Grayscale's Deeper Dive into Compound

Last Update 12/10/2021

Rayhaneh Sharif-Askary: Hi, everybody. Welcome to our deeper dive into Compound. We are going to give folks a few minutes to join and then we will kick it off.

Seeing some great engagement. Good morning, everybody. Panelist number is... I think we'll give it one more minute and then I'll kick things off for us here.

Okay, let's kick this off. Good morning, everybody. Thank you for joining. I am fortunate enough to be joined today by Compound Founder and CEO, Rob Leshner. I also am thrilled to introduce to you all Grayscale investors and the general investment community, our new head of research, David Grider, who has joined Grayscale. He's going to be creating content, thought leadership. So I'm really pleased to have him on the team and to have him on with me today.

So the purpose of these, for those of you who haven't been on before, the purpose of these deep dive webinars is to really make tangible the protocols underlying the products that we have. And I think that's... we get on with the founders. And that's the idea, is to just make it something that folks feel like they can touch and feel, no question is too silly, and of course none of this is investment advice, you should always consult your own broker or advisor. And our private placements, including our Grayscale DeFi fund, are only available to accredited investors.

So now that I've done my disclaimers and intro, I want to kick it off to Rob. Rob, do you want to provide us some background on yourself and how Compound came to be created in the first place? What problem were you looking to solve?

Robert Leshner: Absolutely. And just want to say I'm excited to join this session and webinar with you all this morning. So Compound was founded in 2017, and at the time this was an era in crypto when there was a lot of activity on exchanges where people were buying, selling, and trading crypto for dollars and for other crypto assets. And there was not yet a concept of decentralized finance or DeFi. In 2017, there was a blockchain called Ethereum that was starting to gain prominence where developers were writing smart contracts and deploying them on the blockchain. These are simply computer programs, but these computer programs can open source transparently and autonomously manage assets, create logic, and add a whole layer of programmability to assets that you haven't seen before. And so in 2017, we decided that we were going to use this new technology, smart contracts, to create an autonomous market for interest rates on crypto assets so that any type of user would be able to earn an interest rate on the crypto that they have or borrow crypto that they would like and pay an interest rate. And we created Compound using smart contracts. And today this is known as decentralized finance or DeFi. And it was one of the first applications to attempt this structure to administer a market, and it has created a playbook that a lot of other teams are using when they seek to create DeFi applications as well.

At the time there was some semblance of interest rates being offered through the margin trading books on centralized exchanges or through over-the-counter lending. But this was attempting to create a market that barely existed at the time and has since begun to scale. So today there's about $20 billion of assets earning an interest rate in Compound and being borrowed. The market in 2017 was essentially zero. It took years to start to create these markets that today are relatively commonplace.

Rayhaneh Sharif-Askary: So how does it work? How does Compound work? Explain it to me like I am a five-year-old who doesn't know anything.

Robert Leshner: Yeah, absolutely. So Compound, the protocol, is a series of markets. So every asset that's on the Ethereum blockchain, for the most part, all the large assets, there's a market for. And this market, the starting off point is an interest rate that you could pay to borrow the assets. So if you want to borrow a stablecoin like US Dollar Coin in order to cash out to fiat, or buy more assets with, or trade for any good, you can borrow US Dollar Coin from the protocol. If you want to borrow Ether to purchase NFTs or to run smart contracts on the Ethereum blockchain, you can borrow Ether. If you want to borrow a token to use in some other application, you can borrow that asset.

So Compound lets people borrow assets, and when they do so they pay an interest rate. And that interest rate is paid to all of the other users who want to supply that asset to the protocol. So there's borrowers and there's suppliers who are providing liquidity for people to borrow. And when somebody borrows, it's not based on credit worthiness or their identity or who they are or their character, it's based on the collateral that they provide to the protocol. So in this way, the protocol is able to measure the risk of a borrower very discreetly by analyzing the collateral that they've posted to the protocol and the value of that collateral in real time. And it enforces that a borrower always has more assets posted than what they're borrowing.

And so a great example is you might borrow a thousand dollars of US Dollar Coin by posting $2,000 of Ether as collateral, or you might borrow Ether using Bitcoin as collateral. It allows you to really borrow any asset you would like using any other asset or portfolio of assets as collateral. And in this way it's a system that when a user is supplying assets, they don't have to discern the credit worthiness of a borrower, they just have to understand that the protocol works based on collateral and that all of the accounts are auditable and monitorable in real time.

And so anyone can inspect the health of the market and see that every user is solvent, they can see how the protocol functions, and they can see that when people are borrowing assets, they're incentivized to repay them later because there's more collateral in the protocol than what they have outstanding.

Rayhaneh Sharif-Askary: So it's completely transparent, auditable, peer-to-peer lending that is collateralized the way I might put up my home to get a loan from a bank for instance, except people are putting up cryptocurrencies.

