Temperature Check: Compound v4

Proposals
1

Preamble

  • Full Title: Compound v4: Enhancing cross-chain rewards, liquidation flexibility, and operational efficiency with community-vetted, dynamic market parameters
  • Description: Temp. check to collect feedback on the evolution of Sandbox into v4, introducing streamlined governance, dynamic market parameters, an enhanced liquidation mechanism, and efficient cross-chain reward distribution.
  • Author: @cmrn

Abstract

This temp. check seeks feedback on evolving Sandbox into Compound v4, a more robust and flexible lending platform/interest rate protocol. Enhancements include streamlined governance, dynamic market parameters driven by real-time data, an improved liquidation mechanism, and just-in-time bridging for rewards. These upgrades optimize DAO operations, enhance UX, and strengthen Compound’s position leveraging community-vetted rulesets.

Motivation

The current market demands have highlighted areas for improvement, particularly in governance efficiency, cross-chain rewards, and enhanced liquidations. Feedback from Gauntlet and community insights suggest that a more dynamic and responsive system could significantly enhance performance and user satisfaction. Thus, evolving to v4 is not just beneficial but necessary to maintain and expand Compound’s leadership in DeFi.

Specification/Process

  1. Streamlined governance: Semi-algorithmic approach using onchain data for dynamic parameter setting, reducing workload for delegates/enhancing DAO efficiency.
  2. Dynamic market parameters: Fully algorithmic approach that tailors supply caps, collateral factors, and other params in real-time based on community-vetted rulesets.
  3. Enhanced liquidation mechanism: Supporting partial liquidations and dynamic adjustments to collateral buffers, making the liquidation process less punitive.
  4. Cross-chain reward optimization: Deployment of just-in-time COMP bridging to streamline and automate reward distributions across networks.

Rationale

The proposed enhancements are designed to address specific inefficiencies identified through community feedback and Gauntlet’s analyses. Streamlining governance and automating market parameters will allow Compound to react in real-time to market changes, improving operational efficiency and risk mgmt. Additionally, enhancing the liquidation process and optimizing reward distribution remain critical to maintaining user trust and satisfaction.

Considerations

The introduction of automated systems may raise concerns, particularly with regards to vulnerabilities and the potential for manipulation of onchain metrics. Rigorous testing, external audits, and phased rollouts are recommended to mitigate these risks. Moreover, maintaining a balance between automation and community oversight will be crucial to ensure that the adjustments do not adversely affect the protocol’s health or user assets.

How It Would Work

Let’s take the EIGEN listing for example. Every one of these (CF, LF, LP, SC) would be defined as “X” of “Y”. We may optimize formulas as preferred. @chainlink_labs can help fetch data and automate processes. There are additional vendors as well. Gauntlet is likely best positioned to make some of these decisions. They must be onboard with disrupting themself.

EIGEN Listing Example
EIGEN Listing Example1366Ă—256 11.4 KB

Timeline/Budget

  • Design/development (1-3 months): Finalize specs and begin collaborative development.
  • Integration/testing (2-3 months): Integrate v4 contracts with existing infrastructure and conduct comprehensive quality assurance and penetration testing.
  • Feedback/iteration (3-4 months): Deployment on testnet to collect community feedback and completion of subsequent iterations before final audits.
  • Rollout/monitoring (4-6 months): v4 release across supported networks and ongoing performance monitoring (in line with the Sandbox estimate).

Budget Request: Another ~$600k in COMP would be requested to support these phases, depending on the final scope and contributing teams/solo contributors involved, covering development, deployment, and community engagement efforts.

Expected Outcomes

  • Maximal efficiency: Streamlined governance makes each vote more impactful, with automation reducing operational overhead.
  • Improved experience: More flexible liquidation processes and dynamic market params increase Compound’s attractiveness for both borrowers and lenders.
  • Strengthened position: Real-time adaptability and enhanced feature set reinforcing Compound’s leadership in decentralized finance.

Seeking Feedback

Gauntlet should remain a service provider in critical areas such as incentives. This temp. check serves to gauge community interest and gather feedback on Compound v4. A comprehensive proposal with further detail compiled from community input is to be shared.

Open Source Commitment

Professional DAO contributors are invited to express their interest in contributing to v4. It’d be open-sourced, dedicated as a public good, and a large-scale effort coordinating between contributing teams (with a target to deliver on track with Sandbox estimates).

