While Compound Labs is known for creating the Compound DeFi crypto lending protocol, the rating is for Compound Prime LLC which offers a centralized service to accredited investors that earn 4%. It currently has just $85 million in deposits compared to the more than $6.5 billion on the DeFi protocol.
Compound Prime’s “Compound Treasury” account enables organizations that are not crypto-savvy to wire money in the conventional way, earn the fixed 4% interest rate with no fixed term, and give 24-hours notice of withdrawal. The depositor doesn’t engage directly with cryptocurrency or wallets. Behind the scenes, the wired money is converted into the USDC stablecoin and lent out on the Compound Protocol.
Usually with DeFi, the protocol developer argues that they have limited influence over the protocol and it’s decentralized because of a governance token. In this case, Compound Prime is a legal entity, so this is a centralized offering. And the deposits are considered securities under U.S. Reglation D Rule 506(c), which is restricted to accredited investors.
S&P Global Ratings said the major risks are:
- Compound Prime’s very low capital base
- regulatory risk of cryptocurrencies
- operational risks and complexity
- convertibility between stablecoins and fiat
- and hurdles to generate a 4% return.
On that last point, as of today, if you were an ordinary cryptocurrency user, you could only earn 1.13% on USDC deposits with the Compound protocol and borrowers pay 2.67%. So Compound Prime is subsidizing the rate.
S&P notes that Compound Prime has only 20 customers, compared to the 300,000 of the main protocol. The agency said it’s unlikely to improve the rating over the next year, but longer term, it might if USDC issuer Circle became a bank or had its process for creating USDC fully audited.
On the flip side, it listed several issues that could result in a downgrade. One of them is cyber risk issues. In October last year, a defective smart contract upgrade on the Compound protocol resulted in giving away extra Compound reward tokens, but user deposited funds were not at risk.
Nonetheless, to receive a credit rating from one of the big three rating agencies for deposits linked to a DeFi protocol is a major milestone.