Robert Leshner: Yeah, that's exactly right. And this is the biggest advantage of a DeFi application versus a financial product or market run by a business using spreadsheets and people and all sorts of contracts and processes, the entire system is running as a smart contract, and so every aspect of it and every parameter of it is transparent. And so it's just like you borrowing against your house, you're borrowing against other crypto as collateral. And the system in its entirety is essentially open source so anyone can build applications that monitor Compound, or analyze the markets, or analyze the solvency of individual users.

David Grider: Hey, Rob. Thanks a lot for joining, first off, and that's a great overview on what Compound is doing and the problems it's solving. Maybe just give folks a little bit of background and understanding on the COMP token, and maybe for people who are maybe more familiar with Bitcoin and Ethereum a little bit, how maybe it functions relative to some of those tokens, maybe how those fit in the protocol, and also maybe some of the other tokens that kind of operate in your network?

Robert Leshner: Yeah, absolutely. So the COMP governance token is a tool to add predictability to the protocol. So the protocol is upgradeable over time. You can add new markets to the protocol, so if a new crypto asset comes out, you can add it to Compound, so if there's a market for it to be able to borrow it or earn an interest rate on it. The functionality of the protocol is evolving and living as well. And there needs to be a system in place by which the protocol can be modified, but in a way that adds reliability and predictability for its user because you don't want something to change overnight, you don't want one person or one team to have the power to change something.

So the COMP token is the tool by which the rules of the protocol evolve. So COMP is a governance token. It's one of the first examples of what's now called a governance token. And what it does is it allows the users to vote on changes to the protocol. So if there's a code upgrade that's going to add new functionality, all of the token holders through a seven-day process are able to vote on whether or not this code change is desirable or not. This could include analyzing what it does, how it changes the protocol, and ensure that it's a positive and safe upgrade. And so COMP is being used to vote on changes, whether it's changing the interest rate parameters of a market, or adding a new asset, or modifying the functionality of the protocol in some way.

David Grider: Yeah, I think that's really exciting. You really give the community a voice in how the protocol develops. Are there any recent updates that maybe have come from that or coming on the horizon? Obviously you can't disclose anything that's non-public, but maybe give us some of the recent history and stuff your folks are looking out for.

Robert Leshner: Yeah. So this is actually a really exciting question because at this point, development of Compound is what I would call open source and open to the community. So in a lot of ways now many of the upgrades to the protocol are actually coming not from Compound labs, which originally built Compound, but from developers in the community who are writing modifications to Compound and then having the token holders approve those changes or new markets or new activity.

And so I can speak for Compound labs, but the community, there's always unexpected things that people are building that are really exciting. At Compound Labs, we've recently announced a product called Compound Treasury. This is an interest account built on top of the protocol. The really exciting thing about the Compound protocol is that anybody can build a business on top of it, anybody can build an application on top of it, anybody can source the interest rates or the liquidity for their own use cases.

And so Compound Labs recently introduced a product called Compound Treasury which is a dollar-based product, and what it does is it accepts dollars from customers, converts them into stablecoins, supplies them to the Compound protocol and offers a yield. This product is beginning to drive significant new customer types and usage patterns into the protocol. And I think it's a really interesting example of a team creating an open source protocol and then building a business on top of it that drives usage and volume to the underlying protocol.

David Grider: Yeah. No, I think that's pretty awesome, Rob. Obviously, the thing about these that's most innovative is what you described, anyone can build on top of this kind of open protocol. Maybe talk us through a little bit of that innovation and just what you see.

Robert Leshner: This is actually one of the most interesting attributes of decentralized finance. So Compound is operating as a smart contractor computer program running on blockchain, and anybody can interact with this. You can interact with this smart contract yourself, so you can have your own wallet, you can custody your own crypto, you can interact directly with the smart contract. But it's not limited just to users. So other smart contracts can interact with Compound as well. So if you're a developer out there, you can build an application that directly interacts with the Compound protocol, that earns an interest rate or borrows liquidity from it.

In addition, because this is now open to individual wallets and other smart contracts, you can build an application in any format on top of this. So you could build a business on top of Compound that just interacts with it programmatically or manually, and every set of permutation is possible in this. And so it allows a lot of experimentation and new creative ideas to flourish where you can combine Compound and another DeFi protocol, or build a business that combines Compound and a FinTech system like Stripe. The possibilities and permutations are pretty endless, and in DeFi this is called composability and I think it's one of the biggest strengths of decentralized finance.

Rayhaneh Sharif-Askary: I want to take a little bit of a step back and come back to just how we can think about the token and drill down a little bit. So you touched on governance tokens. Perhaps some folks aren't as familiar with what a governance token is. So can you just drill down a little bit more into how to think about COMP governance tokens and how to put them in context with tokens that other people might know in terms of how they work like Bitcoin or Ethereum?

