Truth is a function of time
1962 year ,Thomas Khun Published 《 The structure of scientific revolution 》. This book applies to the philosophy of Science , Just as Godel's incomplete theorem applies to Mathematical Philosophy .Khun By introducing a plot model to challenge the monotonic linear hypothesis in scientific evolution , In this model , The continuity period is shaken by the discovery of unexplained anomalies , Finally, a sudden paradigm shift . In the endless process of creative destruction , The paradigm is pushed to the limit of its explanatory power , Then it burns down when it becomes unusable . From Aristotle to Einstein and beyond , Every paradigm has tasted the ultimate truth , Make the predecessors look stupid .Khun sure , On the one hand, this paradigm evolution is inevitable , This means that it is destined to happen and will continue to happen , On the other hand , Incommensurable , It means that the new paradigm cannot be based on old tools to prove . Simply speaking , The new is destined to become the old , There is no communication and agreement between the old and the new . Every truth is only a function of time , Including this .
Unfortunately , We are the product of the paradigm in which we live . When trying to frame and describe the things in front of us , We inevitably keep talking about what happened to us before . As an individual agent , We structured and divided the received information , To understand the world , Now new information needs to adapt to pre-existing structures . The older you get , The smaller the space .
： United Finance
Compound On 2019 Launched in 2013 , Now with Aave and MakerDAO Together become Part of the Trinity . However , Tie the three together , Can explain a lot about DeFi Unhelpful simplification in the world . All three are considered loans , but MakerDAO The core function of is to expand the cryptocurrency base by casting a new stable currency supported by asset tokens （ It's like a bank ）, and Compound The function of is to match different periods of asset tokens to meet various use cases . They all call their callable functions borrow and borrow , But the operations behind them don't have much in common .
https://dune.xyz/hagaetc/lending Complete data link
Using old-fashioned names to promote new solutions is really a good marketing tool , But this should not be allowed to come from TradFi or DeFi To the satisfaction of any serious financial analyst . With the introduction of its proprietary chain , Especially its real-world bridge with corporate and bank bonds ,Compound Most successful in marketing its availability —— For borrowers . But what exactly is compound ？ An in-depth discussion of protocol evolution is an introductory course , Introduce the conflict of opposing forces within each company or any general social group .
Compound It is a protocol on Ethereum blockchain , It establishes the money market , Money market is an asset pool with algorithmic interest rate based on asset supply and demand . Supplier of assets （ And borrowers ） Direct interaction with protocol , earn （ And payment ） Floating rate , Without negotiating terms with peers or counterparties 、 Terms such as interest rate or collateral .
Above is Leshner and Hayes In them 2019 The white paper of （Compound white paper ） The definition given in . There is no mention of loans .
In order to avoid falling into the trap of integrating new things into old forms , We first need to go back to the world of traditional banking .
TradFi（ Traditional finance ）： The old way of doing things
Looking from the outside , A bank is a single institution . However , The fact is that , Behind a line in any financial statement , There are several completely different and often competing activities . Although the pillar 3 The report helps external investors better understand what is happening inside the organization , But the reality is , Unable to fully understand what is happening in the company's field from the outside . We call it politics . That's why most financial disasters are only obvious in hindsight .
From Credit Suisse about Archegos Capital The report of , Recorded in the bank 5.5 After the loss of dollars （ As usual , The point is my ）.
2021 year 2 month 19 Japan ,PSR（ Standard advice ） Analysts to PSR The principal sent a dynamic margin proposal for internal review , And pointed out that he had made the terms “ Be as strict as possible ”, If applied to Archegos The average margin available is 16.74% Swap Portfolio , And lead to an increase of about... On the first day 12.7 An additional $billion in margin . If Archegos The dynamic margin rules of bulk brokerage business are applied to Archegos Our swap portfolio already requires half of the additional initial margin .2021 year 2 month 23 Japan , be responsible for Archegos Of PSR The analyst contacted Archegos My accounting manager , And ask to talk about dynamic margin .Archegos The accounting manager said he didn't have time that day , But you can talk the next day . the second day , He postponed the discussion again , But agreed to review PSR The proposed framework sent on the same day .Archegos There was no response to the proposal , And in a week and a half 2021 year 3 month 4 Japan ,PSR Analyst follow-up questions Archegos whether “ Any thoughts on the proposal ”. He was in Archegos My contact said he “ I haven't had a chance to see ”, But hopefully “ Today or tomorrow ” Go and have a look .
Politics hurts .
