Price is the Anchor For Compound Finance To say that this ex | LibreCharts
Price is the Anchor For Compound Finance
To say that this extracted price data is important would be a vast understatement.
According to their website, "The Compound Protocol allows users to borrow crypto assets, using any other supported asset as collateral - giving them the flexibility to settle a trade, or use an application, with an asset that they don't already own. For example, a user holding ETH may supply it to Compound and borrow DAI from Compound instantly." (bypassing the process of obtaining WETH ; probably favorable in times like this where the gas rate is through the fucking roof along w the price of Ethereum itself).
There is an Attached Interest Rate for Borrowers and Lenders as Well
Collateralization is not a 'cost', per se, since you will receive the full amount of your collateralized belongings once you have returned back the value loaned out to you (assuming that the borrower's additional interest rate fees are taken out at the top of this pipeline so that doesn't need to be settled at a latter time).
Thus, in order to ensure that this protocol is 'eating' properly, the stakeholders of Compound are enriched with the difference between the interest rate given to 'suppliers' vs. what's charged to the 'borrowers'.
This Logic is a Bit Convoluted
The interest rate (APY) given to suppliers is in 'Compound' itself (governance token). However, the additional interest rate that is taxed to borrowers is assessed to the underlying currency that they are looking to borrow against (which can be any of the compatible assets that it allows users to interact / trade / collateralize on their protocol).
Thus, that difference between the interest rate paid to suppliers and what's eventually assessed to borrowers could end up diverging significantly over time.
*Example of This Principle*
Compound interest is worth (aggregate) $50 (paid out as 12.3% APY in this random hypothetical). This interest is paid APY for those willing to lend $DAI.
Those looking to borrow $DAI must pay 20.3% interest (again, hypothetical). That's a absolute value difference of +8%. That would be assessed in the cryptoasset that the borrower is looking to borrow against.
So if $DAI were worth $10/each and I want 100 $DAI ($1k in value in this universe), I could provide $BAT as an asset. Let's say $BAT is worth $25/each in this world. That means I need to put up 40 $BAT in order to borrow the full $1k of $DAI. However, I also need to pay an additional +20.3% in $BAT (which amounts to 8.12 additional units for a total of 48.12 $BAT to obtain $1k DAI) [we'll put collateralization to the side for the sake of simplicity].
How does Compound Finance assess the value of the 12.3% that should be given back to the supplier to draw the difference between the two values and glean only that which is meant to be considered excess? (i.e., the +8% we mentioned prior).
They Can't - So They Don't
Why do they need to? You're being paid in Compound governance token. This is a fixed, finite asset (at least insofar as the smart contract owner has pledged not to arbitrarily produce more of it at some point ; but after all, this decision is to ultimately be up to the will of the 'people', so who knows how philosophies will change in the future).
Either way, if you're Compound Finance, you don't need to even consider the difference between the 12.3% and the 20.3% (in raw value) because the 12.3% is already paid off with an asset of imaginary value (i.e., Compound Governance Token <— this is the primary ponzi in this entire scheme because you're able to get a ton of users to accept this as a form of money in this convoluted scheme, even though there is no demand for this token at all beyond sheer price speculation on centralized and decentralized markets created by entities that likely own both).
Therefore, the +20.3% assessed to borrowers becomes pure unadulterated fucking profit if you're the managers of the protocol.