Conclusion

v4 addresses weaknesses while significantly enhancing capabilities and efficiency, ensuring Compound remains competitive and forward-looking. Feedback is crucial as v4 is refined to align with current market demands and the DAO’s broader aspirations.

TLDR

  • Rename Compound Sandbox to Compound v4.
  • Transition from manually setting market parameters to ones that are defined by community-vetted rulesets (supply caps, CFs, reserve factors, liquidation thresholds, etc.).
  • Real-time data (utilization, volatility, liquidity, etc.) defines these rulesets.
  • Enhanced liquidation mechanism creating a less punitive process for users.
  • Just-in-time COMP bridging to solve manually topping up bridge rewards.
  • Currently seeking community feedback on all aspects.

FAQ

  • Does this affect the potential Compound <> Morpho <> Polygon collab?
    • No. DAO voters may choose one, the other, both, or none. At the end of the day, it will be the DAO voters who decide which initiatives to pursue.
  • What areas beyond those that are technical can we improve while here?
    • Socially and operationally, Compound can continue improving on aspects mentioned in community discussions. This provides some good notes.
  • How does “streamlined governance” work exactly?
    • We can categorize proposals with each having unique potential for automation. See beginnings of that here. Gauntlet and other professional DAO contributors are well positioned to contribute on these aspects.
2

I was calling for Compound to $1T years ago.

To never see that would not be the end of the world, but a little sad :sweat_smile:. We’re faced with a choice of direction and bc the community is not lacking talent or motivation, v4 presents a real opportunity. Iron sharpens iron. Morpho sharpened us with Sandbox. Now we can cross the finish and set Compound on correct course for the unending journey ahead of it.

All feedback is welcome.

3

Six months is too long to wait with Aave v4 around the corner. This proposal feels rushed due to the Compound x Morpho x Polygon proposal, not many details here to consider.

Would appreciate clarity on how automated systems would work. I dont like PID controllers or automated systems due to the PVP nature of crypto where liquidity can get pulled at any time (even with established projects like EIGEN) leaving lending markets holding the bag so to speeak.

Also, another $600k in COMP without more details seems like a HUGE ask. I had problems with the Sandbox proposal being more of a thought experiment than a well spec-ed out development effort, that is why I went from a lurker to a active poster. Seeing the approval for so much money for an idea was insane. Definitely not going to support it with a larger ask.

2 Likes
4

Thanks for your thoughtful response here. @mexilc Maybe we should be considering how long Gauntlet themself have been dissatisfied with V3, and beyond their opinion, others too believe it may be holding Compound back (as it relates to liquidations, increasing CFs, etc).

Certainly would be provided in complete detail. Totally understandable.

The ultimate proposal would be just that. Nothing less.

Appreciate your swift feedback.

5

Apologies, missed the Temperature Check in the title.

1 Like
6

There are quite a few things that need to be targeted to enable Compound to catch up in the lending and borrowing race.

Efficient and Flexible Rate Curves

  • Morpho has done great work externalizing this logic.
  • Perhaps we should do something similar in Compound too. We can then run grants or other initiatives focused solely on submitting rate curve simulations and logic.

Market Isolation and Composition

  • Compound and Morpho do not allow collateral to be borrowed, which results in lower risk.
  • In AAVE, the collateral is also put to work, meaning it always carries more risk but is more efficient.
  • We need a design that allows for both options.

Liquidations

  • There are many different types of assets, and the liquidation strategy should depend on the type of asset.
  • Here too, we need multiple strategies.

Rewards

  • We currently have a single type of reward, i.e., COMP.
  • The Woof team added a great enhancement to it, which distributes rewards using a Merkle Tree.
  • AAVE does an excellent job by allowing multiple asset liquidity mining rewards to be distributed on-chain (making it easy to understand), and then user behavior-related rewards are given using Merkle trees.

Risk Updates

  • We should develop an automated sanity simulation system that checks the effect of the markets based on new parameters.
  • Whitelisted members should be able to submit these, and if the tests/simulations pass, they can be applied with minimal time gap. We can have Gauntlet act as guardians/gatekeepers.

Aligned Interests

  • We need to add more utility to COMP.
  • This means adding it as collateral on all markets or it can be staked, etc., to reduce or cover market risk.

Multi-chain Vaults

  • Vaults that can easily move positions from one chain to another based on differences in interest rates.
  • Before we pursue this, it may be better to calculate how much it could have helped based on historical data.

