The Compound Chain

Biweekly newsletter no. 12

What is the Compound Chain?

Compound recently announced its plan to launch the Compound Chain — a cross-chain version of the MakerDAO protocol, governed by COMP tokenholders.

According to the whitepaper, the Compound Chain is a proof-of-authority (PoA) network, in which validators operate with their real-life reputations at stake — this in contrast to permissionless networks, where validation occurs based on economic incentives alone.

A PoA network could potentially enable banks and exchanges like Coinbase to operate nodes on the Compound Chain. 

It seems that the ambition for the the Compound Chain is to become the bridge between the different blockchain ecosystems — the whitepaper hints at Polkadot, Tezos, Solana, Diem, and central bank ledgers among others. 

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How does it work?

Based on the whitepaper, it seems that the Compound Chain effectively functions as a cross-chain MakerDAO.

Users are able to import their cryptoassets from other peer chains onto the Compound Chain by locking their assets on the peer chain and minting them on the Compound Chain. 

Once the assets are on the Compound Chain, they can be used as collateral to borrow CASH (stablecoin), similar to how users currently borrow DAI on MakerDAO. 

The main difference between the economics of CASH and DAI is that the former accrues Yield (DSR rate) by default.

Comparison of CASH & DAI economics

• Cost = Interest inflows (based on Stability Fees)

• Yield = Interest outflows (based on the DAI Savings Rate)

• Spread = MKR revenue (difference between interest in & outflows)

The formula (Spread) for how validators on the Compound Chain make cash on CASH. Source: https://compound.cash/

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Why would Compound build it?

Building a more scalable, cross-chain version of MakerDAO could turn out be a highly profitable endeavour.

MakerDAO’s cumulative revenue since the launch of Multi-Collateral DAI. Source: https://terminal.tokenterminal.com/dashboard/MakerDAO

Validators on the Compound Chain charge fees on

1. Asset transfers (transaction fee), and

2. CASH borrows (the Spread). 

It’s likely that a portion of all fees earned by validators on the Compound Chain will become subject to a revenue share with the COMP tokenholders — similar to how each lending market currently has its own Reserve Factor, which determines the % of interest payments that are directed to the protocol’s reserves, instead of the lenders. 

We’re really excited to follow the development of the Compound Chain, which could, yet again, turn out be a great leap forward for the crypto space as a whole.