Compound, one of the most prominent DeFi protocols in the ecosystem, has temporarily paused four different crypto, namely, 0x (ZRX), Basic Attention Token (BAT), Maker (MKR) and Yearn Finance (YFI).
The decision means that the above crypto can no longer be used by users as collateral for loans.
After two days of voting, the DAO that powers Compound Finance approved “Proposition 131,” which will prevent users from lending relatively illiquid assets on the protocol.
Why Compound decided to restrict the use of four crypto
The decision made by Compound was not implemented without any reason. In fact, it appears that the reason lies in protecting users from potential attacks involving price manipulation.
Indeed, a similar incident occurred in the recent $117 million exploit by Mango Markets. So, Compound is playing it safe and trying to defend itself, according to the proposal on the platform’s governance forum that was passed recently.
Specifically, precisely the four crypto (0x (ZRX), Basic Attention Token (BAT), Maker (MKR) and Yearn Finance (YFI) were suspended because it appears that these tokens have less liquidity in the open markets. Consequently they were vulnerable to price manipulation that could exploit the protocol.
What Compound’s proposal to protect users says
Nearly 99.9% of all voters supported the proposal, which passed on 25 October, with 554,126 Compound (COMP) tokens used in the voting process.
Robert Leshner, the founder of Compound Finance, also voted in favor of the proposal:
“An attack based on the manipulation of an oracle, similar to the one that cost Mango Markets $ 117 million, is much less likely to occur on Compound due to the collateral assets which have much higher liquidity than MNGO and Compound, requiring excessively secured loans. However, as a precaution, we propose to suspend the offer for the above assets, given their relative liquidity profiles.”
In addition, it appears that in a security review of Compound v2 performed in September, the Volt Protocol team had identified potential market manipulation risks related to low liquidity tokens. Specifically, the report stated:
“Attack is possible when the amount of a token that can be borrowed on markets such as Aave and Compound is large compared to the liquid market. The most notable example is ZRX, which has borrowable liquidity on each of these markets that is comparable to or greater than the usual daily volume across all centralized and decentralized exchanges.”
What happened in the Mango Markets exploit
Compound confesses its fears and acts not at random. In fact, the antecedent of Mango Markets does well to warn other decentralized platforms as well. Let’s look specifically at what happened.
On 11 October, Mango Markets, a Solana-based trading platform, was leveraged for nearly $117 million. Avraham Eisenberg, the hacker behind the Mango Markets exploit, manipulated the value of published collateral, the platforms native token (MNGO), to higher prices.
He then took out significant loans against the inflated collateral, which drained Mango’s treasury. The exploiter then drained the assets, which included Solana, USDC, USDT, BTC, and MNGO.
Shortly after the exploit, the price of MNGO bottomed out before the exploiter staged an artificial pump.
The exploiter then claimed that he and a team of hackers engaged in a “highly profitable business strategy” and that these were “open market legal actions, using the protocol as intended.”
After a proposal in Mango’s governance forum was approved, Eisenberg was allowed to retain $47 million as a “bug bounty” while $67 million was sent back to the treasury.
Compound and institutional client loans with crypto collateral
Back in September of this year, Compound had already announced another major innovation, destined to make and remain one of the most important protocols in the entire DeFi space.
Indeed, Compound finally unveiled lending with crypto collateral for institutional clients. In essence, loans with crypto collateral mean that they can be backed by Bitcoin, but also Ethereum and a range of ERC 20 tokens supported by the protocol.
In this way, institutional investors holding quantities of these crypto assets will be able to receive, under classic Compound rules, liquidity in dollars or USD Coin in return. A step that opens the doors of DeFi to major financial institutions.
In a delicate phase like the current bear market, the moves implemented by Compound turn out to be significant. They propose to make a difference in a sector that still has a long way to go and many solutions to offer even to the world of traditional finance.