The king of DeFi (Decentralized Finance) Compound Finance say that they hit the record of 1 billion locked in the protocol, the tweet of the CEO announce that milestone on Friday, the billion is locked is ready for the borrowers.
With the growing interest for the DeFi space Compound look like to be the first company to look at, almost 1/3 of the crypto locked are BAT that are follower by Ethereum (23%) and USDC (22%), of this money the borrowed amount is 367 million with 75% BAT, 9% USDT and 8% DAI.
As Compound Finance assert that the company belong to the users they issued the token COMP that running at the Ethereum blockchain, this token is in a continuous rally and with a very high volatility, as the interest for the company is growing and the ownership of the token give the right to vote on some governance decision.
The incredible rise of Compund make possible for the company to passed as capitalization also MakerDAO.
The interesting fact about Compound is that over 70% of the circulating BAT seems to be locked in the protocol, this is a pretty high risk as the volatility of the Brave browser token could be higher if the number of token is scarce, this may drive to a wave of collateral liquidation for the borrowers.
Different risk, or almost no risk, for the Dollar pegged token as the volatility of those token is governed by the forex fluctuation.
For now all seems good and Compund enjoy them moment of glory, as there is less than 1/3 of the crypto locked that are borrowed we can hope that we would not see a wave of collateral liquidation but if the market will turn negative for few days we could see some sudden fall for BAT valuation.
The DeFi movement is increasing for few good reason, the business that was lead by the banks have some important barrier, if you want to borrow money and put your stocks or your financial asset as collateral you may have certain amount of money and you may sign a lot of papers to the bank, also there are high cost for execute this kind of financial operation, with the crypto DeFi is more easy and cost much less.
The fact that this kind of finance is used by the everyday person instead from the professional investor not eliminate some high risk, is important that those who used this services know how those operation work and where are the risks, because many people risk to get hurt by some error that could be avoided with a due diligence of what really mean borrow money to invest (basically is a leverage investment).
In the first place this kind of operation was used for a leverage bond investment and worked like that, I own 100K Dollar of 10 year US bond (the famous Tbond or treasury bond), with this money I get a loan from the bank of let’s say 50K Dollar and I use them for buy other Tbond, investor use this technique when the borrowing cost is low (when the interest rate is between 0 and 1%) for increasing the return of the treasury bond assuming that those asset are very stable and not fluctuate at all.
The interest I pay for the loan must be lower than the interest that I get from the bond, this is the trick, but if we use this technique for crypto we give up the non fluctuation factor that is the basic of the strategy, different this is if we use the stablecoin.
That’s all for now, thanks for reading and hope you enjoy this post, always remember to do your own research before investing.
Crazy right? 1bn in such a short time frame ! Nice to see you there too.