Interpretation of Compound's "New Weapon" Gateway: Redefining the Value of COMP
Gateway is a cross-chain tool, not a scalability tool.This article is from Little Pepper Blockchain, author: The Fatty Who Doesn't Like to Eat
Recently, the lending protocol Compound has sounded the horn for the DEFI cross-chain track.
On March 2, Compound founder Rober Leshner published an article stating that the prototype Gateway testnet based on Compound Chain has officially launched. Three months ago, the team released the Compound Chain white paper, which mentioned a cross-chain distributed ledger system.
It is reported that this testnet will add cross-chain support for more assets in the future, and Gateway will be governed by COMP holders, including the rights to add new assets. In the coming months, Compound will audit the codebase, conduct stress tests, and finally go live, connecting Gateway to the Compound protocol running on Ethereum.
It is worth mentioning that Gateway is a blockchain network based on the Substrate framework of the Parity blockchain development platform, which offers greater interoperability. Application developers can build on any underlying blockchain network without being limited to the Ethereum network.
Robert Leshner stated, "Gateway is a cross-chain tool, not a scalability tool. In the future, Gateway will provide a bridge to achieve interoperability between blockchain networks without the need for token wrapping or other clumsy methods."
In Robert Leshner's view, Layer 2 solutions like rollups are indeed important, but they overlook the future interoperability of multi-chain systems. Multi-chain means that different sets of rules can communicate with each other and achieve value transfer, while rollups are still limited to the governance structure of Ethereum.
"We are optimistic about all scalability solutions for Ethereum that can make it cheaper and easier to use, which is a good thing. However, none of these solutions can truly achieve what we want to do," Robert Leshner said.
From Robert Leshner's words, it is not difficult to see that Compound's ambition goes beyond being just an Ethereum lending protocol; it aims to establish its own position in the cross-chain track. So, what power does Gateway rely on? What new features will it launch?
Screenshot from: Compound protocol website
The Compound Chain white paper contains a lot of detailed information, and it seems that no one in the domestic blockchain industry has translated it yet. Below is the translation by The Fatty; if there are any errors, feel free to criticize. Enjoy, everyone~
1.0 Problems Solved
We know that besides AAVE, the lending protocol that can rank is Compound, which, according to Debank data, has locked up $53 million worth of crypto assets.
However, this protocol still faces several limitations:
First, the protocol aggregates risks; a single bad asset can spoil the whole pot, limiting the range of collateralizable assets.
Second, high transaction costs deter small traders, making them hesitant.
Third, the protocol cannot support assets that are not tokenized on Ethereum, limiting its application.
According to the white paper, the Compound Chain utilized by Gateway serves as an independent distributed ledger that can address the above limitations and is actively preparing to connect to various new blockchains, including Ethereum 2.0 and central bank digital currency ledgers.
If it can really obtain the interface for central bank digital currency ledgers, that would be impressive; let's hope Leshner is not just boasting.
2.0 Implementation Architecture
Compound Chain operates as a distributed ledger run by a group of validators that execute the same state transition functions. Each validator node packages every block on the chain, executing the same modification logic; moreover, it can also perform "sidecar" functions as off-chain workers for each block.
Compound Chain is designed from the ground up to allow assets on connected "peer" chains to freely cross chains. On each peer chain, there exists a contract that can lock and unlock assets on Compound Chain. Compound refers to this connecting contract as the "Starport" of the peer chain. Each peer chain can also run localized token contracts for native assets of Compound Chain.
The core validator logic loop requires validators to continuously read from the Starport contract and confirm user requests that they deem valid and finalized. When validator nodes reach consensus on an event, the resulting data will be integrated into Compound Chain. When enough validators consider a user request valid (by signing), the Starports will be willing to execute that instruction.
3.0 Account System
Compound Chain, like most public ledgers, implements value transfer and storage through public key and private key signatures. Users interact with Compound Chain using the public key and private key pairs of the blockchain they are using, such as Ethereum, Solana, etc.; on Compound Chain, all addresses can be recognized by their peer chains, such as Ethereum:
0x3fda67f7583380e67ef93072294a7fac882fd7e7
Any balance on Compound Chain can be sent to any other address; for example, an Ethereum address can send ETH from Compound Chain to a Tezos address, or Tezos can send WBTC from Compound Chain to a Solana address.
