Compound is offering two upgrades for the third version of its protocol via Proposition 132. Voting is still open, but protocol stakeholders have very little time left to make their views known.
Proposal 132: management of liquidation events and guarantee reserves
Members of the Compound community have the opportunity to suggest ideas for upgrades. This, to optimize the various functionalities of the protocol which is in its third version. There is currently a vote in progress, that of the proposal 132, which the parties to the protocol can accept or reject. The latter aims to upgrade the management of liquidation events and the calculation of guarantee reserves.
Here is a brief explanation of the reasons for these upgrades. According to Compound, all of a user’s collateral is absorbed into the protocol when it is liquidated in version 3 of the protocol. He is usually left with a positive base asset balance (USDC) and no debt. A community developer noticed that the absorb feature lacks an event log in case an account ends up with a positive balance.
This has no impact on accounts. Nevertheless, adding an event log can improve the user experience on Etherscan and blockchain explorers. This will also facilitate analysis. Regarding the collateral reserve, this fix makes it possible to implicitly consider all excess collateral assets available using the ERC20 balanceOf function as part of the collateral reserves.
Understanding liquidation and collateral reserve
Compound is one of the leading cryptocurrency lending and borrowing protocols in the DeFi ecosystem. It is an algorithmic application where users can deposit crypto and earn interest without having to trust a third party with the funds. Additionally, any user can lock up their cryptos as collateral to borrow other assets for use throughout the DeFi space. Compound is a set of smart contracts that store and track all assets.
The protocol allows users to earn interest on deposits of crypto assets and use the deposits as collateral backing self-managed loan positions. Arguably the most important variable in Compound is an asset’s collateral factor. This dictates how much of an asset’s value is borrowable. This system ensures that accounts provide more assets than they borrow from the protocol.
Compound works on the oversize method. This means that borrowers must provide more value than they wish to borrow to avoid liquidation. A liquidation occurs when the value of the borrowed assets exceeds the borrowing capacity. This happens when the value of the collateral drops or when the value of the borrowed asset increases too much. Liquidations are triggered by Compound’s oracle system which receives price updates.
The Compound protocol is maintained and upgraded through a community governance system. COMP token holders and their delegates debate, propose and vote on all changes to the protocol. For Proposition 132 relating to liquidation and collateral reserves, voting will close on Saturday, October 29, 2022.
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