Compound Labs released a white paper Thursday detailing its plans to create Compound Chain, an application-specific blockchain that can provide money market services across multiple networks.
“We want to announce the designs for a blockchain that can scale Compound over the next century,” Compound founder Robert Leshner told CoinDesk on a phone call. The decentralized finance (DeFi) firm isn’t committing to a timeline yet but it is at work on a testnet now.
The new white paper, a draft of which was shared with CoinDesk in advance, authored by Leshner and Compound Labs staffers Geoffrey Hayes, Jared Flatow and Max Wolff, cites three limitations of the current version of Compound on Ethereum: gas costs, inability to serve assets on other chains and the fact that all supported assets aggregate the risk of each supported asset.
Those new supported assets aren’t envisioned to be limited to blockchains of the trustless, permissionless variety either. The new project is meant to support the forthcoming and rumored digital assets from central banks and investment banks.
The white paper states:
"Compound Chain is a reimagination of the Compound Protocol as a stand-alone distributed ledger, capable of solving these limitations and proactively preparing for the rapid adoption & growth of digital assets on a variety of new blockchains, including Eth2 and central bank digital currency ledgers."
Compound Chain joins the chorus of blockchain interoperability efforts, but it’s somewhat unique in that it’s attempting to do so in an application-specific way. Not many similar attempts have preceded it, though Leshner did credit the stablecoin and payments chain, Terra (which just added synthetic equities), as one of them.
While this is an entirely new and standalone blockchain, it will be governed by the same Ethereum-based system that runs Compound v1 – the COMP token. Once the Compound Chain goes live, this will be a considerable new set of powers accruing to COMP owners.
Within an hour of the product’s announcement, COMP surged by as much as 10% in price, according to Messari data.
While the Compound Chain will be governed by COMP – the token that spurred the yield farming craze over the summer – it also introduces a new cryptocurrency called CASH.
Compound Chain’s native CASH token will be used to pay for transactions on the network. CASH will be minted in much the same way as DAI, as a debt against locked collateral held on the Compound Chain.
Like DAI, CASH will start arbitrarily pegged to the U.S. dollar, but its peg can be changed by governance decisions. Unlike DAI, all CASH will earn some kind of yield from a portion of interest paid against loans originated on the blockchain. The precise amount will be one of many parameters determined by COMP holders who participate in governance votes.
The whole purpose of the chain is to function like Compound but in a cross-blockchain fashion.
A new interoperability play
As soon as an asset is uploaded to Compound Chain, it’s available for lending to others. It’s up to users if they want to borrow against their assets or not.
As on Compound, they will be able to borrow any supported asset but they will also be able to borrow assets, starting with CASH, that are unique to the Compound Chain.
Compound Chain should ship ready to support Ethereum. As for the next chains to be integrated, “This is really up to the community,” Leshner said. “I suspect the first additional chains would be things like Solana and Polkadot and Tezos.”
The only real prerequisite is the blockchain needs to be able to support smart contracts. The smart contracts for moving assets between Compound and smart contract chains are referred to as “starports.”
While this might be seen as a major break from Ethereum to some, the chain that kicked off DeFi will continue to maintain control of the new chain, at least for now.
As the white paper explains, “The Compound Governance system on Ethereum established a distributed decision-making process, and is capable of streaming governance actions to the Ethereum starport, which Compound Chain validators receive instructions from.”
Further, Leshner expects those who are long Ethereum will see an advantage to incorporating other chains, because it will enable Ethereum to port value created on other chains into the world computer’s DeFi applications, in the form of CASH.
The chain can also mint new assets, but early users’ ability to upload assets from other blockchains will likely be seen as more important. Assets will be uploaded by moving the asset into a smart contract on layer-one chains (such as Ethereum or Cosmos), which the Compound Chain validators will witness and then mint on the corresponding Compound Chain wallet.
Compound Labs has not indicated what technology it will be built on at this point, only that it will use a proof-of-authority architecture. All the parameters will be set through governance decisions of the participating COMP holders.
Proof-of-authority is similar to proof-of-stake in some ways, but it’s important to point out that all validators are selected by COMP holders. “If you can appoint malicious validators, it’s the same as being able to steal all the funds in Compound,” Leshner said.
Proof-of-authority is just the launch setup. “Governance can remove itself and switch to a fully open proof-of-stake system,” Leshner said, though he doesn’t expect it will for some time.
The main intent appears to be to broaden DeFi into all parts of the crypto ecosystem.
“The Compound Chain is designed from the ground up to enable bridging value between its connected ‘peer’ chains,” the white paper states.
Some of those peer chains may be more cumberbund classical (see: CBDCs) than punk rock, but therein lies the opportunity for a company like Compound Labs.
The team there is already looking at new business lines that could be enabled by the new chain. For example, certain centralized digital currencies, such as jpm coin, may require known liquidators who have been through compliance checks. This could be a role the team behind Compound could play,for certain more-restricted assets.
“At launch, the goal is to replicate the user experience of Compound but with a really clear path to be able to support every blockchain and every asset,” Leshner said.
Update (Dec. 17, 20:50 UTC): Adds information on COMP price activity following the Compound Chain announcement.