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What is compound?

Compound, established in September 2018, is a cryptocurrency loan guarantee platform. Users can deposit cryptocurrencies into Compound, lend cryptocurrencies to the outside world, and earn interest. They can also use the deposited assets as collateral to lend cryptocurrencies. Compound currently supports 8 types of cryptocurrencies, namely BAT, DAI, ETH, REP, USDC, USDT, WBTC, and ZRX. The lending interest of each cryptocurrency is different. As of June 22, the cryptocurrency with the highest lending rate is BAT, and the lending and lending rates are 24.31% and 32.24% respectively.

Compound operates according to the generation time of the Ethereum block (about 15 seconds). Users can deposit and lend at any time, and the interest is updated every 15 seconds. It can quickly realize rolling interest and enjoy the compound interest effect. In other words, every 15 seconds, the system will settle the interest and include the interest in the principal to continue making profits.

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After the release of COMP, will the top leaders in the industry change?

In February of this year, Compound announced that it would issue COMP tokens using ERC-20 rules. Four months later, on June 18, COMP was launched on the decentralized exchange Uniswap, and the industry landscape began to change. In just four days after its launch, COMP’s value rose from $63 to $330, an increase of more than 400%, and the amount of locked positions also tripled from $200 million to $600 million. On the contrary, MakerDAO’s lock-up volume dropped from $490 million to $430 million. Compound reversed the situation and became the industry leader just by issuing tokens.

COMP is completely different from MakerDAO's token project. Not only is it not a stable currency like DAI, nor is it a designated fee token like MAKER tokens. Let’s take a closer look at the economics of the COMP token.

(1) COMP is a community governance tool for the Compound contract, which is used by COMP token holders and voting agents when discussing, proposing, voting, and other related activities related to contract changes.

(2) The total supply is 10 million, of which ① 2.4 million (24%) are allocated to Compound Labs’ shareholding investors; ② 2.22 million (22.25%) are allocated to founding members (cash out after 4 years); ① 4.23 million (42.5%) distributed to Compound users; ④775,000 (7.75%) as rewards for participating in governance; ⑤Compound Labs does not hold COMP tokens.

(3) After careful analysis of the distribution of ③, it can be found that in the next four years, Compound can distribute about 2,880 cryptocurrencies to users every day, and the distribution amount is proportional to the interest income of ETH, USDC, DAI and other markets. Among them, 50% is allocated to asset suppliers, and the other 50% is allocated to lenders. If more than 0.001 COMP is distributed, it can be automatically entered into the user account. The COMP entered into the account can be withdrawn at any time, and the allocation will be disclosed in real time.

As of June 22, Compound has distributed 20,238 COMP, of which USDT market occupies 15,707, the largest number, followed by BAT (2126), USDC (1042) and DAI (617).

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COMP is reminiscent of FCoin

COMP's performance reminds people of another cryptocurrency project, "FCoin". "FCoin" is one of the popular "trading is mining" projects. Every time a user makes a transaction, he will get a corresponding number of tokens distributed by the exchange according to the transaction volume. The operating mechanism of the two is roughly the same. When users conduct transactions (deposit and loan), they can obtain platform tokens distributed by the exchange, which is very attractive to users.

However, the limitations of the "transaction-as-mining" project have become very obvious. Since the circulation is fixed, the tokens will be distributed one day, at which point the attractiveness of the token will disappear completely, users will leave, and the token itself will lose value. The problem is that most users can predict this process in advance, causing the price of tokens to fall much faster than expected. In addition, in order to obtain higher returns, the exchange artificially increased the trading volume, which also caused the token to eventually become a piece of waste paper. This is how we see the end of FCoin. FCoin distributes self-issued FT tokens to users in the name of giving 80% of the exchange fee income to users as dividends. Finally, the price of FT, which was once selling for $1.26, plummeted to $0.43 within ten days, and the trading volume also dropped significantly. In the end, FCoin announced its closure in February this year due to financial difficulties.

Some people in the industry worry that COMP may become the second FT. COMP limits the number of tokens distributed per day to 2880, claiming that tokens will not be distributed all at once. But 2.4 million tokens have already been distributed to Compound Labs shareholders, who will surely flip coins to cash out when the COMP price reaches a high. Also, after four years, all COMP tokens will be distributed, will COMP still have value after that? This is questionable.

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Exchanges: go online first

For exchanges, listing COMP is an unavoidable temptation. The U.S. cryptocurrency exchange “CoinBase” announced that it will list COMP on June 22 through the BTC/USD trading market of the investor-only platform “CoinBase Pro”. After the news came out, the price of COMP rose sharply. CoinBase also invested $1 million in Compound last September.

The fastest responder in South Korea is the CoinOne exchange. CoinOne Exchange announced on June 19 that COMP will be listed on the Korean Won market. Trading will start on June 22, and specific information about the project will be released later. That is to say, in order to speed up the launch of COMP, the exchange has adopted the practice of first launching and then disclosing project information.

JOIND Kwon Seona reporter kwon.seona@joongang.co.kr

JOIND Kwon Seona reporter kwon.seona@joongang.co.kr