What is the Compound protocol?
Compound is part of a wider trend called decentralized finance, or DeFi, an umbrella term for decentralized financial products that offer new ways to trade and lend crypto, and participate in the growing crypto ecosystem. Compound offers users the ability to earn interest on deposited crypto, and also borrow crypto assets against deposited collateral without losing their position on the assets they hold.
Briefly, when you deposit crypto into Compound (for most users this is via a linked wallet), Compound will generate an equivalent amount of cTokens, which are like a functional receipt of your deposit. These cTokens accrue interest and can be redeemed for the deposited assets at any time, with the accrued interest. In addition to earning interest, once you have deposited, you may begin to borrow against that amount in any supported cryptocurrency. The user then pays interest on this borrowed amount.
Another neat aspect to the way Compound is built is that the platform and its functionality can be incorporated into other decentralized finance applications as a way to reward cryptocurrency deposits on their platforms.
The Compound platform is built on top of the Ethereum blockchain. Compound is a decentralized, non-custodial protocol, governed by its community through the voting rights conveyed by its token, COMP.
What is COMP?
COMP is an ERC-20 governance token that conveys voting power to its holders. The Compound protocol can only be upgraded by putting a proposal going through a voting process as described in Compound’s governance framework, and this process ensures distributed control over development decisions.
In addition to being traded on open markets, COMP can be earned by staking assets on the Compound platform. This participation reward helped drive its adoption throughout the crypto ecosystem, and it was often one of the assets traded by “yield farmers“, platforms that leverage high yields and rewards to optimize returns for its uses.
As with most governance tokens, COMP’s value is not just in its voting rights, but also indirectly represents the popularity and growth of Compound. Investors in COMP can learn more about what holding COMP means by studying the activity and roadmap of Compound.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Compound, including an opinion that Compound is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of Compound prior to making it available on Wealthsimple Crypto and has concluded that Compound is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated Compound based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of Compound, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Compound;
- The supply, demand, maturity, utility and liquidity of Compound;
- Material technical risks associated with Compound, including any code defects, security breaches and other threats concerning Compound and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with Compound, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of COMP.
Like all other crypto assets, there are some general risks to investing in Compound. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that COMP presents some concentration risk in that Compound’s investors hold a large amount of COMP; however, to mitigate this risk, the team has published the list of COMP holders for full transparency of its controlling parties. Further, the Compound community is not under any legal or regulatory obligation to disclose material information to the public regarding community activities. Holders of COMP have no recourse to Compound or Wealthsimple if COMP declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading Compound. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021