INSUBCONTINENT EXCLUSIVE:
Compound wants to let you borrow cryptocurrency, or lend it and earn an interest rate.Most cryptocurrency is shoved in a wallet or
metaphorically hidden under a mattress, failing to generate interest the way traditionally banked assets do
But Compound wants to create liquid money markets for cryptocurrency by algorithmically setting interest rates, and letting you gamble by
borrowing and then short-selling coins you think will sink
It plans to launch its first five for Ether, a stable coin, and a few others, by October.
Today, Compound is announcing some ridiculously
powerful allies for that quest
It just become the first-ever investment by crypto exchange juggernaut Coinbase new venture fund
It part of an $8.2 million seed round led by top-tier VC Andreessen Horowitz, crypto hedge fund Polychain Capital and Bain Capital Ventures
— the startup arm of the big investment firm
[Update: Compound told us it was Coinbase Ventures& first investment when it closed its round, though Coinbase notes that it done 8
rapid-fire investments over the past two months alongside this funding.]
While right now Compound deals in cryptocurrency through the
Ethereum blockchain, co-founder and CEO Robert Leshner says that eventually he wants to carry tokenized versions of real-world assets like
the dollar, yen, euro or Google stock
That because Leshner tells me &My thesis is that almost every crypto asset is bullshit and not worth anything.&
How to get Compound interest
on your crypto
Here how Compound tells me it going to work
It an &overnight& market that permits super-short-term lending.While it not a bank, it is centralized, so you loan to and borrow from it
directly instead of through peers, alleviating you from negotiation.If you loan, you can earn interest
If you borrow, you have to put up 100 percent of the value of your borrow in an asset Compound supports
If prices fluctuate and your borrow becomes worth more than your collateral, some of your collateral is liquidated through a repo agreement
so they&re equal.
To set the interest rate, Compound acts kind of like the Fed
Itanalyzes supply and demand for a particular crypto asset to set a fluctuating interest rate that adjusts as market conditions change
You&ll earn that on what you lend constantly, and can pull out your assets at any time with just a 15-second lag
You&ll pay that rate when you borrow
And Compound takes a 10 percent cut of what lenders earn in interest
For crypto-haters, it offers a way to short coins you&re convinced are doomed.
&Eventually our goal is to hand-off responsibility [for
setting the interest rate] to the community
In the short-term we&re forced to be responsible.Long-term we want the community to elect the Fed,& says Leshner
If it gets the interest rate wrong, an influx of lenders or borrowers will drive it back to where it supposed to be
Compound already has a user interface prototyped internally, and it looked slick and solid to me.
&We think it a game changer
Ninety percent of assets are sitting in people cold storage, or wallets, or exchanges
They aren&t being used or traded,& says Leshner
Compound could let people interact with crypto in a whole new way.
The Compound creation story
Compound is actually the third company
Leshner and his co-founder and CTO Geoff Hayes have started together
They&ve been teamed up for 11 years since going to college at UPenn
One of their last companies, Britches, created an index of CPG inventory at local stores and eventually got acquired by Postmates
But before that Leshner got into the banking and wealth management business, becoming a certified public accountant
A true economics nerd, he the chair of the SF bond oversight committee, and got into crypto five years ago.
Compound co-founder and CEO
Robert Leshner
Sitting on coins, Leshner wondered, &Why can&t I realize the time value of the cryptocurrency I possess& Compound was born in
mid-2017, and came out of stealth in January.
Now with $8.2 million in funding that also came fromTransmedia Capital, Compound Ventures,
Abstract Ventures and Danhua Capital, Compound is pushing to build out its product and partnerships, and &hire like crazy& beyond its seven
current team members based in San Francisco Mission District
Partners will be crucial to solve the chicken-and-egg problem of getting its first lenders and borrowers
&We are planning to launch with great partners — token projects, hedge funds and dedicated users,& says Leshner
Having hedge funds like Polychain should help.
&We shunned an ICO
We said, ‘let raise venture capital.& I&m a very skeptical person and I think most ICOs are illegal,& Leshner notes
The round was just about to close when Coinbase announced Coinbase Ventures
So Leshner fired off an email asking if it wanted to join
&In 12 hours they researched us, met our team, diligenced it and evaluated it more than almost any investor had to date,& Leshner recalls
Asked if there any conflict of interest given Coinbase grand ambitions, he said, &They&reprobably our favorite company in the world
I hope they survive for 100 years
It too early to tell they overlap.&
Conquering the money markets
There are other crypto lending platforms, but none quite like Compound
Centralized exchanges like Bitfinex and Poloniex let people trade on margin and speculate more aggressively
But they&re off-chain, while Leshner says Compound is on-chain, transparent and can be built on top of
That could make it a more critical piece of the blockchain finance stack
There also a risk of these exchanges getting hacked and your coins getting stolen.
Meanwhile, there are plenty of peer-to-peer crypto
lending protocols on the Ethereum blockchain, like ETHLend and Dharma
But interest rates, no need for slow matching, flexibility for withdrawing money and dealing with a centralized party could attract users to
Compound.
Still, the biggest looming threat for Compound is regulation
But to date, the SEC and regulators have focused on ICOs and how people fundraise, not on what people are building
People aren&t filing lawsuits against actual products
&All the operations have flown beneath the radar and I think that going to change in the next 12 months,& Leshner predicts
How exactly they&ll treat Compound is up in the air.
One source in the crypto hedge fund space told me about forthcoming regulation: &You&re
either going to get annihilated and have to disgorge profits or dissolve
Or you pay a fine and you&re among the first legal funds in the space
This is the gamble you take before asset classes get baptized.& As Leshner confirmed, &That the number one risk, period.&
Money markets are
just one piece of the financial infrastructure puzzle that still needs to emerge around blockchain
Custodians, auditors, administrators and banks are still largely missing
When those get hammered out to make the space safer, the big money hedge funds and investment banks could join in
For Compound, getting the logistics right will require some serious legal ballet.
Yet Leshner is happy to dream big despite all of the
He concludes, &We want to be like Black Rock with a trillion under management, and we want to have 25 employees when we do that.They
probably have [tens of thousands] of employees
Our goal is to be like them with a skeleton team.&