Robert Leshner: Yeah, absolutely. So a governance token is really very different from Bitcoin or Ethereum. So bitcoin is a currency and its value comes from the fact that it's scarce and you can send it to anybody that you would like. It's a very simple cryptographic asset. Ether is a more complicated asset in that it's powering this smart contract blockchain and that the Ether is used to deploy smart contracts and interact with smart contracts. One of those smart contracts is Compound. And Ether, in a lot of ways, is useful for interacting with a DeFi application and its value really is derived from how many people want to interact with these smart contracts.

The third class of tokens, which is very different from the first two being a currency or fuel, so to speak, is an application or governance token. So Compound is an application that's built on top of Ethereum, and the governance token owns the protocol. So the protocol can only be modified by the COMP governance token holders, and the governance token holders essentially have ownership and modification rights of the protocol. And so in a lot of ways you can think of this as similar to corporate governance that you would use to manage a legal entity. In the crypto world, you have a token that provides token governance of a cryptographic protocol and market. So in this case, the COMP governance token is what controls and decides on changes to the Compound protocol.

And so it's a very different type of asset. I think that those who are interested in the underlying protocol and its growth and its metrics are able to analyze it in the context of governance token in a way that you wouldn't look at something like Bitcoin.

Rayhaneh Sharif-Askary: So with the token, so to transfer the rights to make decisions around the protocol and effect outcomes in the protocol. And if I'm a token holder and I care and I want to cast the vote, great. If not, then presumably I sell my token to someone else who wants to cast a vote, and that's kind of how we think about value and the transfer of these assets and who is really providing the outcome of this protocol.

Robert Leshner: Yes and no. I think some of that is completely correct, but a lot of people don't vote their Amazon shares. They don't say, "Oh well, I'm not going to vote them, they're worthless. I'll transfer to somebody else." They say, "Oh, I just know that other people are going to be using these and voting and participating in corporate governance." Whereas I think a lot of investors are passive and don't participate directly in the governance process.

Rayhaneh Sharif-Askary: Okay. That makes sense.

David Grider: So maybe one way for framing value or just the token for folks just like maybe I have a bunch of BAT for example, and I really just want that to be listed and I want increased liquidity, it's useful for me to own COMP for that reason because maybe I can get it on there and I can kind of help facilitate borrowing and lending on your guys' platform. Is that maybe one or a couple of the ways that could be really incentives for folks?

Robert Leshner: Yeah, I mean the primary incentive is that the governance token controls changes to the protocol. So whether it's adding new assets or changing the way that the protocol functions or how it's deployed, that's really where the token comes in.

Rayhaneh Sharif-Askary: So obviously this is really exciting. What's your big focus today? And what are you excited about today? What's your vision going forward? What would you like to see 3, 5, 10 years from now?

Robert Leshner: Yeah, there's a lot to be excited about. So I take a very long-term focus, and I think then in 10 years what you're going to see is that more assets are crypto assets living on blockchains than aren't. I think in 10 years pretty much every asset's going to be issued on a blockchain as opposed to through very legacy systems of records. I think most of the assets on stock exchanges are one day going to be issued on blockchains instead of through paper and spreadsheets, so to speak.

And so I think in 10 years the number of assets that are accessible to a system like Compound is going to grow exponentially. When we started Compound in 2017 we said, "Oh, it's going to take 10 years, 20 years before there's a lot of assets that a market like Compound can support," and I think that it's a waiting game. But I think in 10 years you're going to be able to borrow treasuries on Compound or use treasuries as collateral to borrow dollars. I just think it's going to be a process of waiting for assets to live on blockchains.

I think the other thing that's happening very quickly is that the user experience of interacting with a protocol like Compound is getting easier and easier. In a lot of ways, I think it's analogous to the internet in '92 where anyone could have run their own email server, there was a couple email clients, but very few people used email. It took AOL and Gmail to make it easy enough that people didn't have to interact with an SMTP server themselves, they could just get the benefit of the system.

I think we're going to see over the next couple of years the user experience of Compound improving dramatically. You're not going to have to custody your own crypto and interact with a smart contract on your own. You're going to be able to get the interest rates from Compound or the liquidity from Compound through an exchange or a custodian or a broker or a bank. And so I think the biggest thing to look forward to is that Compound is going to continue to exist as a layer or a protocol, but you're not going to be interacting with it directly as a user. It's going to be more integrated with a larger and broader financial ecosystem.

Rayhaneh Sharif-Askary: So this... Go ahead, David, jump in.

David Grider: Oh no, I was just going to say yeah, definitely, I see it how we're kind of moving to a world where you guys are really kind of the... your protocols are in the backend and you have businesses like Coinbase just as the user interface to make it tangible for folks custodying some of the assets or some of the other solutions. Maybe walk us through maybe a demo, Rob, of... share your screen a little bit and give us a little more context on maybe how the protocol works and some folks can get a little more tangible with it.