The technical aspects are something I don't quite understand, so I can't judge how impressive the Compound Chain code is. Later, I'll have Little Pepper Blockchain's chief technical expert, Shao Di, look into it, and I'll post the relevant research conclusions in the Mustard Circle.
4.0 Asset Applications
Compound Chain has the capability to generate native assets and can integrate them onto peer chains; it can also allow assets from other peer chains to be staked onto Compound Chain, such as ETH, UNI, DOT, DIEM, etc.
Users upload assets to Compound Chain through Starports, which exist as contracts on the peer blockchain (like Ethereum smart contracts) and contain the logic for locking assets until released by Compound Chain validator nodes. The signed instructions sent by Compound Chain to Starport are called notifications.
Uploading Assets
During the asset upload process, users follow the contract rules of the local Starport, such as locking assets by calling a smart contract. Compound Chain validator nodes obtain event logs from the peer chain and witness the locking action by monitoring the relevant event logs.
When a node capable of packaging blocks sees a confirmed event, it will sign a message on Compound Chain to prove it. Other nodes will only validate the block if they believe the event is real, for example, if they see the event in a sufficiently long head chain on their complete Ethereum node.
The asset will be credited to the user's address. For example, Compound Chain indicates that the Ethereum public address 0x3fda67f7583380e67ef93072294a7fac882fd7e7 now has N tokens of asset A.
Releasing Assets
A user can also withdraw and release assets from Compound Chain at any time, transferring them back to the native peer chain, but there are two prerequisites:
First, both the address and the asset must be native to one blockchain;
Second, the withdrawn assets must not violate the staking requirements set by Compound Chain users.
The asset withdrawal and release process is divided into two steps. First, the user signs a withdrawal request and submits it to Compound Chain for queuing, waiting for off-chain workers to process it and indicate its inclusion in a block.
Then, the withdrawal request is signed by validators to form a notification, allowing the user to redeem the asset from Starport.
On Compound Chain, assets cannot be uploaded arbitrarily or in unlimited amounts; there are certain restrictions in place to prevent market risks caused by bad assets.
To protect users from transferring unusable assets onto Compound Chain, the default uploadable asset quantity is set to 0. Supply limits are enforced by local Starports and updated through signed notifications.
5.0 Lending Assets
If a user wants to borrow some assets, they must have enough staked assets in their Compound Chain account to cover their debt.
Compound Chain relies on a staking coefficient, representing the utility of one asset for borrowing another, ranging from 0 to 1. Staked assets do not have to be native assets on the account chain; assets from other chains can also be used. What does this mean? For example, an Ethereum address user can hold XTZ on Compound Chain as a staked asset.
The liquidation process follows a first-come, first-served principle, absorbing a user's debt. It is worth mentioning that during the process of reclaiming the staked assets, users can receive additional rewards, such as 5%. The liquidation price data comes from Compound's own oracle, Open Price Feed.
Compound Chain performs liquidity checks on operations based on price signatures from the Open Price Feed standard, determining when a user can reduce collateral or increase borrowing amounts, as well as whether an account needs to repay its debt.
Low-cost block validation allows prices to be treated as block demands, uploaded to Compound Chain by validators in near real-time, without needing "benevolent" users or incentives. In the future, this system may be enhanced through decentralized exchanges on Compound Chain.
6.0 Native CASH Asset
Compound Chain uses a native account unit—CASH, which is an asset generated from lending, similar to DAI in MakerDAO. The total amount of CASH held by users and validators always equals the total amount of CASH debt. CASH is not only a lending asset but also a consumable asset that can pay transaction fees on Compound Chain.
For example, if a user is currently cash-strapped and happens to have some stakable assets supported by Compound Chain, they can upload their assets from other chains to Compound Chain, and then that user can borrow some CASH assets and use these CASH assets to pay network transaction fees.
In terms of interest income, the CASH held by users and validators earns continuous compound interest through an interest rate index.
