Compound Governance Proposal #1: Adding USDT

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While last week marked the beginning of our DeFi governance campaign, this week marks the first governance proposal we’ll be voting on – supporting USDT on Compound

In case you missed it, DeFi Rate was delegated 10,000 COMP tokens during a time when they are largely inaccessible to the public. This is a great honor to us, and we’re extremely proud to kick things off with a rather important governance proposal. 

“Should Compound support USDT?” 

Back in September, Compound users were given the privilege to vote on which assets they would like to see added to the protocol. 

The two leaders in the poll were Tether (USDT) and Maker (MKR). 

We’ve now come to the point where the first official governance poll is live, starting with voting on whether or not Compound should support Tether

In order to add Tether, the Compound team has developed an improved cToken contract which adds support for token transfer fees in the underlying token (something which may be added to USDT in the future) as well as an updated price feed that pegs USDT to $1. All changes have been reviewed by Compound’s internal team along with OpenZeppelin.

It is important to note that with this proposal, the implementation is highly conservative as USDT will not be able to be used as collateral for borrowing other assets on the protocol. With this design, if USDT ever loses its peg and the price falls to $0 on secondary exchanges, no Compound users would be liquidated and therefore largely protected by any significant downturns with Tether. 

For DeFi Rate Governance, we want to push Compound into becoming a globally adopted money markets protocol. We believe Compound has the potential to act as a critical piece of technology for global finance, and it’s absolutely vital that we make sound, rational, and transparent decisions when it comes to voting. 

Generally speaking, our votes will always look to support two things: (1) growing the protocol (2) protecting the users. 

With that, this first proposal is a great test as supporting USDT draws tension to both sides of our governance stance. Below we outline the pros and cons of supporting USDT and ultimately, our decision. 

TL;DR – While we believe adding USDT will increase usage on Compound across the board and the proposal’s implementation is extremely conservative, DeFi Rate will be voting “No” in light of community sentiment and to preserve protocol integrity given the controversies and skepticisms surrounding USDT.

For USDT

Tether is the third-largest crypto asset by market cap, reporting $7.5B USDT in circulation with roughly $5.1B of that supply being represented on Ethereum. Supporting USDT on Compound would open up an entirely new user base and would become the 2nd largest asset by market cap supported by the protocol behind ETH

In short, adding USDT would drastically increase the economic bandwidth available to Compound’s lending and borrowing capabilities. Users would be able to access the billions in capital and deposit it into Compound for earning a yield. Given USDT is a stablecoin, we can forecast that lending rates will be rather attractive relative to the non-stablecoin assets on Compound. 

Looking at other protocols, Aave has seen a fair amount of success with USDT support. The alternative lending protocol has captured roughly $3.71M in USDT volume making it the third-largest lending pool behind ETH ($4.88M) and USDC ($4.49M). In addition, Aave is offering 8.04% APY on USDT deposits – one of the highest yielding returns for stablecoins on the market today. 

Furthermore, the addition of USDT to Aave has led to the largest amount of protocol fees to date – a strong signal that Compound is likely to benefit from the same trend.

All in all, it’s clear that adding Tether would increase the available liquidity for Compound, the user base, and even future protocol revenues. Generally, we stand for growing Compound and adding Tether undoubtedly ticks off all of the boxes. 

However, like anything in this world, there are trade-offs. 

Against USDT

As anyone who has been around the crypto block knows, Tether has long faced criticisms regarding transparency and insolvency. Despite being the largest stablecoin by market cap, many stories have revealed that Bitfinex – the issuer of Tether – has been unable to prove that the stablecoin is fully backed 1:1 with underlying legal tender.

This was most apparent last April when a report was published by the New York Attorney General, revealing that USDT is backed by cash and short-term securities equal to 74% of the outstanding supply. Therefore, in practice, nearly a quarter of the USDT supply is allegedly not backed by much, if anything.  

The lack of transparency is apparent with Tether’s “audits” as the most recent report available on the website last verified the reserve on June 1, 2018. Comparatively, USDC has full audit reports completed by an independent firm, published on a monthly basis. Here’s the report for March 2020 for example. 

Despite listings on virtually every major exchange and a rapidly growing supply transitioning to Ethereum, it’s worth noting that the issuance of Tether is entirely dictated by one centralized entity, namely one which has a far less credible reputation than Coinbase with USDC.

Perhaps best known by the Bitfinixed Twitter + Medium account, there is a long-standing controversy among the crypto community that Tether should not be trusted. 

Here are some of the more colorful reports outlining these issues: 

Regardless of which side of the fence you fall on the Tether controversies, it’s certainly worth noting that out of all the top stablecoins on the market, Tether seems to have the most superficial background. 

Conclusion

Our team has spent an extensive amount of time deciding how we want to vote on this proposal.

As outlined in our original bid, we’re firm believers that adding a diversified pool of assets to lend and borrow should be a strong focus for the protocol moving forward. We largely want to support the addition of new assets and help promote those which we believe would be a good fit in the wider umbrella of DeFi lending.

While we believe the precautions implemented in the proposal by Compound Labs are sufficient for supporting USDT, we don’t feel comfortable supporting the stablecoin given the poor reputation of the parent company(s) – Bitfinex/iFinex/Tether Unlimited – and the concerns surrounding it’s 1:1 collateralization. 

Upon conducting a Twitter poll, it was clear to us that a sizable portion of the DeFi community also feels uneasy about Tether’s roll in DeFi, and that we should ensure those concerns are being voiced.

As such, we’re electing to prioritize community sentiment and will be voting to not support USDT.

This does not go to say that we disagree with those voting yes on this proposal. In fact, we very much recognize and see the value in adding USDT – hence why the overwhelming majority of the vote is geared in that direction. 

This also doesn’t mean we’re against supporting centralized assets in the future either. We believe there’s a bridge to be made between DeFi and CeFi and there’s plenty for the protocol to benefit from supporting more traditional assets. But there’s a line we must draw in the sand. We’re happy to support centralized assets on the contingency that there’s a high degree of transparency and integrity with the parent entity. Unfortunately, we don’t believe this to be true with Tether. 

If one thing is for certain, the first governance poll has been quite a rollercoaster. We’ve received opinions from numerous parties and have not made this decision lightly. As many have said before, decentralization and trust lie on a spectrum, and for this particular vote, we believe the amount of potential risk does not justify Compound risking its reputation as the industry-leading lending protocol.

We hope this article clearly outlines our rationale for the decision. Please feel free to reach out to us with any questions or feedback! 

 4/28/2020

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