Robert Leshner: Sure, yeah. Happy to. Okay. So I'm going to right now just share a market overview of the Compound protocol just to give you a sense of what's happening in the protocol. So right now there's $19.7 billion of assets earning interest in Compound and there's $8.8 billion of assets being borrowed from Compound. You can see the most popular assets that are being supplied and being borrowed. Stablecoins dominate the assets being borrowed. This should not be a surprise, people love to borrow dollars, it's the primary use case of the protocol at this point. And borrowing USDC, DAI, and USDT, which are three different stablecoins, dominates the borrowing activity.

You can see the composition of individual markets, and you can see for any specific asset like US Dollar Coin, a history of the interest rates and the metrics of the market, and you can see details of the market including the interest rate model. So one of the things I didn't touch on before, but I think is very important to something like Compound, is that the interest rates aren't set by somebody every day deciding what the interest rate should be, they're actually set by the market according to an interest rate model that takes into account supply and demand to borrow the asset. And in this way the interest rates adjust in real time as market conditions change.

So you can see the interest rate model that you know US Dollar Coin adheres to, where you can see the borrowing cost and the supply interest rate. And you can see the different metrics of the market. You can see how many users there are, how many borrowers there are actively, and how much liquidity is available in the market. So right now, if you were an institution, you could borrow $1.2 billion of USD Coin from the protocol right now. And this gives you an overview of the different markets available. So you can find this at

If you want to see what a Compound protocol looks like as a user, you can see that when you log into Compound, you're basically bringing your own cryptographic wallet. So this address has supplied $3.48 of Sushi token, I'm earning an extremely small interest rate on this because there's very few borrowers for the Sushi token. You can see all of the different markets, you can see the interest rates available, and you can see what you're able to do with each of these assets.

When you go to vote on different proposals. There's no active proposals right now, but there's a tab to vote on any active governance proposals, and you can see how many votes you have in your wallet. I think to give you a quick overview of governance, there's on, a history of... and we'll wait for this to load for two seconds... there's a history of all of the participants in governance and all of the protocol proposals that have ever occurred, whether they've been executed or they failed, or what the history is. And you can see every change that's ever been made to the protocol since governance was launched and how the protocol has been modified.

And this is a seven-day governance process that uses the COMP token. So if there's a proposal to adjust the collateral factors of different assets, you can see how many tokens voted for the proposal, how many voted against the proposal, the history of the proposal and information on what the proposal does. So in this case, some assets had their utility as collateral to borrow modified. And this is a great example of what a governance proposal looks like. It changes some parameters, it might not be changing the functionality of the protocol or the way things work, but it changes parameters.

And so oftentimes these are linked to a forum post that goes into the history of the different proposals and debates and discussions, et cetera. So this is really the governance architecture of the protocol and where COMP comes in, and you can see all the proposals here. And there's also how many participants there are, there's currently 1,727 addresses participating in governance and there's 2.8 million COMP that are participating in governance right now.

Lastly, I think what's really interesting to show off is that Compound is an open protocol. We touched on this composability before, but there's actually a robust amount of documentation for developers on how to integrate the Compound protocol and how to build applications on top of it. So there's lots of different guides that have been set up and there's lots of documentation available for developers on how to interact and build the Compound protocol into your own system, whether that's an exchange, or a custodian, or a new application.

So the documentation is really important because this is in some ways a tool for individual users but also a tool for developers. And this power is really, I think, expressed in the documentation and showing that this is an open product and protocol, not simply a business. So with that, I'll stop my screen sharing, but if you're interested in the Compound protocol, using it directly to earn an interest rate or borrow or participate in the governance of the protocol, all of this is available on

Rayhaneh Sharif-Askary: So this is great and we actually have a ton of questions and I apologize in advance, we are not going to be able to get all of them, but I am going to attempt to ask you some of the more topical ones that have come off from compliance and from folks that are listening. So we were just talking about votes. Are governance votes anonymous?

Robert Leshner: So they're pseudo anonymous. So the way it works is any address which is just a cryptographic public address can hold COMP tokens and participate in governance. Many of the larger voters or participants choose and elect to identify themselves, but it's voluntary. So you could have an anonymous address participating in governance, and you can also voluntarily tag your address and identify your profile, so to speak.

Rayhaneh Sharif-Askary: Speak more to how specifically the algorithm or how the interest rate is determined. I don't know how technical you want to get..

Robert Leshner: No, that's a great question. So each market has an interest rate model that defines what the interest rates are at any given amount of supply and demand. And so what the community does is they define the model that the market's going to operate on. And all of the models essentially say if borrowing demand is high, interest rates are high, and if borrowing demand is low, interest rates are low. And all of the models generally define this, but in detail they define what the curve looks like and how quickly interest rates rise as a function of demand. These principles play out in every financial market. If you were looking to borrow Tesla stock, if nobody was looking to borrow Tesla stock, the borrowing cost would be very low. If everyone is borrowing it for a governance action or to short sell or whatever, the borrowing cost might be extremely high.