I think it would be best to work on a very thin core layer, and all the logic should live in hooks/modules, which can be plugged in based on the type of assets, market conditions, etc.

We should probably set up sessions and have people/teams present their solutions for each of these areas. Based on past contributions to Compound and the designs, we should select at least two solutions for each track.

We can assemble a team of 3-4 members who understand the design, lending, and borrowing space, can facilitate these sessions, and take ownership of 1-2 areas each.

Some of the members who are familiar with the code and have been contributing for a while and are currently active include:

On the market side, I see great inputs from:

4 Likes
7

Reminder: This temp. check serves only to collect feedback on the potential evolution of Sandbox to Compound v4 (including additional enhancements). Thank you @robinnagpal for the insights and tagging of relevant contributors. Here’s a look at where we are currently:

approval-process
approval-process1024Ă—297 37.8 KB

1 Like
8

Hey Community. I would like to highlight that WOOF! is working on the the tech vision for Compound future vision and it will be published later this week.

Thanks for bringing it up. We definitely would like to have a such discussion.

1 Like
9

Thanks @dmitriywoofsoftware for the reply in Cylon’s thread. Below is an initial draft of my proposed COMPonents chart. It aims to include known ecosystem contributors (and one potential supplement), including delegates, while allowing for some degree of positional flexibility.

COMPonents chart
COMPonents chart2331Ă—1170 116 KB

@Gauntlet, OZ (@jbass-oz), @AlphaGrowth, @woofsoftware, @arr00, @DoDAO, @PaperclipLabs, @platonia, @Nazzy, + delegates. High potential as a new or returning contributor: Chainrisk, RexShinka, Mike Ghen, and peersky (among others).

PR Genius could be supplemental if the Compound community believes AlphaGrowth’s presence/marketing is providing continuous value (met at their ETHDenver booth). They help with bookings and announcements similarly. Feedback remains welcome.

2 Likes
10

Hey @cmrn while the structure definitely looks promising from an organisational perspective, I was kind off shocked to see Platonia up there in the chart, instead of us - Chainrisk.

We started working and contributing in the DAO almost a year back building compound native risk management tools - [Chainrisk] - Economic Risk Simulation Engine for Compound v3

Platonia started some work in the DAO since Jan 19th 2025. And had shared an introductory post in late december 2024 - Platonia Introduction

1920Ă—1141 142 KB

We have been constantly getting on community calls and contributing on the risk side since the last 6 months. This can be verified from all major delegates and the growth team. Also a proof to how deeply we studied & raised the DAO Operational Concerns can be found here - Dao Ops Concerns + The pressing need for a secondary risk manager

We already have established work in the DAO in which we have collaborated multiple times with the Delegates to help Compound at vital times. You can find some links to our public work here -

All of this speaks for itself as it was done without any incentives paid to us by the DAO. We have always instilled the confidence that we are there to supplement and help on risk, whenever the DAO needs us.

Also another important thing I want to bring forward to the attention of all delegates is that the Platonia team is comprised of ex-Gauntlet team members.

While on one hand Gauntlet team has done some amazing work in the past for the DAO, If the DAO wishes to go forward with On-Boarding Platonia, it is basically funding Gauntlet 2.0 for supplementing Gauntlet. Then we can no-way call it two different eyes looking at risk and growth of Compound. The very essence of keeping two different risk managers is to collaborate, complement and compete at the same time to foster healthy growth of the protocol. The AAVE DAO is the most successful example of it with Chaos Labs and Llama Risk.

So yes, we feel offended to be termed as a new contributor to the DAO and assigning where we fit the best, to a fairly new contributor.

My two cents here would be - If we are to progress as a DAO, we must start recognising and valuing the contributions of long term believers of Compound.

Also, @cmrn, we have never got the chance to catchup on a one-on-one chat to discuss our views on growth of Compound and DAO structures, but I would love to facilitate that here and see how we can help here - Calendly

Regards
Sudipan
CEO, Chainrisk

11

The chart is not exhaustive. Chainrisk is listed in the “high potential” note as a result of your contributions. More hands on deck is good. This isn’t about having too many cooks in the kitchen. It is about shipping! I invite you to join the public Compound v4 working group to discuss R&D (here is the link). We have another meeting targeting Tuesday or Wednesday.