Compound V4 Draft Vision by WOOF!
Acknowledgments
Thanks to Platonia for their insights and analysis of other protocols, as well as their thoughtful suggestions. Their work was insightful and valuable, and I personally would love to collaborate with Platonia, as their analytics can help improve both the current and future versions of the protocol.
Thanks to @cmrn for his insights and efforts in initiating discussions about the future vision of the protocol.
Thanks to @cylon for consolidating potential strategic directions for the protocol and DAO.
Thanks to all contributors, including Gauntlet, AlphaGrowth, DoDAO & Robin, allthecollors, and many others I may not have mentioned, for their valuable discussions.
Introduction
Over the past few years, I have had the opportunity to explore various money market protocols, which has given me a deep appreciation for what Compound and Compound Labs have contributed to DeFi—particularly innovations like Governor Bravo and liquidity mining. However, with Compound Labs stepping away from active protocol development, the community has taken on the responsibility of driving initiatives. This shift has led to a slowdown in the introduction of fundamental innovations.
Since 2021-2022, the lending landscape has evolved with new narratives, such as curated markets (e.g., Morpho and Euler) and improved liquidity efficiency (e.g., Fluid).
One of my key concerns is why isolated markets were chosen for V3. While this approach enhances borrower safety, it also introduces liquidity inefficiencies compared to cross-margin markets. This raises the question of whether deprecating V2 was the right decision. I believe both V2 and V3 could coexist, serving different types of users.
Why Morpho or Euler?
Curated markets have significant potential because they allow for quick and efficient bootstrapping of new markets or vaults while enabling customized parameters. Speed is a key advantage of these protocols, as they avoid lengthy integration and governance processes, unlike Compound. Additionally, these protocols provide reusable infrastructure, which simplifies market deployment.
When designing a new version of the protocol, we should consider:
- How quickly we can launch a new market or vault—can we outpace Morpho or Euler?
- Whether we can limit governance involvement to only the most critical proposals while reducing friction in market creation.
Why Fluid?
Fluid focuses on liquidity efficiency by integrating money markets with decentralized exchanges (DEXs), making it more capital-efficient than traditional protocols. As we develop the new version, we should prioritize liquidity efficiency to enhance the protocol’s competitiveness.
Liquidity Mining
Compound pioneered liquidity mining to drive growth, a strategy widely adopted by other protocols to attract users with higher APRs. However, I believe Compound should move away from this model.
Without the recent reduction in incentives, Compound would have spent $10M annually on rewards. If this had continued, the treasury would have been depleted within five years. This calculation does not account for vendor payments or the continued decline in the price of COMP.
Newer protocols have shorter life cycles and more tokens to allocate for incentives. However, if Compound V4 adopts a more liquidity-efficient model, it may reduce or eliminate the need for additional incentives.
Possible solutions:
- Delegating incentives to the blockchains where the protocol is deployed or to specific collaterals.
- Reducing the continuous selling pressure on COMP would be beneficial for the protocol.
Speed
As mentioned earlier, speed should be a core focus of development—whether in launching new markets, integrating chains, or implementing protocol upgrades.
Institutional Adoption
Compound V4 should explore partnerships with institutional players, as large-scale investors can provide significant liquidity. While securing institutional deals is challenging, successful integrations with entities like Coinbase or BlackRock could enhance confidence in the protocol’s long-term growth.
We need to determine:
- What would make institutions more likely to integrate with Compound?
- What critical features or guarantees must the protocol provide?
Liquidations
The issue of liquidations has been discussed extensively in the community. During the last market crash, liquidators earned approximately $6M, while neither the protocol nor users benefited. MEV builders and liquidators extracted significant value from users.
Key areas for improvement:
- Reducing liquidation fees to enhance user-friendliness.
- Updating or redesigning the liquidation mechanism to allow for soft or partial liquidations opens the door for more aggressive collateral factors.
Long-Term Holder Benefits
Introducing benefits for lenders and borrowers based on the duration of their positions. Users who maintain long-term positions could receive advantages such as better interest rates or lower liquidation penalties. While the exact mechanics are still unclear, this idea could be worth exploring.
