Compound to Offer Stablecoin Crypto Loans to Institutions

September 14, 2022 - 3 Min Read

Key Takeaways:

  • Compound will offer stablecoin loans to institutions, with Bitcoin, Ethereum, and some other ERC-20 assets accepted as collateral.
  • The endeavor comes as institutions and financial organizations continue to chase liquidity.
  • Just recently, Coinbase offered to pay 1.5% interest on $528 million of MakerDAO's PSM.

Major DeFi lending protocol Compound aims to stretch out its lending services to institutional investors, accepting Bitcoin, Ethereum, and some other ERC-20 assets as collateral.

The latest endeavor comes amid the growing demand for crypto loans, the platform said in a Medium post today, adding that institutions can now borrow from Compound Treasury, the only decentralized company that has received a credit rating from S&P Global Ratings.

“Compound Treasury can now address the demand for liquidity with a simple, reliable borrowing solution while continuing to provide the same trusted service we’ve delivered to clients earning interest over the past year,” said Reid Cuming, VP of Compound Treasury.

The protocol detailed that "accredited" institutions can take stablecoin loans in USD Coin (USDC) or in USD with fixed rates starting at 6% APR. The loans won't have a predetermined limit or boundary, allowing institutions to "draw liquidity and repay balances as they see fit–for as long as they remain overcollateralized."

Compound is the fifth-largest DeFi protocol in terms of Total Value Locked (TVL). The protocol currently boasts over $2 billion in assets and more than $285 billion in total transaction volume since its launch in September 2018.

How Compound Plans to Avoid Issues that Crippled Centralized Lenders

In mid-May, following the implosion of the Terra ecosystem, several top-tier crypto lenders faced liquidity issues after their loans to crypto funds (like three Arrows Capital) and other crypto companies who had exposure to Terra went bust. Celsius, BlockFi, and Babel Finance were some of the crypto lenders that lost millions of user funds.

In a bid to prevent such an incident from happening again, Compound aims to use smart contracts to make the entire position transparent. Furthermore, the positions will remain overcollateralized to protect against price swings and short-term volatility. "Collateral never leaves Compound Treasury’s control, increasing transparency and the safety of funds for our clients," the announcement added.

Rising Demand for Liquidity

Institutions and major financial organizations usually face challenges trusting opaque centralized lenders or interacting directly with new and vulnerable DeFi protocols when chasing liquidity. The recent market downturn has further eroded confidence in these platforms. However, there is still strong demand for liquidity.

Just last week, Coinbase put forward a proposal offering to pay 1.5% interest on 33% of MakerDAO’s Peg Stability Module (PSM), worth around $528 million. If accepted, the deal would provide Maker with an additional $24 million in yearly revenue.

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Contributor

Ruholamin Haqshanas is contributing crypto writer for DeFiRate and finance journalist with over two years of experience writing in the field. He has a solid grasp of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi) and the emerging market for non-fungible tokens (NFTs).