Created by:
Ayhan Güler & Kaan Alp
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Compound (COMP) vs Maker (MKR)
Part II
– Blockchain Technologies in Finance –
How it works?
Compound
As we mentioned while explaining what Compound is, the system works between those who deposit and take interest (lenders) and those who need loans (borrowers). The said interest is calculated by an algorithm according to the number of depositors and loan seekers and the liquidity pool it creates, in short, supply and demand. The more liquidity in a market, the lower the interest rate. A system has been created with the thought that when the interest rates fall, depositors will withdraw their money and thus the interest rate will increase. In addition, this interest rate is renewed according to the Ethereum blockchain’s block creation time, that is, approximately every 15 seconds.
The cToken used in the compound system is generally kept as a new token as long as the collateralized token remains locked. When you give your Ethereum balance to the Compound system, it holds your asset as cToken and lends it. In other words, when the crypto money assets you lend are taken as collateral, they are signed as cToken and transferred to the system. These cTokens act like a contract at a bank, through which borrowers and lenders agree to the terms of the transaction. At any time, you can withdraw the crypto currency you have left as collateral, together with the interest you have earned. Examples of cTokens include cETH, cBAT and cDAI.
So where does the COMP token come into play? Compound rewards lenders with COMP tokens based on the number of cTokens held in their wallets. When the user deposits a loan into the system, he receives both interest and becomes a COMP token owner. The user is free to do whatever they want with the COMP token, as Compound does not impose any limits on the users regarding the COMP token it distributes. Thus, the user has the opportunity to instantly sell his COMP token on the market and has the possibility to increase the amount he will earn.
You can borrow cryptocurrencies if you keep a certain collateral value in your wallet, as well as lending over the compound protocol. If your debt is not paid, your collateral is confiscated.
As for which currencies can be traded in Compound, you can find all the coins that can be traded in Compound in Figure 1 you see below.
Figure 1
MakerDAO
The user shows the current cryptocurrencies in the system as collateral and can receive DAI produced by MakerDAO in return. The main reason for using this system is that users who think that the price of their cryptocurrencies will increase, get the chance to get a loan and make different investments without selling that cryptocurrency. For example, if a user deposited 1 ETH (worth $100), this will allow him to take up to 40 DAI (assuming a 150% collateralization rate) against his $100. The user can either convert the obtained DAI to another stable coin or use it to buy other cryptocurrencies. However, if the price of Ether drops below $100 his Collateralized Debt Position will be forcefully closed. -A collateralized debt position, or CDP, is a type of smart contract used by MakerDAO to create its DAI stable coin currency. CDPs are essentially margin accounts explicitly tailored for Ethereum-based stable coins- To stop this from happening he needs to put in more Ether or take out less DAI in the first place. This is to ensure there’s always enough capital locked against the amount of money being taken out.
If we talk a little more about DAI, which we mentioned in the previous section, MakerDAO aims to minimize the problems caused by volatility in the cryptocurrency and ETH markets by offering DAI as a stable currency. The single-collateral DAI backed by ETH was launched in 2017. In November 2019, DAI began to support multiple collateral assets in addition to ETH, further driving user adoption. Since then, market cap for DAI has grown exponentially, reaching a high of $10.38B in February 2022 (Figure 2). With the introduction of multi-collateral DAI users could use any ERC20 token to collateralize their Collateralized Debt Positions. For example users could actually use their Wrapped Bitcoin to collateralize their CDPs.
Figure 2
To explain how DAI remains stable at $1, the creators of MakerDAO think that it will automatically return to $1 if the price goes up or down. Because when the price of DAI drops, those who created DAI and borrowed before will try to buy DAI from the market and close their loans cheaply. Thus, as the purchases increase, the price of DAI will rise to $1 again. If the DAI price rises, people will send ETH to the MakerDAO system and create DAI at $1, and they will try to sell these DAIs at a higher price in the market. When sales increase, the DAI price will drop to $1.
MKR, another token of the system, is a governance token as we said before. Although money exchanges are made with DAI in the system, the interest on these transactions is paid with MKR. MakerDAO do not share dividends to MKR holders but they give the holders voting rights over the development of Maker Protocol and are expected to appreciate in value in accordance with the success of DAI itself. In addition, if there is a sudden decrease in the value of the cryptocurrencies held as collateral and the amount of collateral falls below the loan, then the difference is covered by MKR token.
About Tokens
COMP
Utilities
Every token distributed is free to use in the market. Thus, there are no barriers to the trading the token. Holders of COMP can propose changes to the protocol, debate and vote whether to implement changes suggested by others without any involvement from the Compound team. This can include choosing which cryptocurrencies to add support for, adjusting collateralization factors, and making changes to how COMP tokens are distributed.
How Many COMP Tokens Are There in Circulation?
The total supply is capped at 10 million COMP and as of writing, less than a third are in circulation (~3.3 million). Out of these 10 million tokens, just over 4.2 million tokens will be distributed to Compound users over a 4-year period. The second biggest allotment (almost 2.4 million COMP) goes to the Compound Labs, Inc shareholders, whereas 2.2 million tokens will be distributed to the Compound founders and current team with a 4 year vesting schedule. Finally, 775,000 COMP are reserved for community governance incentives and the remaining 332,000 tokens will be allocated to future team members. The exact rate of COMP emission is subject to change over time, as voters are able to increase or reduce the emission rate by passing a proposal through community governance.
MKR
Utilities
The most outstanding feature of the Maker (MKR) platform is that it gives importance to users’ opinions and votes. For a new update, change and development to be made on the Maker platform, it acts according to the votes of users who have Maker in their wallet. MKR owners will continue the development, marketing and even external relations of Maker, which is completely decentralized as of July 20, 2021. Teams will present to MKR owners in which field they work and how much budget they want in return. As a result of the voting of MKR owners, the teams that were given a budget will continue to work. Here are some aspects of the protocol where owners can vote:
Amend the risk parameters of existing collateral asset types;
Adding new collateral asset types to the protocol, allowing users to submit new cryptocurrencies to mint more DAI;
Change the DAI Savings Rate: holders of DAI tokens can earn savings by locking them in a special contract, and the Savings Rate impacts the profitability of that contract.
How Many MKR Tokens Are There in Circulation?
There is no hard-coded limit on the total supply of MKR. In various cases, MKR may need to be mined or burned. Thus, the supply of MKR is a dynamic value that changes depending on market conditions and the overall health of the DAI ecosystem. It currently has a total of over 1,000,000 MKR in the market.
