The DeFi space has seen its own share of ups and downs in recent months. May’s crash was brutal for the tokens in that space as well, but they managed to get through and recover in time.
COMP, however, was a token that desperately tried to return to its previous highs. Unfortunately, it was unable to do so and a few fundamental factors held back its recovery.
So taking a look at the same would give us a better understanding of where Compound stands today.
Review the basics first
Compound is a DeFi loan protocol that allows users to recover interest on their cryptos by depositing them into one of its pools. Basically every time users deposit tokens into a compound pool they receive cETH in return and over time the exchange rate of those tokens against the underlying asset increases. This is essentially how users win.
Borrowers, on the other hand, can opt for a secured loan from any pool by depositing a collateral. The base LTV ratio varies depending on the collateral asset, but currently ranges from 40% to 75%. This is because the interest paid varies depending on the asset borrowed. Here, borrowers are usually faced with automatic liquidation if their collateral falls below a specific holding threshold.
Evaluate its performance
Since its launch in 2018, Compound’s platform has managed to gain a lot of traction and popularity. People have always blocked their assets on this platform. TVL’s growth from $ 1 billion to $ 11 billion over the past year is a testament to this.
Compound’s activity gradually accelerated in June and July. In fact, according to data from Messari, Compound managed to reach a new ATH in outstanding loans and deposits towards the end of the third quarter of this year.
Cracking the Numbers – Outstanding loans rose 57% in the third quarter, due to increased liquidity in the COMP market. Conversely, during the May crash period, it had shrunk massively because the liquidity and interest rate factor had acted as a spoiler.
However, in the last few months favorable market conditions and fanciful lending rates have managed to bring people back on board. Indeed, the symbolic value of COMP managed to increase slightly. During the same period [Q3], outstanding deposits also increased by 48%.
The aforementioned numbers would likely have been even higher if the whole episode of the distribution bug hadn’t happened.
Here is the reverse
However, since the start of 2021, the aggregate utilization rate has fallen from 58% to 38%. Simply put, this report gives an overview of the extent to which the compound is being used. The state of deterioration of this metric is obviously not a great sign.
Depositors, at this point, are receiving the least interest they have received in Compound’s history. Perhaps this is one of the reasons that contributed to the decline in usage.
Unsurprisingly, the volume of borrowing and the volume of deposits also declined significantly over the same period, despite the strong growth in loans and deposits.
Although the third quarter was a relatively “calm” quarter for Compound, it has the potential to tip higher in the fourth quarter. The Compound community has a lot to look forward to. The launch of Compound Chain, for example, will help the influx of new people into the Compound ecosystem. This will in effect improve the state of the usage metric.
Likewise, we can expect protocol revenues to return to their previous highs as well. Only when the aforementioned factors, together, play out as expected, market participants should expect COMP’s valuation to return to near its highs of $ 900 in May.
If that doesn’t really happen, the DeFi token will struggle to break above its $ 300 range.