In my strategic consulting career , The name of the game is the consistency of incentives . The best financial institutions focus on decomposition through the combination of internal transfer pricing policies , At the same time, build a compensation plan , Cause the agent to act for the benefit of the bank as a whole . Realize that net interest income is a combination of several value streams , Banks began to set transfer pricing for everything , From liquidity （ That is, let mobile users pay for what they lock into the Ministry of Finance ） credit （ That is, stripping the cost of credit risk from the front office profit and creating an income statement for risk managers ）, as well as SG&A（ Selling cost ）. others , Even more complex （ Usually a corporate or institutional bank ） Developed an economic value added based on each large transaction (EVA) Bidding system , If the transaction is approved , Each team is ready to introduce EVA Bid - The bid will become the budget of the team . It was the age of the financial crisis , Everyone has the same ambition ： Find a balance between many agents , To restore satisfactory profitability without expanding the new destructive bubble .
Imperfect totalitarianism of corporate policy
Banks have been and are trying to do three things ：
- Identify and isolate key activities that affect their business
- Allocate sufficient resources for each activity
- Adjust incentives for these resources , To minimize the improper behavior of the organization
A set of company policies have been developed to achieve these goals . If you really want to know what primitives the complex architecture of banks is based on , You need to study company policy books . However , There are two main problems ： The first is that only insiders can access （ majority ） Company policy , The second is that it is difficult to simulate the interaction between these policies , Therefore, it is difficult to identify potential defects . Generate monsters at some point in the future . In the example above , Even Credit Suisse （ Maybe ） Has formulated correct high-level policies to control the counterparty risk of its prime brokerage business , However, the incentive measures are not unified to promote all agents to take effective actions according to these policies . As organizations become more and more complex , Enterprises are becoming more and more opaque , Visibility and control issues are magnified on a large scale .
That's why , From the outside , Analysts will be complacent when describing bank activities and continue to use simplified primitives ： To loan 、 To loan 、 Risk management 、 Mobility 、 Solvency, etc . for example , If we look at loans from a more granular perspective , We will identify several sub activities ： launch 、 Risk underwriting 、 Price settlement 、 Continuous monitoring 、 Credit collection 、 Customer relationship management, etc . Each activity has competing ambitions , Every activity should be regulated by policy , Each policy should be implemented through an incentive system for participants , Hope to achieve a good balance .
In traditional finance , It should be so detailed and effective , It's impossible at all . That's why , During my years as a private equity owner of financial institutions , My main job is to visit the company and make sure everyone talks to each other in the right way .
DeFi The protocol is being transformed into executable 、 Compiled and testable code , Just like the old school corporate governance strategy used to write on paper . meanwhile , This should enhance our ambition to look at the value chain . take Compound As a loan agreement , It's like putting Geneva CERN（ European Organization for Nuclear Research ） Accelerators are like machines that study the universe ： It can describe it to the public , But it's completely useless in physicists .
Paradoxically ,DeFi The agreement is achieved by placing almost all sources of risk on token fluctuations or market risk , This makes this improvement process less urgent . If we exclude protocol security and Governance , Also known as endogenous risk —— This needs to be discussed separately , Every bad unexpected source of protocol users is embedded in the pricing dynamics of asset tokens in use . And there are many different factors that will affect the pricing dynamics of asset tokens .
COMP The first primitive ： Automatic term structure
This is a long introduction , however Compound What do you actually do ？
Algorithm rate setting . stay Compound Agreement , Token holders will their ERC-20 Asset contribution to liquidity pool , In exchange for a dynamically calculated floating rate of return . On the other hand , The borrower provides mortgaged assets , In exchange for , Other assets can be obtained temporarily by paying dynamically calculated floating costs . The protocol applies Hansen The concept of combination curve introduced in the context of automatic market maker , Define each market with certainty （ That is, each asset ） The difference between the active interest rate and the passive interest rate . At every point in time （ block t）, Those constructed interest rates （ Or term structure ） Is a function of market utilization plus a set of parameters to motivate participants and ensure sufficient propagation as a buffer for the protocol .
Compound Market risk analysis link for agreement participants ：https://dirtroads.substack.com/p/-8-primitive-obsession-chasing-the?r=k87cd&utm_campaign=post&utm_medium=web&utm_source=twitter
A well run algorithm and rate setting will be able to attract enough users , While maintaining positive net assets .Compound Success has been achieved in both areas .
