Decentralized Lending Platform 'Compound' Passing Stress Test With Flying Colors

Francisco Memoria

A stress test commissioned by the decentralized finance startup Compound has shown it can scale its total borrowed value by 10x without greatly improving its risk, staying at a less-than-1% chance of going default.

The stress test, conducted by blockchain simulation platform Gauntlet Networks, subjected Compound’s decentralized borrowing and lending protocol to various stress tests to replace users’ interactions with the protocol and establish how its mechanisms will hold.

On Compound, loans are over-collateralized, which means that to take out a loan, users have to put down collateral whose value is superior to the value of the loan itself. In the cryptocurrency space, however, there are several risks as the volatility of cryptocurrency prices could see loans easily become under-collateralized. This could trigger a liquidation.

Gauntlet’s stress test reportedly deployed various slippage models, liquidator and borrower strategies, projected price trajectories, and more to figure out whether the protocol was safe when the total outstanding debt was high, whether it would be safe under volatile market conditions, and how Compound can determine the liquidation incentive and collateral factor for a new asset.

The results showed that there was “statistically significant evidence that even when Ether (ETH) realizes its maximum historical volatility, the Compound system is able to grow total borrowed value by more than 10x while having a sub1% chance of default.” In its report, Gauntlet Networks wrote:

Our conclusions show that the Compound protocol can scale to a larger size and handle high volatility scenarios for a variety of collateral types.

As first reported by TheBlock, Compound CEO Robert Leshner commented on the results noting these allow the startup and the community to “better understand what works, and what doesn’t, as the protocol scales.” Leshner added the report will “directly improve how we and eventually the community manage the risk levers to ensure stability.”

As CryptoGlobe reported, earlier this month the total value of the cryptocurrency locked in the DeFi space surpassed $1 billion thanks to the rising price of ether, as over 3 million ETH tokens are locked in the space. At press time, according to DeFi Pulse, the value has dropped to $976.7 million.

Featured image via Pexels.