Risk Builds as Farmers Pile $1 Billion into Compound

Key Takeaways

  • 77% of BAT’s market cap is sitting on Compound
  • ETH and USDC are the primary assets used as collateral to borrow on Compound
  • Borrowing a volatile asset against a stablecoin increases one’s liquidation risk

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With extraordinary yields, farmers are rushing to plant their crypto in DeFi protocol Compound. But there’s a drought coming.

DeFi Won’t Stop, Risks Pile Up

If you thought Compound was done after surpassing MakerDAO to become DeFi’s most valuable protocol, now is its time to backtrack.

The last 24 hours have seen Compound facilitate over $20 million in lending and $2.2 million in borrowing. Compound’s supply-side has assets worth just over $1 billion, with the top three stablecoins (USDC, USDT, DAI) accounting for 36% of this.

Compound Total Supply and Total Borrow dashboards
Source: Compound

What’s concerning to see is BAT as the most supplied and borrowed asset on Compound. $271 million in BAT has already been borrowed from the protocol, out of a total pool of $310 million. This ratio is not sustainable.

SIMETRI Winning in Crypto

According to CoinGecko, BAT’s market cap is $404.5 million at the time of press. These numbers indicate that 77% of the total BAT supply is currently on Compound.

It isn’t just the sheer amount of BAT on the money market that’s concerning; it is that BAT is a highly speculative asset. Stablecoins usually dominate money market volume thanks to their relatively stable value, wandering a maximum of 2-5% in times of high distress.

Compound will liquidate borrowers if their collateral is worth less than 133% of what they borrowed. In other words, they can only borrow 75% of what they put into the protocol.

BAT, however, has no peg and can fluctuate wildly. A surge (and to a lesser extent a fall) in Basic Attention Token prices would devastate Compound borrowers.

Cred - compound without complexity

Apart from ETH, borrowers seem to be using USDC as collateral. The stablecoin is responsible for $220…

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