Compound Chain: A Comprehensive Guide

Author: Okereke Innocent
January 21, 2021

 |6 min read

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Compound chain

Compound Chain is a distributed ledger with the ability to transfer value and liquidity between peer ledgers. It means that Compound Chain allows users to borrow and lend cross-chain assets from different blockchains like Polkadot and Tezos. It will have its own native token called CASH, which will be used to pay for transaction fees on the platform. 

The traditional Compound Governance structure will still execute the governance of the blockchain. Its traditional governance structure relies on COMP tokens on Ethereum. The team is building a limited-feature testnet implementation that will be released in early 2021. 

According to the statement by Compound’s founder Robert Leshner, “we want to announce the designs for a blockchain that can scale Compound ver the next century.” The whitepaper revealed that there are three major limitations of the current Compound supported by the Ethereum blockchain. The limitations include high gas fees, the inability to serve assets on other chains, and all the supported assets aggregate each supported asset’s risk.

All those new supported assets were not thought to be limited to blockchains of the trustless, permissionless variety as well. The new Compound Chain will support the forthcoming and rumored digital assets from investment banks and central banks. This new blockchain will be a reimagination of the Compound protocol, serving as a stand-alone distributed ledger. 

It will possess the capability to solve the Compound Protocol‘s limitations by proactively positioning for rapid adoption of growth and digital assets on emerging blockchains like Eth2 and the central bank digital currency ledgers. 

The Compound Chain is now part of the blockchain interoperability efforts. However, it is unique to attempt to do so in an application-specific manner. 

The Governance of the Compound Chain

Although it is an entirely new and standalone blockchain, the Compound chain will be governed by the COMP token. This is the same Ethereum based system that runs Compound v1. Immediately the Compound Chain is live; it will be a considerable new set of powers accruing to the owners of COMP. 

While the COMP token will govern the Compound Chain, the platform also introduces a new cryptocurrency called CASH. The native CASH token will be used to pay for transactions on the network. It will be minted the same way as DAI, as a debt against locked collateral held on the Compound Chain. 

Cash will start arbitrarily pegged to the United States dollar, but its peg will be subject to governance decisions. Unlike DAI, all CASH will earn a yield from a portion of the interest that will be paid against loans on the blockchain. The actual amount will be one of the things that will be determined by COMP holders that take part in governance votes. 

The main essence of the chain is to function like Compound but in a cross-blockchain way. 

How Compound Chain will Improve Interoperability 

Immediately a user uploads an asset on the Compound Chain ecosystem, the asset will also be available or lending to other users. However, users can decide to borrow against their assets or not. While on the Compound platform, such users can be able to borrow any supported asset. They will start with CASH, which is unique to the Compound Chain. 

The one foreseeable prerequisite is that the blockchain should be able to support smart contracts. Smart contracts required for moving assets between Compound and the smart contract chains are all referred to as “starports.” According to the Compound whitepaper, “The Compound Governance system on Ethereum established a distributed decision-making process. It is also capable of streaming governance actions to the Ethereum starport, which the Compound Chain validators receive instructions from.”

Also, the chain can mint new assets. However, early user’s ability to upload assets from other blockchains will be seen as more important. Users can upload an asset by moving the asset into a smart contract on layer-one chains (an example is Ethereum or Cosmos). The Compound Chain validators will witness the assets’ move and then mint the corresponding Compound Chain wallet. According to the whitepaper, compound Chain is designed to enable bridging value between its connected “peer” chains. 

More Information Underway

At the time of this writing this post, Compound Labs is yet to indicate the type of technology Compound Chain will be built on. They only revealed that it would rely on proof-of-authority architecture. All parameters will be set by the decisions of the participating COMP holders. The proof-of-authority is similar to proof-of-stake, but it is important to note that validators are only selected based on COMP holders. Leshner said that if a user can appoint malicious validators, it is the same as the user stealing all Compound funds. As an incentive to operate the protocol efficiently, validators earn a portion of the interest paid by CASH borrowers, for every block they author. The incentive (reward) for validators scales with the amount of cash in existence, thus increasing as a function of assets.

According to Leshner, proof-of-authority is just the launch setup. The governance can remove itself and switch to a fully open proof-of-stake system. However, this might take a while before taking effect. This system’s main intent seems to be to help drive DeFi into all parts of the crypto ecosystem. The compound Chain team is already considering new business lines that could be enabled by this new chain. 

For instance, some centralized digital currencies like the JPM coin may need known liquidators that have passed through compliance checks. This could be the role that the team could play for some more-restricted assets. Upon its launch, the aim is to replicate the user experience of Compound but with a completely clear path to be able to support all blockchain systems and assets. 

The Fear of Centralization by the DeFi Community

Since it announced the launch of Compound Chain, there have been several negative reactions. Many respondents have expressed their concerns regarding the perceived centralization associated with the project. One of the major critics of the project is Set Protocol’s, Anthony Sassano. Anthony pointed out that the reason for the expensive Ethereum gas fees is because of its high decentralization. According to Anthony, for Compound Chain to have fewer gas fees means that it will be less decentralized. Also, it is a proof-of-authority chain where COMP governors will choose the validators. 

Conclusion

The new chain adopts a more centralized consensus mechanism, which has received a mixed reaction from the DeFi community. If the interoperability feature is exactly as the whitepaper has described, then it will be a great addition to the blockchain community. 

Also take a deep dive in Uniswap V2 Protocol.

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