Yield cash increases globally. If Yield cash equals 3%, a user holding 100,000 CASH will have 100,008.21 CASH after one day.
The cost of borrowing CASH must be greater than or equal to Yield cash; otherwise, borrowing and lending CASH will not generate meaningful value. Interest and spread are core parameters controlled by governance. CASH debt increases through the lending index, as shown in the diagram below:
In terms of cross-chain capabilities, CASH can be transferred and released to other peer blockchains, allowing the value of any asset from any blockchain to be utilized in decentralized financial systems on Ethereum or other blockchains.
This process is similar to releasing and transferring an asset already held by Starport, with the difference being that CASH is minted by the native contract of Compound Chain, and the balance is recorded on Compound Chain.
To ensure that CASH on peer chains simultaneously accrues interest on Compound Chain and remains a homogeneous, non-arbitrageable asset, the YieldCASH interest index is periodically synchronized with the peer blockchain. Between two periods, the interest index is calculated locally.
In terms of price stability, CASH is priced by the protocol (in liquidity calculations) at an arbitrary price, initially set at $1. Through governance, CASH can begin to track an alternative index, such as the consumer price index or a basket of currency indices.
The availability of stablecoins, which means having a very high staking factor, limits the potential fluctuations between the market value of CASH and the internal value of Compound Chain.
7.0 Consensus and Incentive Design
Compound Chain is a Byzantine Fault Tolerant Proof of Authority (POA) network operated by validators approved by governance. The block consensus function can remain correct and reliable in the presence of 1/3 or fewer faulty validator nodes.
Validators' responsibilities include: writing blocks, validating blocks generated by other nodes, monitoring events on peer chains, signing notifications deemed valid from peer chains, and occasionally updating oracle prices. Block finality is separate from block writing; final confirmation of a block occurs when 2/3 or more validators agree that a block is part of the chain.
Additionally, to maintain BFT guarantees, Starports require > X validator signatures to process notifications, where X is greater than or equal to 1/3. A larger threshold can be chosen to reduce the impact of malicious nodes.
As an incentive for effectively running the protocol, validators receive a portion of the interest paid by CASH borrowers. The rewards for validation actions increase with the amount of CASH in existence, enhancing the security of the asset function.
Moreover, to prevent attacks from a large number of "dust" transactions that consume validators' bandwidth, while uploading and transferring released assets does not incur fees on Compound Chain, there will be a minimum value threshold limit.
8.0 Governance of the Chain
The governance system of Compound on Ethereum has established a distributed decision-making process that allows governance actions to flow to the Ethereum Starport, from where Compound validators receive instructions. This can create foundational conditions and update system parameters:
Initial validator set
Supported assets, supply limits, and staking factors
Interest rates for CASH assets
9.0 Final Summary
For mature Ethereum DEFI protocols to generate high value, they need to be "fed" with relatively high-quality assets. Cross-chain is a feasible, large-scale, and rapid path to acquire assets. The essence of the DEFI wars among major players is actually the competition for the market of relatively high-quality assets.
If Gateway can be successfully implemented and attract a large number of high-quality assets, it will activate the value of Gateway and produce several impacts:
First, over-collateralized protocols like MakerDAO will be challenged, as the CASH stablecoin generated can not only be produced from more assets at lower costs but can also enter a broader public chain ecosystem, while also serving the function of paying transaction fees, thus solidifying its intrinsic value.
Second, the integration of lending protocols and DEXs will create demand for transactions as a large volume of assets flows through Gateway. The assets deposited on Compound can provide some liquidity to DEX trading pools, increasing the efficiency of asset utilization. Furthermore, this will lead to more composable and automated innovations.
Third, the value of the COMP token needs to be redefined; it cannot be viewed solely as a governance token for one DEFI protocol. The current asset utilization efficiency on Compound and the protocol's own effectiveness are actually constrained; Gateway creates greater imaginative space and freedom, allowing for connections with more assets and amplifying the protocol's value.
The cross-chain method of Compound is somewhat "tricky" in that transferring assets back to other chains can be cumbersome, requiring off-chain workers for verification and waiting time. It does not allow for free movement, and there is a risk of interception.
