Decentralized finance (DeFi) firm Compound Labs, the creator of the Compound money market on Ethereum, has a new company: Compound Treasury.
It could be one of the most significant developments in “institutional DeFi” to date. While asset managers like Bitwise have packaged DeFi tokens for big investors, few have offered gateways to DeFi’s underlying protocols.
In cooperation with Fireblocks and Circle, Compound Treasury lets neobanks and fintech firms send dollars that are converted into USDC, the dollar-backed stablecoin Circle administers in partnership with Coinbase.
Those USDC tokens will then be deployed on Compound for a guaranteed interest rate of 4%, vastly better than anything firms would get from a savings account or even a certificate of deposit.
“This is our path to sustainability as a company. … If the interest rates in Compound earn more than 4% over time, the business will make money,” Compound founder Robert Leshner told CoinDesk. “It’s the ability to offer a new financial product that fintechs have been clamoring for.”
According to a blog post shared in advance with CoinDesk, Compound Treasury enables “large holders of U.S. Dollars to access the interest rates available in the USDC market of the Compound protocol, while abstracting away protocol-related complexity including private key management, crypto-to-fiat conversion, and interest rate volatility.”
The math
If it’s hard to understand where a 4% return could come from (current returns on USDC deposits on Compound are 1.67%), it’s important to note that all Compound users are still earning COMP governance tokens (which trade at around $298 as of this writing), and will do so at a consistent rate for about three more years.
So it’s not just whatever yield USDC deposits earn, but also the liquidity mining returns; and if Compound the protocol becomes more important in its multichain future, the COMP earned will become more valuable, allowing Compound Treasury to earn a stronger profit.
That said, Compound Treasury won’t take wild bets to goose returns further, chasing whichever liquidity pool has the most lucrative profits. “It’s going to be only stablecoins. Because customers should never be exposed to the risk of cryptocurrencies,” Leshner said.
Compound Treasury will also work more like a normal savings account. Users can get in and out when they want. No commitments to lock up for a certain period.
Other related products have come along recently. Circle just launched Circle Yield, which offers depositors various returns depending on how long they lock in their USDC. Circle also recently rolled out the waitlist-only DeFi API, which is used in the Compound Treasury product. Anchor, from Terraform Labs, is offering 20% returns, but users will need to touch cryptocurrency to access it.
It’s useful here to remind readers that while Compound Labs made the Compound protocol, it doesn’t own it. It may have a large portion of its governance tokens, but many others do as well. So far, no portion of revenues on Compound goes to COMP holders.
From the start, it was always the plan to build the protocol and then build a business atop the protocol that would have a revenue stream, which brings us to Compound Treasury.
“This is what Compound Labs is offering, a dollar on-ramp to the protocol,” Leshner said. “I think this could be shockingly big and shockingly profitable.”