As loan originations reach all-time highs, outstanding debt on Compound nears pre-MCD levels

Compound burst onto the scene last summer and has gradually become one of the largest credit platforms in DeFi. Unlike MakerDAO which denominates debt by minting newly created Dai, Compound is a money-market protocol that takes deposits of existing assets from prospective lenders and enables borrowers to take out loans against that pool of assets. The interest rate is then derived algorithmically based on the utilization rate, or proportion of the total pool borrowed.

Last month, daily originations spiked to an all-time high reaching nearly $10 million. Unfortunately for borrowers, the move coincided with the local top as the price of Ethereum plunged shortly after leading to over $2 million liquidated over the course of 4 days only to break the prior daily record a few days later with $1.5 million on March 8th.

It’s interesting to note that ERC-20 tokens have nearly no borrow interest, however, ZRX and REP both saw seemingly random large volume spikes. These assets are typically borrowed in order to short-sell, and if that was the case the trader would have faced steep losses as in both cases the price dramatically increased shortly after the originations. It’s unknown what caused the loans to be taken out, but for ZRX it did coincide with an imminent vote on 0x v3 meaning they could have been borrowed with the intention of influencing the vote.

While the total debt outstanding has increased 44% this year, it has yet to reach its prior highs. Much of the decrease towards the end of 2019 was a result of the upgrade to multi-collateral Dai where users unwound their positions as a result of the uncertainty inherent in such a major upgrade. USDC has remained remarkably flat over the last few months meaning growth in outstanding debt on Compound will likely continue to come from Dai. There is currently $120 million Dai with that figure likely to increase as more Sai is migrated and Vaults taken out.

The future looks bright for Compound as they’re coming off a fresh round of capital after raising $27.5 million. While investors purchased equity in the company, they may be hoping for an alternate means of capturing value. The team recently announced they will be introducing a token to existing Compound stakeholders that will initially be used for governance. There are no explicit plans for it to be used as an investment, however, it could easily collect protocol level fees and use that to return value to token holders. This contrasts with another tokenless protocol, margin trading platform dYdX, that instead looks to collect fees at the company level rather than introducing a token. Watching how these seemingly divergent strategic decisions play out will be critical in assessing the viability of decentralized business models.