Summary: Compliantly facilitating identity and legacy data-linked borrowing and lending, whose transparent and efficient markets are powered by automated governance, will help usher in the next 100,000+ Compound protocol users. One method of capturing this opportunity is by creating products and markets that allow one to draw under collateralized debt from DeFi markets by using the credit risk data they have today. Towards this end, the community and/or the Compound team, by way of governance or other routes, could create three net-new products within the Compound ecosystem:
- The COMP Profile
- Identity-linked Compound Assets (“ilCOMP Assets”)
- Compound Interest Rate Pools (“ciPools”)
Idea 1: The COMP Profile
- Ethereum address and/or ENS.
- Personally identifiable information to facilitate proper KYC and compliance processes (SSN/Passport image). (Potentially use Nexus Mutual’s KYC process as a guide. See their whitepaper, page 12, section header name “Identity”)
- Credit score inputs from Experian, Equifax, and/or Transunion. (Potentially seek to turn these providers into information oracles where credit data is tokenized and callable)
- All financial activity data of borrowers would be linked to the COMP profile which can then be exported across decentralized finance markets (potentially both inside & outside of Compound). This could start the foundation of a self-sovereign on-chain credit bureau.
Idea 2: Identity-linked Compound Assets (“ilCOMP” Assets)
- Assets that are created within Compound’s money markets, are non-transferrable, and that are tied, upon minting, to a specific COMP profile (Here forward referred to as “ilCOMP assets” and/or “identity-linked Compound assets”).
- ilCOMP assets use an individuals’ legacy financial information (credit scores, etc.) to programmatically calculate, via automated community governance, COMP profile-specific individualized debt ceilings or “IDC’s”. IDC’s are updated dynamically and can persist as a field within an individuals’ COMP profile.
- Upon minting of ilCOMP assets, an on-chain undercollateralized compound debt (or “UCD”) is created in equal proportion to the amount of ilCOMP assets minted by the COMP profile.
- ilCOMP assets and their corresponding UCD’s are interest bearing and accruing, but with fixed rates & durations. These fixed rates and durations are determined by the “ciPOOL” used in the ilCOMP asset minting process (further explained below in Section 3, #1).
- At the stated expiration, the “undercollateralized compound debt” is either paid back, defaulted on, or the borrower posts enough collateral to “continue the debt” at the market floating interest rate seen in current Compound markets.
- ilCOMP assets are burnable and only redeemable at partner exchanges for USD via a governance process in order to disincentivize, prevent, and rectify fraudulent activities.
- Undercollateralized compound debts (UCD’s) are NFT’s and thus can be tokenized. As a result, exposure and risk to UCD’s can be spread out across multi pool lenders and dynamically priced by market participants.
- Interacting with ilCOMP assets does not bar a user from interacting in Compounds’ legacy markets.
Idea 3: Compound Interest Rate Pools (ciPools)
- The pool of available capital for borrowing, or the “ciPools”, is supplied by lenders to various liquidity pools. Each pool mints ilCOMP assets with set expiration dates and a market-rationalized fixed interest rates. For example, lenders supplying capital to “Pool A” are aware of the fixed interest rate and duration of that pool and by definition all of the UCD positions drawn from that pool. Once “Pool A” is fully committed, new pools can be formed in the view according to market demand and by collective governance action.
- Safe, sensible, and trusted liquidity mining campaigns could potentially be used to incentivize initial set(s) of lenders into and borrowers from the various ciPools.
- Past the point of these ideas shown above, the self-sovereign COMP profile could mark a first step in making it easier for individuals to remove a legacy banking institutions’ required participation from the borrowing process by creating a truly direct application process.
- A similar but tangential opportunity exists where banks may be able to offer services (UCD’s) to customers by tapping into Compound’s Markets. If successfully executed, this would further deepen the depth of markets on Compound.
Disclaimer(s): The contents above describe theoretical ideas and are to be used for illustrative purposes only. The contents above are not to be used, in any way, as legal, technical, financial, and/or professional advice and as such should be thoroughly reviewed by appropriate parties prior to any decision making. The contents above are provided “as is” and without warrant to their accuracy or general viability. All contents described are done so at a high-level and require further due diligence, testing, research, and examination by various parties.