Compound markets work the same way where the borrowing cost really is a function of demand. For assets like tokens that don't have too many active uses, the borrowing demand is very low. For stablecoins, the borrowing demand is typically relatively high and each market has its own interest rate model that governance sets. And if you're really geeky, you can see the exact code that all of these models operate on. You can see the algebra of them all, you can play around with them on the markets pages of Compound, but it's really a little module of the computer code that defines very specifically what the interest rates are and how they work.

Rayhaneh Sharif-Askary: I just want a quick follow-up. So basically I want to make sure I get this. It's all, you have your supply demand curves and the different models have different levels of elasticity and people vote on basically the level of elasticity of the model.

Robert Leshner: Exactly.

Rayhaneh Sharif-Askary: Okay.

David Grider: And kind of inherent in that is some of the risks or interest rate risks. And maybe just walk people through how folks know I put my money in my Ether Compound the protocol and my USDC, and thinking about how the protocol manages some of those risks and keeps the lending process safe?

Robert Leshner: Yeah, absolutely. So there's two primary risks to Compound, and you can read, and I'll screen share a little bit again just for four seconds. There's two primary risks to Compound. There's technical risk, which is the risk that there's a undiscovered bug in the protocol because this utilizes novel and new technology. And there's market risk, which is the risk that borrowers collateral isn't sufficient and they lose the incentive to ever repay what they've borrowed or they have a debt but they don't have any assets in the protocol. Those are the two primary risks, technical and market.

On you can see some of the information that analyzes these risks both done as security audits of the protocol as well as formal verification of the protocol, as well as the economic security of the protocol. And this really goes into the two primary risks, technical and market. Now on the technical side, there's the risk of a bug. Now every new application, every DeFi protocol has this type of risk, but it's also a function of transparency and the work that's gone into securing information and the passage of time. Compound has $20 billion in it today. It didn't start off with $20 billion in it, and the security of the protocol increases as a function of time and not having any issues.

So there's never been a bug in the code of the protocol that has occurred or has lost users money. It doesn't mean that the likelihood is completely zero, but the likelihood of it is proven lower and lower and lower every year that elapses without an incident as long as all new code goes through the same thorough process that the existing code has gone through. So that's the first risk is technical risk.

There's been lots of DeFi applications that have had bugs that have made it to production either because they weren't audited or because they were rushed or because of other factors. And I usually advise friends and family, myself and individuals that you can trust a DeFi application the longer it's been around without an incident, but it doesn't prove that Compound is guaranteed to be safe, just that the risks are low.

And the second is market risk. And this is the risk that the collateral that borrowers provide is insufficient, that the protocols is saddled with losses. And this is also a risk that is based on the passage of time. When Compound was brand new, to be transparent, we weren't sure if a 30, 40% daily selloff in crypto would be handled by the protocol successfully or not. Since Compound has been running, there's been multiple massive market corrections where crypto has sold off 30, 40% in a day and the protocol hasn't incurred any losses. And this is really a function of those collateral factors and the parameters of the protocol and the market risk parameters being managed by the community in a safe and judicious way.

And it's possible that the risk parameters are too conservative or too loose, but that is represented in the market risk and there's no guarantee that the protocol won't suffer a failure from market risk. It hasn't happened to date even through multiple massive market corrections, but that's the second risk of the protocol.

Rayhaneh Sharif-Askary: So on a micro level, what happens if I put up a bunch of Ethereum to borrow some stablecoins and the value of my collateral just declines dramatically. What happens? What are the sequence of events? And then do I post more collateral?

Rayhaneh Sharif-Askary: Yeah, absolutely. So you're required to maintain excess collateral when you borrow. So if you want to borrow a thousand dollars of USDC using Ether, you might have to maintain a minimum of $1,300 worth of Ether. If the value of your Ether is going down, you either have to provide more collateral to the protocol or you have to repay what you've borrowed. But if the ratio was ever insufficient, anyone in the community can liquidate your position by repaying what you've borrowed and taking a corresponding amount of your collateral.

So the way this works is if Ether's dropping in value when your collateral is declining, anyone in the community can say, "Oh, this is looking a little bit dangerous, we're going to repay the USD Coin she borrowed, we're going to repay $100 of it, not even the whole amount, we'll repay $100, and take $108 of Ether." And in this way it reduces the risk of the borrower and ensures that the protocol stays on.

Rayhaneh Sharif-Askary: And are they incentived to do that because maybe they want to sell USDC and they want to buy Ethereum?

Robert Leshner: So a liquidator is oftentimes looking for just a short-term profit and they're given an economic incentive to repay what you've borrowed because they receive a little bit more collateral than what they're repaying. So you're basically seeing the protocol paying somebody to de-risk at risk users.

Rayhaneh Sharif-Askary: Okay, that's great.

Robert Leshner: Yeah.

Rayhaneh Sharif-Askary: So I have another-

Robert Leshner: Yeah, please go ahead. Next question.

Rayhaneh Sharif-Askary: So go ahead, please.

Robert Leshner: I was going to say it's a system that's been running for a few years, and any data scientist or analyst can pull all of the data for every position and every user and every liquidation historically and see how it works. And that's one of the cool things about an open-source protocol is that you can analyze all of this on an address level basis.

