Recursive borrowing introduction
Recursive borrowing is where, usually a DApp will supply ABC, borrow almost 100% of the available borrow limit, also with ABC. Then supply the borrowed ABC back into Compound. This can be repeated at least 2 times. What happens is all that is supplied to the protocol cannot be used by anyone else to borrow. A user could supply $10k and after recursive borrowing, end up receiving COMP rewards for $25k worth of supplies AND $18k worth of borrows with very little risk if setup and managed properly.
My idea is to end recursive borrowing once and for all, while distributing the excess COMP to DApps/users who are using Compound how it is meant to be used. Lots of the protocols interacting with Compound are designed to leverage exposure of a specific asset on Compound, some everyday users of the protocol are guilty of this as well. All of the protocols farming COMP, from what I have found, regularly harvest the COMP rewards and trade COMP into the asset that is being used to farm.
Keep it Simple!
I like simple. So, the most simple method for not allowing recursive borrowing of the same asset would be to not allow same-asset supply-borrow. Since this option is probably not feasible without a substantial overhaul to Compound’s currently active smart contracts, I have come up with the next possible solution.
Solution to end recursive borrowing, example:
If a user/DApp were to supply ABC, then a borrow of ABC will reduce their COMP rewards on the supply side by the borrow amount. If the entire borrowed amount is then used to add more supply then the address/contract will receive zero COMP rewards for their borrow side.
Basically, within each asset, COMP rewards will be based on the ‘net’ borrow and ‘net’ supply for users/contracts interacting with Compound.
Why end recursive borrowing?
Recursive borrowing is rewarding professional farmers 4 - 5 times more COMP than the protocols and users using Compound for how it is meant to function. Ending recursive borrowing in this manner will allow more COMP rewards to be distributed throughout the protocol, rewarding the users and DApps that deserve to be rewarded.
- This will most-likely reduce the TVL within Compound by a significant amount.
- Protocols/DApps/users who are using recursive borrowing will be upset.
- Compound’s TVL will reflect the most accurate TVL value than any other DeFi protocol.
- Interest rates should become more aligned with actual utilization.
- COMP rewards (%) should increase across the board, especially on the borrow side, which may grab more attention from users and also drive up usage on other DApps/protocols that interact with Compound.
Please add to this idea. Feedback of any kind is more than welcome.