Coinbase Venture, the venture capital fund of the company has made its first investment in a startup called Compound which allows cryptocurrency to borrow digital currencies or lend them and earn interest over it. This shows that the cryptocurrency industry is adopting some cues from the traditional banking industry which allows users to receive interest on their digital currency holdings rather than just keeping them idle.
Coinbase was one of the eight participants in this $8.2 million seed-funding round with some other backers like Andreessen Horowitz, Bain Capital Ventures, and Polychain Capital besides participants from companies like Abstract Ventures, Danhua Capital, Transmedia Capital, and Compound Ventures.
— Compound (@compoundfinance) May 16, 2018
While talking to TechCrunch, Compound co-founder and CEO Robert Leshner said that the company will initially deal in digital currencies through the Ethereum blockchain but the company is further planning to have tokenized versions of the dollar, yen, euro or Google stock.
Leshner in his blog update said: “We think it’s a game changer. Ninety percent of assets are sitting in people’s cold storage, or wallets, or exchanges. They aren’t being used or traded.”
He further added: “…when Compound launches it’s [sic] first money markets on the Ethereum blockchain, individuals, institutions and applications will earn interest on Ether, stablecoins and utility tokens, with complete liquidity — similar to the overnight rate for dollars and government currencies.”
There have been several token projects that have discussed the idea of generating interest or dividend income on crypto assets but it’s Compound who has shown how it’s done! Salil Deshpande, Managing Director at Bain Capital Ventures, in his blog post states that the existing lending solutions“are not good enough: they are either centralized and have substantial counterpart risk, or require robust order books for each type of cryptoasset, which generally do not exist.”
He further added: “Compound is decentralized blockchain infrastructure for enabling a clear use case — interest rates for cryptoassets — with a relentless focus on security and interoperability.”
Compound’s protocol comprises a series of open-source smart contracts which can themselves adjust the interest rates for each asset in real-time, as borrowing demand for the asset changes. The borrowers like sophisticated speculators or hedge funds will be using their portfolio as collateral in order to borrow from the protocol.
This will result in a “fully liquid, transparent and predictable interest rates — ready for developer and institutional adoption.”
Olaf Carlson-Wee of Polychain Capital said: “Spot interest rates are a financial primitive, and necessary for the evolution of decentralized markets. Compound’s goal is to become permanent infrastructure…A company that survives a hundred years.”