Rayhaneh Sharif-Askary: And on average, this is probably a crazy question, but on average what's the overcollateralization? 20 to 40%?

Robert Leshner: Yeah, exactly. On average it's like 30 to 40%.

Rayhaneh Sharif-Askary: So another one from investors, can you please compare Compound to Aave?

Robert Leshner: Yeah, they're similar in that they're both protocols that allow you to borrow an asset using other crypto as collateral. Compound launched this model in 2018, and they were able to reproduce a very similar system afterwards.

David Grider: Some folks are kind of asking about maybe plans for scaling out across other ecosystems, Solana or Avalanche or cross kind of layer twos on Ethereum. Maybe just talk through folks where they're at and

Robert Leshner: Yeah, there's a few pieces here. So the Compound community is able to launch Compound on other blockchains. I think for the time being it's the folks has been on Ethereum, but that's open to the community to change at any time. And there's a development effort to bridge external blockchains to Ethereum to introduce new markets to the Compound protocol called Gateway, which is a project that is in development to scale Compound beyond Ethereum assets to create a single interest rate market with a variety of different blockchain assets.

Rayhaneh Sharif-Askary:So does Grayscale have a Compound product?” Yes, we do. It's part of our Grayscale DeFi fund, which is diversified fund that gives access to various governance tokens in the DeFi space. If you want to learn more, please reach out to us or send an email to [email protected]. Can you talk a little bit more about the decentralization of Compound, the ways in which it's decentralized and really paint that picture for everybody?

Robert Leshner: Yeah, absolutely. So Compound is a smart contract running on a blockchain. There's very few powers that are available to anybody to modify this smart contract. Originally, the power to upgrade or modify or change the parameters of the protocol was held by Compound labs, which originally built Compound. This power was handed off to the community by replacing a single administrator of the contracts with the Compound governance system, so this is where the COMP token comes in. But the protocol is operating in a structure by which the COMP token is governing the protocol.

It takes the powers that were held by a company and replaced them with the COMP token. And so it's a smart contract system that has a few upgradeable parameters and systems and the COMP token has complete and a hundred percent control over the protocol and all changes. There's no rights or abilities that our team holds anymore that are special or different from COMP token holders, and all power to make changes is done in the open through an open governance process.

David Grider: Yeah, Robert, I think maybe taking that and extending it to another question, we're seeing in the chat folks are kind of asking about how differences maybe between this DeFi approach you guys take, which is open and transparent global versus some challenger banks or the fintechs. Maybe talk people through the real innovation here. Are you seeing those guys plugging into your process and how do you think that plays out in the future?

Robert Leshner: Yeah, that's a great question. Fundamentally, it's a very different type of model. So one is you have a business that's operating using people and their own technologies and in order to get the product you have to go to that company and it's run by a very clear organization. In a decentralized application like Compound, it's a computer program deployed to a blockchain that's open and running on its own, and it's not controlled by any one party, where you can have more assurances that the system is going to do what it says it does than a closed or centralized product.

I would say it's remarkably different and better simply because you can have more assurances that a protocol like Compound will be around in 10 years, assuming that all changes to it are done safely and correctly.

David Grider: Yes. Speaking of how you think it'll be around in 10 years, maybe talk us through what you're seeing in terms of the user base that you've seen maybe in the past and how you think it's evolving. Obviously there's a few different segments between institutionalization and also enabling broader on bank access. We'd love to hear your thoughts.

Robert Leshner: Absolutely. Well, what's so remarkable is that DeFi itself is only a couple of years old and Compound was one of the very first protocols to even create the concept of it. And we've seen the user base evolving over time as a function. A lot of it is anecdotal because there's not deep detail in all of the addresses interacting with Compound and they're all just addresses at the end of the day. But anecdotally, it's really been evolving from early adopting individuals interacting with a protocol like Compound, to today we're starting to see more and more businesses and professional trading firms and institutions starting to interact with the protocol, either building on top of it or using the protocol directly.

And so this is, I think, just one of the things that happens when a technology begins to mature. And I think over time what we're going to see is that the majority of the usage of Compound in five years is going to be coming from exchanges and custodians and institutions that are integrating Compound into their own products in some way.

David Grider: Or maybe even banks, right? Are you having any conversations with the legacy bigger financial infrastructure players? What are you hearing?

Robert Leshner: Yeah, we're seeing a lot of curiosity. I think a lot of banks are looking to educate themselves on what's possible and how DeFi changes markets for them. And so there's definitely a lot of curiosity, and I'm definitely privileged to have had a few nice conversations, but I think it's too early to say or expect anything specific from those types of institutions.

David Grider: Someone else here is asking about, they phrase it with... it's a tough question here, and they're asking about ETH gas fees. Do you have any thoughts on where that puts the Compound product in the market? And obviously we talked a little bit earlier about some of your other plans for scaling, but as to other change, it's really up to the community, but I just wanted to hear what you think about the situation there?