Health Factor Adjustments
Currently, supply caps limit borrowing capacity. A user with excessive collateral but a minimal borrow balance can create an artificially high health factor, preventing riskier users from accessing liquidity. A potential solution is to introduce weighted disadvantages for users with excessively high health factors.
Interest Curve
I would like to pay attention to improving the curve mechanisms. The benefit will be to have adaptive and flexible curves for different market conditions to provide the most comparative options in bear and bull scenarios.
Compound V2 and V3 Liquidity
A major challenge is managing liquidity across existing versions of Compound. Over the years, the protocol has attracted significant liquidity, and we must consider how to transition or integrate these assets into V4.
Options include:
- Maintaining V2 and V3 while shifting focus to V4.
- Deprecating older versions and creating migration mechanisms.
- Designing V4 to integrate elements of both V2 and V3.
Cross-Chain Compatibility
There is growing momentum to unify EVM chains, driven by Arbitrum and Across. Inspired by this trend, I believe Compound should prioritize cross-chain functionality to abstract network differences for users.
Rewards
Protocols like Velo and Aerodrome have innovative models for fee claiming, bribes, and governance incentives. We should explore a similar approach as bribes, allowing:
- Arbitrum to incentivize specific markets.
- EtherFi to allocate incentives for weETH.
- Individuals to fund liquidity incentives for specific assets/markets.
This approach delegates the responsibility for reward distribution from the protocol directly to the partners.
Price Feeds
Price feeds are critical to protocol security. We should explore enhancements, including CAPO (developed by WOOF!) and other best practices.
COMP Utility
The COMP token’s utility is vital for the protocol. Potential enhancements include:
- Using protocol revenue to buy back COMP and send it to the treasury.
- Possibly implementing a stakedCOMP mechanism to make COMP a yield-bearing asset.
- Combining buybacks and staking to maximize utility.
Legal Considerations
Regulatory compliance is essential. Potential solutions include:
- Registering Compound outside the U.S.
- Exploring a DUNA structure.
This issue must be addressed in the design phase to prevent legal roadblocks from stalling development.
Protocol Revenue
The protocol should be designed for sustainable revenue generation to support initiatives like stakedCOMP, COMP buybacks, and vendor payments. Quarterly reports should track revenue sources and provide optimization recommendations.
ERC-4626 Compliance
Lending (and borrowing) positions should adhere to the ERC-4626 standard, as it enhances interoperability with other DeFi protocols.
UX and Abstraction
The protocol should be designed with high-level abstraction to improve both developer integration and user experience.
Isolated Markets, Curated Markets or Cross-Margin Markets
This is arguably the most critical question shaping the future vision of the protocol. The way we define and position the protocol will determine its direction.
How other protocols approach this:
- AAVE – DAO-curated, cross-margin protocol with optional isolated collaterals.
- Morpho – Permissionless, risk manager-curated, cross-margin protocol with vault abstraction.
- Euler – Permissionless, risk manager-curated, offering both cross-margin and isolated markets.
- Fluid – DAO-curated, cross-margin protocol with optional isolated collaterals.
To determine our path forward, we must conduct thorough research, weigh the pros and cons of each approach, and base our decisions on data. However, one clear trend emerges—every major protocol supports cross-margin markets. Given this, I believe V4 should follow the same principle.
A key strategic decision is market positioning:
- Do we aim for a broad set of markets with diverse collateral assets?
- Or should we focus on 20–30 core assets, reducing the need for extensive curation?
Regardless of the direction, deployment and market management must become significantly faster and more competitive.
A Probable High-level Vision for V4
The protocol could adopt a hybrid structure:
Main Markets – Cross-margin, DAO-curated, and upgradeable focus on top-tiered assets.
Curated Markets – Functioning as infrastructure, immutable, and targeting different types of clients.
This dual approach balances flexibility with stability, ensuring efficient growth while maintaining a competitive edge.
Conclusion
This document does not propose a final solution but highlights key questions that must be addressed for Compound V4. WOOF! is eager to contribute to research and development to help drive Compound’s renaissance. Based on the community’s direction, we will share more of our thoughts and dive deeper into parts of the post in the following replies.