A company based in San Francisco has developed a platform to create a market for interest rates for cryptocurrencies.
Compound, a money market protocol that works on the blockchain ethereum – the distributed registry technology that underlies all cryptocurrencies – will allow crypto holders to lend the coins they do not use to the suitors who need to encrypt, creating an unused market virtual currency.
"Blockchain assets are new and exciting, but they lack basic financial infrastructure – efficient interest rates," said Robert Leshner, Founder and CEO of Compound in a blog post. "Over time, hundreds of billions of dollars of assets will be made tokens, but the institutions that implement them will require the benefits of traditional financial markets: today's launch is only the first step".
The Compound protocol combines flows of interest rather than people, which means that once a coin is provided it becomes a fungible resource. This allows users to withdraw their coins whenever they want. "You can borrow for six hours and pay six hours of interest, you can lend for two hours and earn two hours of interest," Leshner said.
The prevailing interest rate paid by borrowers to suppliers is determined by an application-based algorithm. However, the company said it would initially set the interest rate before the market forces took over, but it expects the creditors to earn an annualized rate of around 5% and 10%.
The interest accrued is linked to the price of the asset at the time it is sent to the Compound platform and any change in the underlying value of the assets deposited is at the risk of the creditor, the party that still holds the asset.
Interest is paid "in kind", which means that it is paid in the currency that is lent and / or loaned.
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The protocol will initially support four cryptocurrencies: Ether,
which has a market value of $ 21.9 billion, 0x ($ 354.7 million), Basic Attention Token ($ 163.6 million) and Augur ($ 143.3 million), according to CoinMarketCap data. Once the protocol is operational, the company will add a stablecoin, a currency that is pegged to an underlying fiat currency, the US dollar.
Leshner said he expects those who contribute or lend will likely be a mix of individual and semi-professional investors who consider any incremental return on their cryptocurrency to be significant. Considering that borrowers will typically be your sophisticated institutional investors who wish to take advantage of greater leverage or the ability to bet against, or in short, the resource. "Whether it's a title or a cryptocurrency, you have to borrow it before shorting it," Leshner said.
To remedy any risk of default, Compound requires that each account have a balance that covers the amount borrowed in excess in the cryptocurrency they are providing or borrowing.
However, like many facets of the digital currency market, there are risks with the protocol that Leshner has described as "existential" risks, which include the cessation of a currency, the currency that comes off the blockchain ethereum or a potential fork. A fork is where an update is made to the software and users can not agree on the new protocol so that the currency is split, or forked into two separate assets, as in the case of 2017 when bitcoin
forked and created with Bitcoin Cash.
In the case of a fork, there would be duplicate ownership of everything on both chains, "your private key would be able to conduct transactions on both chains, and the state would be identical to the fork-block, and then start to diverge, "The company said.
The company received $ 8.2 million in seed funds from Andreessen Horowitz, Polychain Capital and Bain Capital Ventures.
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