Compound's founder is unworried about DeFi defaults

2022-10-18 02:02:25 By : Mr. Simon Zhao

Photo illustration: Annelise Capossela/Axios. Photo: Compound Labs

Decentralized finance (DeFi) may seem weird, but it's not going to implode like other crypto lenders have, at least not according to Robert Leshner, the CEO of Compound Labs and founder of one of DeFi's blue chip protocols, Compound Finance.

Why it matters: Outsiders reading the odd story about cryptocurrency might think any company doing finance with bitcoin nearby is "DeFi," but it's not. It's only DeFi if it functions autonomously, out in the open.

Zooming out: DeFi lenders, such as Compound, Aave, MakerDAO, Solend, Liquity and others are the most directly parallel to the companies that have had dramatic flameouts in recent days, firms like Celsius, Voyager and BlockFi.

Reality check: Nobody wants to see their collateral liquidated while they were sleeping. And this is something anyone participating in DeFi needs to monitor — especially in a volatile market.

No one wonders what DeFi operations are up to. Every deposit and every loan — and the exact terms of every loan — are viewable on chain, all the time.

By contrast: "Unlike opaque centralized lending business where nobody knows what the business is or what their policies are," Leshner said. "It turns out that most everyone threw their policy playbook out the window and just made uncollateralized loans to Three Arrows Capital, which came back to bite them in the ass."

Yes, but: DeFi isn't indestructible, Leshner noted. If the crypto markets tanked extremely fast, like they did in March 2020, liquidations might not be able to keep up and protocols could be saddled with bad debt.

Plus, hacks: New users should be really careful about which DeFi projects they put money into. There's been a lot stolen (though not so much against the top tier products).

The intrigue: "The first reason why centralized lending businesses are imploding is because they are not in the advertised business of lending," Leshner said.