Thread by @MrBenLilly

Reading a great insight by @mhonkasalo regarding Compound protocol.

Decided to collect my thoughts using a twitter thread format.

🧵👇

Compound set the crypto world on fire when it began to bootstrap liquidity to its network last year. You can probably guess when it happened by looking at this chart.

It bootstrapped liquidity through a subsidy program aka the birth of liquidity mining and yield farming. To date 1,140 COMP tokens are distributed per day, about $16.8m per month to serve its tens of thousands of users. Works out to be about $51/user or liquidity provider.

To incentive borrowing, Compound needs to run at negative interest rates. Essentially the COMP token allows for somebody to borrow wBTC at about 4% while earning 8.5% from COMP token subsidies.

After accounting for lending wBTC, borrowing wBTC and harvesting COMP @TheBlock__ @mhonkasalo gives wBTC on Compound a real rate of more than -5%.

With massive borrows skewing the statistics in such a way where the mean borrow size of $1.01 million is drastically more than the median of $12,000, it's clear a few massive wallets are capturing most of the rewards.

Few immediate questions come to mind.

- When real rates turn positive, do COMP holders begin to sell?

- For a token to hold value while dilution increases over time, the biggest holders need to hodl. Who's holding? Polychain, Bain, Andreessen are a few... and why?

(Me speculating) On the roadmap is Compound's Gateway, a Proof-of-Authority blockchain. Meaning permissioned validators. Validators are chosen via a governance vote with COMP tokens.

This is likely why COMP tokens haven't diluted the market and hurt price.

However, if real rates turn positive then there's a scenario where price takes a hit. But my thinking is tightly controlled supply will continue until the Gateway validators are voted upon.

The bigger question is what happens when $4.4 billion of loans on Compound begin to unwind???

Over $2 billion worth of DAI is outstanding. DAI is created from a loan via MakerDAO. Right now $2.75 billion of DAI is currently outstanding. That's a big chunk.

Which means we need to know what asset is being locked up on MakerDAO...

Looking at makerburn.com ETH makes up about 1.5 bn DAI, wBTC makes up 307mn.

USDC makes up about 780mn, but we're not too worried of a USDC sell off.

The collateral backing these loans is about 3mn ETH and nearly 14k wBTC. The wBTC isn't worrisome, but 2.6% of ETH supply being locked up in a subsidy program is.

Which begs three questions in my mind.

1 - If Compound sells off or its subsidy program ends or becomes ineffective in light of a selloff, what happens to the 2bn worth of DAI?

2 - @MakerDAO is slowly raising its stability fees - rates on borrowing DAI using ETH collateral. Is there a 'tipping point' soon where these loans unwind?

The orange line is stability fees on ETH A vault, currently 5.5%.

3 - In a blowoff top environment, does the magnitude of this dynamic grow? If so, how do you shield yourself from the collateral damage (couldn't help myself there)?

@LynAldenContact I'm guessing this was one of your concerns regarding ETH? @RaoulGMI I know you're curious..

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