Robert Leshner: In terms of the gas fees? I mean, yeah, so-

David Grider: How it's impacting the pricing and the product.

Robert Leshner: Well, it impacts every single application on the blockchain right now in a bad way. It's making it where it's not economic for individual users, especially with smaller balances to interact with Compound. If it costs $50 to interact with Compound and you're only going to earn $50 of interest in a year, there's no reason to use Compound. So what we're seeing is aggregation becoming a concept, and this goes to, will a bank one day use Compound, or will an exchange use Compound?

I think what we're going to see is we're going to see more and more businesses that interact with Compound on behalf of dozens or hundreds or thousands or millions of users where there's a single transaction that provides access for a huge number of participants. And this is a very simple and natural scaling technique that we've seen where you might have one address with a lot of money in it, but it's just representing 10,000 users. And I think that's the most obvious scaling solution that's occurring, and that is one that actually incentivizes institutions to be able to create their own access points because $50 in gas fees for an individual is horrible, $50 in gas fees for 10,000 users is negligible.

David Grider: I think that's kind of the beauty of it, this open protocol, the way it gets used can just evolve on its own as the market evolves and people can come in and create new innovative business models on top of it without any permission. And actually it's a lot like how a lot of payment transactions are even settled today with batching instead of pushing them to the fence.

Robert Leshner: Exactly. Yeah.

Rayhaneh Sharif-Askary: We're seeing some questions pop up about the treasury and the treasury allocation. Do you want to speak to that a little bit?

Robert Leshner: Yeah, so there's about three and a half million COMP tokens that are run by the community. So the current COMP token holders can decide where and how COMP gets distributed, how it gets used, and there's a lot of COMP tokens currently directed by the COMP token holders out there. This goes back to governance, which is any COMP token holder with a good idea or a use case for the treasury can allocate it as they see fit if they can convince the majority of COMP token holders to support their approach. But this is something that is entirely in the hands of COMP token holders.

David Grider: Could you maybe talk us through a bit more about the issuance of COMP and the supply curve? A lot of people think about the fixed supply of Bitcoin or the previously independent supply of Ethereum getting burned out. Talk to folks through how that works out a little more.

Robert Leshner: Yeah, absolutely. So there's 10 million COMP tokens period, there can't be more or less. And there's a fixed number of tokens. At this point, there's about three and a half million tokens that are held by the protocol that COMP token holders vote on how they get distributed to users. As it currently stands, and we can actually... I'll screen-share this. As it currently stands, there's about 3.4 million COMP remaining to be distributed and the protocol is distributing 2,312 tokens to users per day. So it's about three to four years of remaining distribution.

David Grider: That's pretty amazing. Again, we can all just kind of hop on here, participate and then have some say in how this thing operates, right?

Robert Leshner: Exactly. Exactly. And if the token holders through the governance process want to change this, it's extremely easy to change and it's one of the powers of decentralized governance.

David Grider: Yeah, that's incredibly powerful. Someone's asking, does the app have insurance, right? Obviously this is not like FDIC insured like obviously a bank, but crypto's developed some of its own interesting insurance kind of ways like Nexus Mutual for some products. Do you have anything like that on this or is it really just risk-managed?

Robert Leshner: Yeah, absolutely. So there's no conventional insurance products for something like Compound yet. I think DeFi is so new. If you ask that question in five years, the answer's going to be of course. But this is a novel system that doesn't have insurance yet.

David Grider: Let me just see what else here makes sense to ask or if you have anything you can mention it. I'm just looking through some more of the questions.

Rayhaneh Sharif-Askary: Yeah. So someone was asking about Solana, the impact of Solana. Let me find the question. Of course the second I need it, I can't access it. Do you know what? Let's come back to that one. Oh, here we go. How do you think Solana will change your approach and will you eventually support and compete against SolFarm, Raydium, and its higher throughput and scalability?

Robert Leshner: Yeah, it's up to the community if they want to deploy Compound to Solana.

David Grider: Rob, do you have any sense how much of a lending market you know guys might actually capture? Or obviously we kind of know what the on chain DeFi segment of it is. Do you have any sense about the CeFi segment and the sizing these relative markets?

Robert Leshner: Yeah, it's a good question. I don't have as good of sense of the sizing of the CeFi markets because they're the opposite of DeFi, they're opaque and closed and any information they share, you're taking them at their word, and they don't really share much information to begin with. I think Genesis is the only one that's sharing information. I think they talk about loan originations and things, but I don't have a good sense of their outstanding amounts. But I think they're about the same size. I think centralized players like BlockFiare in the same zone of size. I think in aggregate, I'd say the market is probably close to 100 billion at this point, of which Compound is about 20, so it's probably about a fifth of the market.

David Grider: Is that outstanding loans or is that originations over a time period?

Robert Leshner: That's outstanding. Originations is the worst metric possible because-

David Grider: It can turn over so much.