Dune Analytics Analyze links ：https://dune.xyz/datanut/Compound-Finance-Deposits-and-Loans
In an era of little yield competition ,Compound The introduction of the Treasury is another way to introduce traditional dollars into the agreement （ Massive subsidies ） The way . By providing 4.00% Annual interest rate and liquidity commitments , It's not hard to understand why . Although we are sure that regulators will not help , But the marketing intent is clear ：Compound Trying to take advantage of its first mover advantage .
however , It is not clear who will benefit from the increase in sales . As of today ,COMP（ The governance token of the agreement ） The holder of the has only the right to govern , They have no other way to get value from the use of the platform . That doesn't necessarily mean COMP There will be no value stream in the future , perhaps COMP Tokens have no value . However , Valuation is not the focus of this article .
Compound 2nd Primitive： Automatic clearing engine
The Comptroller is Compound The risk management of the agreement . The Comptroller defines the level of collateral required to borrow tokens and all involved clearing parameters , In case the mortgage position is too risky . This is a Compound Ways to protect liquidity providers in the event of exogenous shocks , Encourage these providers to participate in .
Liquidation mechanism . stay Compound The automated clearing process of high-risk Treasury in the agreement protects liquidity providers by encouraging liquidators to buy collateral . Emphasize that most loan agreements work well in encouraging liquidators to close their positions ; Actually, it's too good , And at the expense of the borrower . The fierce natural gas price competition between liquidators and the short bidding interval in auction liquidation confirm the attractiveness of liquidators' business .
come from DeFi An empirical study of liquidation ： incentive 、 Risk and instability
Compound The liquidation mechanism of （ and Aave – The so-called fixed point difference ） Give the liquidator the right to liquidate a certain percentage of the collateral , The percentage of this collateral exceeds the minimum required to restore health . This design decision further benefits the liquidator rather than the borrower . In return , The liquidator is exposed to the risk of loss caused by the fluctuation of collateral price during liquidation , But flash loans are used in fixed spread clearing （ Such as Compound Liquidation ） This risk is greatly reduced .
Flash loan . Atomicity of blockchain transactions （ Joint success or failure of execution in the transaction ） Make flash loans possible . Flash loans represent loans obtained and repaid in a single transaction . The borrower can borrow up to all available assets from the flash loan pool , And use funds to execute any logic in the transaction . If the loan plus the required interest is not repaid , The whole deal will resume , Without any state change on the underlying blockchain （ namely , Flash loan never happened ）. Flash loans have been widely used for clearing .
The workflow is as follows ：
- The liquidator is in currency X Borrow a quick loan to pay off debts .
- The liquidator repays the borrower's debt through a quick loan , And get money at a premium Y Security for .
- The liquidator exchanges part of the purchased collateral in exchange for currency X.
- Close flash loan , The liquidator shall repay the flash loan together with the interest , The remaining profits belong to the liquidator ; most important of all , If liquidation is not profitable , Flash loan will not succeed .
come from DeFi An empirical study of liquidation ： incentive 、 Risk and instability
let me put it another way , The real winner is the liquidator , I.e TradFi Something that market makers are very close to , The borrower's fee is . It sounds familiar ： read Robinhood, as for Robinhood, The fact does not seem to have caused much trouble to borrowers . This may be related to a good user acquisition strategy 、 Marketing is related to the main use cases of borrowers ： Margin trading . leverage （ Non institutional ） Traders' optimism sometimes confuses the mind .
Compound Early competitive advantage
We have come a long way to describe Compound stay DeFi Practical role in ecosystem , But if we don't first understand what the thing is trying to do , It's hard to judge how good the thing is .
We've opened Compound And identifies two protocol primitives ：(1) Automatic term structure , as well as (2) Automatic clearing engine . The protocol bundles the two primitives together in the initial user experience （ They don't necessarily belong together ）, And it may still be better than the user experience of most competitors . Expansion of product line and creation of integration bridge （ With other blockchains and other DApp） Efforts are being made to further improve this experience , Further attract users on the platform , Even if they are not the people who benefit the most from their design .
however DeFi It's modular , We already know . This means that it can push the construction of any complex tool to smaller and smaller basic blocks . That's why by betting early on solutions that can prove better than existing solutions , Or the reason to bet that new primitives can be incorporated into outstanding solutions that have not yet been built to achieve extraordinary returns . That's why it's hard to keep the same solution for a long time （ Tokens, ） The reason for value . But this is a different governance and incentive issue , Can be better solved outside the agreement itself . ah , The power of modular combination is really puzzling .
However ,Compound The policy may not go wrong .DeFi The competition between the agreements is very fierce , In the space of pure modularization and commercialization , Defending the early competitive advantage is extremely difficult .Compound What we are trying to do is to improve customer loyalty by providing a good experience and attractive user experience . Although it has a strong for me TradFi Aftertaste , But in the non institutional world, it may be enough .
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