Repay with Collateral Leveraging Flash Loans

Protocol Development
1

  1. Withdraw a portion of their collateral.

  2. Sell the withdrawn collateral on a decentralized exchange (DEX).

  3. Repay their loan with the proceeds.

This process is cumbersome, gas-intensive, and introduces significant market risk due to price slippage. An automated, on-chain solution would provide a seamless user experience, making the Compound protocol more competitive and user-friendly.

The proposed solution utilizes a flash loan to perform all these actions in a single, atomic transaction. This ensures that the entire operation either succeeds completely or fails, eliminating partial transaction risk.

Overall Project Plan

The project can be divided into a three-phase plan, from initial research and development to final deployment and governance approval.

Phase 1: Research, Design, and Development (Duration: 6-8 weeks)

This phase focuses on the core smart contract logic and technical architecture.

Step 1.1: Architectural Design & Requirements (Duration: 1-2 weeks)

  • Description: Finalize the technical specification for a new RepayWithCollateral smart contract. This contract will act as the orchestrator, inheriting from IFlashLoanRecipient interfaces of both Balancer and Aave. It will be a proxy contract that is upgradeable by Compound governance.

  • How to Implement:

    • Identify Target Protocols: Analyze the specific PoolAddressesProvider and Vault contracts for Aave V3 and Balancer V2 on the Ethereum mainnet to ensure the correct flash loan access points.

    • Define Core Logic: The contract will need to:

      1. Request a flash loan for the full amount of the debt token (e.g., USDC, DAI).

      2. Immediately use the flash-borrowed funds to call repayBorrow() on the user’s cToken account within Compound.

      3. After the loan is repaid, it will withdraw a portion of the user’s collateral from Compound.

      4. Use a DEX aggregator (like 1inch or ParaSwap) to swap the withdrawn collateral for the borrowed token.

      5. Repay the flash loan amount plus a small fee to Aave or Balancer.

  • Cost: No direct cost for this step, as it’s a planning phase. This is handled by the internal development team.

Step 1.2: Smart Contract Development (Duration: 4-6 weeks)

  • Description: Write the Solidity code for the new RepayWithCollateral.sol contract. This will involve writing and testing the core logic, ensuring it handles all edge cases (e.g., failed swaps, insufficient collateral) and integrates correctly with Compound’s cToken and Comptroller contracts.

  • How to Implement:

    • Core Contract: Implement the executeOperation function (for Aave) or receiveFlashLoan function (for Balancer). This function will contain the entire logic for the repay-and-swap sequence.

    • Helper Contracts: Develop small helper contracts or libraries to safely interact with DEX aggregators to find the best swap price.

    • Initial Testing: Conduct comprehensive unit tests and fork simulations to ensure the contract functions correctly and adheres to security best practices.

  • Cost: This is a crucial and resource-intensive step.

    • Development: Estimated cost of $20,000 - $50,000, depending on the complexity of the code and the developer’s hourly rate. This includes coding, testing, and documentation.

Phase 2: Security and Integration (Duration: 8-10 weeks)

This phase focuses on ensuring the security of the new contract and preparing for its integration with the Compound protocol.

Step 2.1: Formal Security Audit (Duration: 6-8 weeks)

  • Description: Hire a reputable, third-party smart contract audit firm (e.g., Trail of Bits, OpenZeppelin, ConsenSys Diligence) to conduct a thorough security review of the RepayWithCollateral contract. This is a non-negotiable step to protect user funds.

  • How to Implement:

    • Audit Firm Selection: Select a firm with a proven track record of auditing blue-chip DeFi protocols.

    • Audit Scope: The audit should cover all aspects of the new contract’s logic, its interaction with Compound, and its calls to Aave, Balancer, and DEX aggregators.

    • Remediation: Address any vulnerabilities or issues identified by the auditors.

  • Cost: This is the most significant cost of the project. A comprehensive audit for a project of this complexity can cost between $30,000 and $100,000, or more depending on the firm and the scope.

Step 2.2: Governance Framework & Simulation (Duration: 2 weeks)

  • Description: Prepare the proposal for the Compound DAO. This will involve writing the on-chain executable code for the proposal and testing its execution in a forked environment.

  • How to Implement:

    • Proposal Code: Write the smart contract code that, if passed, will add the new RepayWithCollateral contract to the Compound protocol’s governance-controlled Timelock.

    • Simulation: Run a mainnet fork simulation to ensure the proposal code will execute correctly without causing any unintended side effects.

  • Cost: This is a low-cost step handled by the development team.

Phase 3: Community Proposal and Deployment (Duration: 1-2 weeks)

This final phase involves submitting the proposal to the Compound DAO and overseeing its on-chain execution.

Step 3.1: Community Proposal and Voting (Duration: 1 week)

  • Description: Submit the executable code and a human-readable description of the proposal to the Compound DAO. This requires the proposer to hold the necessary COMP voting power.

  • How to Implement: The proposal will follow the standard Compound governance process:

    1. Proposal Submission: The proposer (with the required COMP) submits the proposal.

    2. Review Period: A 2-day waiting period begins.

    3. Voting Period: A 3-day voting period takes place, where COMP holders cast their votes. A quorum and a majority vote are required for the proposal to succeed.

  • Cost: No direct cost beyond the on-chain transaction fees for submitting the proposal.

Step 3.2: Execution and Launch (Duration: 1 week)

  • Description: Once the proposal succeeds, it is placed in the Timelock contract. After a 2-day waiting period, any address can call the execute function to deploy the new contract and finalize the protocol upgrade.

  • How to Implement: This step is a standard part of the Compound governance process and does not require complex implementation.

  • Cost: Minimal, limited to gas fees for the final execution transaction.

Total Estimated Project Cost

  • Development & Testing: $20,000 - $50,000

  • Formal Security Audit: $30,000 - $100,000+

  • Total Estimated Cost: $50,000 - $150,000+

This proposal aims to provide a clear, step-by-step roadmap for implementing a highly beneficial feature for the Compound community, with a strong focus on security and transparency. The successful completion of this project will cement Compound’s position as a leading, user-centric DeFi lending protocol.

2

Thank you for the proposal @bigoxdev.

The idea of repaying the dept is great, and it’s definitely something Compound should have as a feature.

I’d like to point out a few conflicts with commitments of existing vendors:

  1. As outlined in WOOF!’s proposal, Repay Loan with Collateral is part of our mandate and is already in the development.
  2. Compound has recently engaged Certora and ChainSecurity as security providers. Their mandate includes security audits, and I believe any audit of functionality at the core protocol level would fall under their scope. Therefore, commissioning an additional third-party audit might be unnecessary.
3

Thank you for pointing out @Pasha

  1. I checked out WOOF!’s proposal and Repay Loan with Collateral is just one small part of their $2M project. And I think it will take time to deliver this feature. So I was suggesting to develop this as an extension until WOOF!’s project will be completed. And it’s totally up to user’s choice which function they prefer to use.

  2. I meant of auditing the mentioned project rather than the whole core protocol.