Compound is a decentralized lending platform running on Ethereum, known for its significant presence in the DeFi space. In April 2021, Compound Labs announced the development of Compound Chain, a new evolution of their platform. This tutorial will provide an overview of Compound Chain, also referred to as Gateway, and how it aims to scale the Compound ecosystem to a multi-chain world. We will explore the motivation behind this development and the challenges faced by Ethereum as the primary foundation of DeFi.
Ethereum has emerged as the leading platform for DeFi due to its early mover advantage. It provided a solid foundation for computational platforms where various applications and assets could interact. Ethereum’s network effect has grown over time, making it the go-to platform for developers and users alike.
Composability is a key concept in DeFi, enabling applications to interact with one another and build upon each other’s functionalities. Ethereum’s ecosystem fosters this rich web of activity, making DeFi an exciting concept. With hundreds of applications built on Ethereum, it has become the hub for DeFi innovation.
The growing popularity of Ethereum has led to scalability issues and high gas costs. As more applications and activities try to fit into a single ecosystem, the cost of interacting with Ethereum increases. This scalability challenge has driven users and developers to explore alternative platforms for building their applications.
To address the scalability concerns, several layer 1 chains have entered the picture, offering platforms for decentralized financial applications. These chains operate as independent ecosystems, each with its own computation platform, assets, and applications. However, these ecosystems are relatively isolated from one another, limiting interoperability.
Compound plays a vital role in the Ethereum ecosystem as an interest rate market. It allows assets from Ethereum to be used as collateral for borrowing other assets within the Ethereum blockchain. Currently, Compound supports popular Ethereum assets such as Ether, wrapped Bitcoin, US Dollar Coin, DAI, Tether, and various Ethereum tokens.
There are two approaches to address the fragmentation across blockchains. The first approach is to deploy a separate instance of Compound on each blockchain, creating isolated ecosystems for each chain. While this allows for limited utility within each ecosystem, the overall interoperability is constrained.
The second approach, which Compound aims to achieve with Gateway (Compound Chain), involves creating a single interest rate market that spans across multiple blockchains. Gateway facilitates cross-chain interactions, allowing users to supply assets from one chain and borrow assets native to any other chain. This approach offers increased utility by consolidating assets into a single market.
Compound Chain is a distributed ledger for cross-chain interest rate markets. It operates as an overarching interest rate market that spans different blockchains. The architecture involves multiple blockchains, each with its computational platform. On top of each blockchain, there is a contract called a starport, which acts as a bonding contract.
Users with wallets native to different blockchains can interact with the starport contracts by supplying assets. The supplied asset balances are represented in Compound Gateway, the cross-chain interest rate market. Once an asset is in Gateway, users can borrow or download assets onto any other blockchain, enabling seamless cross-chain functionality.
Compound Chain bridges the gap between Ethereum and other blockchains, allowing assets to move seamlessly without the need for trading, asset wrapping, or centralized exchanges. It creates a tool for cross-blockchain operations on credit, enabling users to leverage assets on different chains. This facilitates the emergence of new types of decentralized finance applications on each chain.
Compound Chain is currently in the testing phase on the Gateway test net, with smooth operation and active community participation. While the exact timing of the mainnet launch is not certain, it is expected to be ready in the early Q3 of the year. The Compound Labs team and community validators are working towards the goal of scaling Compound to include assets from multiple blockchains, fostering a larger and more interconnected DeFi ecosystem.
Compound Chain (Gateway) aims to address the challenges of a multi-chain world by creating an overarching interest rate market that spans multiple blockchains. By enabling cross-chain interactions and increasing utility for assets, Compound Chain facilitates seamless movement of assets between blockchains. As this technology evolves, it is expected to unlock new possibilities in decentralized finance and contribute to the growth of the DeFi ecosystem.