relatively you know stable we're not like you know pulling the lever every time you know something happens from another market you know it's an interesting model that says the interest rates not a bunch of people and so you know we actually don't look at other projects on a day to day basis that's just not how we think about it you know they might look the compound as sort of like that the base rate because it's by far the largest market and sort of plan around compound but compound doesn't plan around other projects you

said idea that you would die for compound to be something that other companies build on top of and other companies already building on top of compound right now there's a few and we're starting to see more and more developers building on top of the protocol every week we have seen a series of projects launch sort of in tandem with compound over the past couple of weeks we've seen compound protocol integrated into a project called open which is doing a decentralized exchange we've seen CDP saver in a grade compound as well as instead app being able to sort of interact with compound alongside maker

in both cases we've seen a project called xiri on build a really beautiful web interface around the protocol we're starting to see more and more integrations of compound into other applications and systems I think you know give it a year and you can see you know a pretty vibrant ecosystem spring up around compound at least that's our goal and our goal is to help any developer wants to build with compound you know we try to be you know very supportive of other developers with you know engineering resources mentorship design and just you know anything we can do to help developers we will quit so what what do you would be the the

metrics for success for say that the next year or the five years or no all of compound all of compounds future that's a great question um we actually measure success in terms of the number of applications that enable you know I think at the end of the day you know compound long term isn't going to be used by users going directly to the compound protocol I think over time the compound protocol is going to be a base layer for other applications to be created and users aren't going to have to you know fiddle around with the compound protocol they'll just go to other applications and so for us the success metric is the number of experiences that we enable to get built you know pretty soon we're gonna start

to you know really start to reframe how we show off compounds to not be compound but the projects built on compound and that's that's how we think about success very interesting so a component sort of recede into the background over time that's the goal I mean I think success really looks like compound being a part of many other applications but on its own not being something that you have to use directly being able to use compound to do other services and so what are some of the cool features apart from the price orbital that that your team is working on so we're working on a longer term we like to think of it as you know more decentralized oracle system after

that I think we're gonna be really focused on building out as you might call them SDKs and api's for other developers it's less about changing what happens on chain and more about enabling new use cases and we'll be doing that in parallel with transitioning governance towards the C token holders so you know at the end of the day we become less and less important and the community becomes more important that's maybe a lovely note to end on thank you so much Robert for coming on the show it's been super interesting and I look forward to seeing what compound we'll be up to thank you Friedrich it's been such a pleasure to join you on after Center I can't wait for you and

the rest of the community to follow compounds progress and it's been great to be on the show thanks a ton for taking on d-day likewise thank you we released new episodes of epicentre every week click here to subscribe for hundreds of insightful interviews with some of the leading minds in blockchain and crypto you can also listen to the audio version of the podcast on iTunes Spotify stitcher and other podcast apps click here for a full list of places where you can listen thanks for watching at the center and we hope you'll join us for our next episode