Robert Leshner: Yeah, there's traders that borrow $100 million, repay it the next day, then borrow $100 million dollars and then repay it. So I think originations is really poor metric because a lot of this stuff has very short turnover, so just looking at what's outstanding.

David Grider: Yeah, totally. Honestly, before, I used to work on some securitizations for Lending Club and Prosper and SoFi. And then when I saw DeFi and what you guys are doing, this is just the next iteration of this, and these markets have grown so fast, catching up to even those and what's happening there. The disruption you guys are having already on fintechs, it's incredible, just because anyone can plug into it, right? And I think that that's why, given your model is just open, anyone can just plug into this liquidity system and it just creates this incentive for anyone who wants best pricing to really go to this system and check that first. “Where can I get that?”

Robert Leshner: Exactly. That's why open is better than closed.

David Grider: Yeah, totally.

Rayhaneh Sharif-Askary: It sounds like some people just want to hear your thoughts on DeFi more broadly and the bull case for DeFi, again, looking more like a few years out.

Robert Leshner: Yeah, I think the bull case for DeFi is hopefully extremely obvious at this point. You have open transparent systems that can run these markets with essentially zero overhead versus systems that are run by people with spreadsheets that make mistakes or that commit fraud. DeFi is just a superior approach to creating financial products and markets, and I think in 10 years the majority of financial activity is going to be DeFi just because it offers, when done correctly, a safer and more fair and more transparent system. And it's something that users want, it's something that the ones creating these markets want. It's something that markets crave efficiency and it's just a more efficient, transparent approach to markets than the legacy counterparts.

David Grider: Rob, outside of your lending segment you're focused on, is there any other, maybe, DeFi projects that you're more excited about than others could be across any of them new chains, any other segments?

Robert Leshner: Yeah. Well, I think there's really three primary use cases in DeFi right now that generally dominate. So there's markets like Compound, which I think are easy to understand. Then there's decentralized exchanges. I think decentralized exchanges are in some ways another holy grail of DeFi in that when done correctly, they can be far superior to traditional exchanges in that they're faster, cheaper, better, lower slippage, all of these things. So I'm excited about a lot of different projects in decentralized exchange.

And then lastly, there's decentralized currencies and this includes things like Bitcoin, but it also includes things that are built in DeFi like stablecoins, like the stablecoin, DAI by MakerDAO. I think you get lost in the excitement of newer things, but I think are fundamentally incredibly exciting and important as DeFi applications. And so my top three use cases are borrowing, trading, and decentralized stablecoins. I think they're the most important use cases and I still am most interested in those three use cases. But I think over time you're going to start to see decentralized insurance, decentralized derivatives, all sorts of products that people want to migrate from the old way of doing things to faster, cheaper, more transparent, safer, more fair DeFi.

David Grider: One of the things maybe we didn't even touch on as much as I think we could here is because your protocol's open, all the code is there, anyone can build on it. It's really just these API layers and this financial economy stack, and the innovation that's being built on top of it. We don't even know what's going to evolve next and just like DAI plugs into you guys and maybe people if they want to liquidate, they can use swaps to do those transactions. How all of this infrastructure is so modular and innovative and allows for innovation.

Robert Leshner: Exactly. I can't tell you what's going to happen next. The really exciting thing is that anyone in the community or anyone out in the world with a great idea can build it and integrate Compound, and it's not up to me. It's not like a process where people have to get our permission. Anyone can build new use cases.

Rayhaneh Sharif-Askary: I think I want to squeeze in one more mechanical question. This is around custody. Does one, to get involved, do they have to transfer their tokens to Compound or can it work through a Coinbase or Gemini or any other kind of exchange for instance, or Wallet?

Robert Leshner: That's a great question. And this goes to one of the things I was saying earlier, is that right now if you want to use the protocol directly, the answer is yes. So if you want to earn an interest rate yourself, you can supply assets directly to the Compound protocol, which is a computer program that stores and holds the crypto and administers the market. You're interacting directly with the protocol.

Over time there's going to be more and more ways to get the benefits of Compound, but with somebody else managing that interaction for you. So I think eventually you're going to have just like Gmail eliminated the need to run your own SMTP servers, they're going to have platforms that offer you the interest rates from Compound, but you keep your relationship with them instead of interacting directly with the protocol. So you could have your Bitcoin on some exchange and that exchange interacts with Compound underneath the hood, but you don't have to interact directly with the protocol.

Rayhaneh Sharif-Askary: So we have to unfortunately wrap, but thank you so much Rob for joining us today. I think we all learned a lot and thank you everybody who dialed in. If you have questions that you did not get an answer to, again, you can reach out to us [email protected], or if you want to learn more about our product that has Compound, again, please feel free to reach out to us. We're here to help. And I hope that everybody has a really great rest of their day.

Robert Leshner: Thanks, everybody.

David Grider: Thanks, everyone.

Rayhaneh Sharif-Askary: Bye.


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