How Does Compound Interest Work?
Coinbase VC has made its first investment, taking only 12 hours from initial meeting to investment.
Venture capital divisions are all the rage these days as tech giants realise it’s a lot cheaper to fund useful projects from inception, rather than buying them out later.
Coinbase recently jumped in with its own VC fund, Coinbase Ventures, which made its first investment shortly afterwards.
The recipient is a startup called Compound.
As the story reported in TechCrunch goes, Compound was just about to wrap up its funding round when Coinbase VC was announced. The Compound team sent an email, and after a few hours of thorough evaluation, the fledgling company was a few million dollars richer.
“In 12 hours they researched us, met our team, diligenced it and evaluated it more than almost any investor had to date,” said Compound co-founder and CEO Robert Leshner.
It might be a good combination.
Coinbase customers might be able to benefit from Compound’s services, which currently have little overlap with Coinbase’s existing product range, while Compound’s business model calls for a big launch with plenty of partners and users right from the start.
How does Compound work?
Compound has several facets.
At its heart, it’s a centralised cryptocurrency lending platform.
Borrowers can put up cryptocurrency as collateral and then borrow off it. If price fluctuations drop the value of collateral lower than the amount borrowed, some of that collateral is automatically liquidated to equalise the amounts. So far so normal.
The difference is that liquidated assets are sold on Compound’s own market, with a liquidation discount to incentivise arbitrageurs to pick up some discount liquidated coins.
Also, anyone can become a lender, similar to peer-to-peer lending platforms. The main idea behind Compound is that it gives people a relatively safe and effective way to put their crypto assets to work and earn interest.
Lenders can choose to trigger a liquidation protocol anytime they want, essentially swapping their lent amount for borrower collateral or to withdraw their investment in about 15 seconds flat.
It’s a centralised platform though, and rather than directly connecting lenders and borrowers, it pools assets, allowing both the lender and borrower side of the equation to freely interact with and withdraw from the market whenever they want, without affecting others.
The protocol algorithmically sets interest rates for each accepted currency, based on supply and demand for that coin within the market. With a large enough user base, this should help pull anomalies, such as spikes in demand for one particular coin, back to the middle and maintain stability for both lenders and borrowers.
It’s an Ethereum-based platform, but the protocol is meant to be low work and low cost.
Despite being a centralised platform, it also includes a governance structure for platform token holders, rather than the company itself.
A building foundation
Significantly, people can build on top of the platform.
Leshner has previously noted that while Ethereum is an incredibly powerful platform, it’s also extremely difficult for certain financial applications such as calculating compound interest or for creating programs to allow many users to freely deposit or withdraw funds from a system. This means existing automated blockchain lending platforms have tended towards fixed duration simple interest loans.
The creation of Compound was designed to solve these problems and open up a lot of doors for blockchain financial applications.
The end result is basically intended to be a powerful, lively and flexible decentralised economy that can host other applications in addition to its core functions.
It’s easy to see why Coinbase might be interested in it.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and XRB.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering.
It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance.
Robert Leshner: Compound – An Automated Money Market for Ethereum Tokens (#295)
Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators’ websites before making any decision.
Finder, or the author, may have holdings in the cryptocurrencies discussed.
Latest cryptocurrency news