DeFi lender Compound to set borrow caps on 10 crypto collateral assets
Quick Take
- The Compound community has voted to set borrow caps on 10 non-stablecoin crypto collateral assets.
- Compound’s move is the latest attempt by DeFi lenders to guard against the risk posed by tokens with low liquidity profiles.
Compound will enforce loan limits on 10 crypto tokens in its version 2 protocol at the end of November, thus reducing the amount of the affected collateral that users can borrow.
This decision is based on a governance vote concluded on Monday. The governance vote was on a proposal submitted by DeFi risk management protocol Gauntlet to the Compound DAO. Gauntlet’s proposal called for Compound to set borrow caps on certain collateral assets. This move, Gauntlet explained, was to adjust the risk parameters of Compound v2.
The 10 crypto collateral assets affected include Compound’s own COMP token as well as wrapped bitcoin (WBTC) and Uniswap’s UNI token. Other tokens include SushiSwap’s SUSHI, Aave’s AAVE, and MakerDAO’s MKR. In total, 10 collateral assets will have borrow limits on Compound v2. Half of these tokens, including WBTC and SUSHI, did not previously have any borrow caps.
| Collateral | Current Borrow Cap | Recommended Cap |
| WBTC | No Limit | 1,250 |
| BAT | No Limit | 900,000 |
| UNI | 11,250,000 | 550,000 |
| COMP | 150,000 | 18,000 |
| LINK | No Limit | 45,000 |
| SUSHI | No Limit | 750,000 |
| ZRX | No Limit | 1,000,000 |
| AAVE | 66,000 | 12,000 |
| YFI | 1,500 | 20 |
| MKR | 5,000 | 300 |
The new borrow cap for non-stablecoin collateral on Compound v2. Table: Compound governance
For Gauntlet, the need to enforce loan limits has to do with limiting the impact of high-risk attack vectors. The DeFi risk manager pointed to DeFi lender Aave, which recently incurred $1.6 million in bad debt. Aave’s bad debt originated from a big short position on the CurveDAO token (CRV).
Gauntlet argued that borrow caps on non-stablecoin collateral assets had insignificant capital efficiency risks. This is because 96% of Compound’s lending volume is in stablecoins. The DeFi risk manager added that these limits could be increased in the future if organic demand for the affected collateral assets begins to increase.
Not everyone in the Compound community agreed with Gauntlet’s plan. Some community members argued that enacting borrow caps could reduce Compound’s competitiveness in the DeFi market and force volume to migrate to competitors like Aave. Despite these objections, the vote passed with unanimous approval.
Compound setting borrow caps on these assets is the latest move by DeFi lenders to protect against market manipulation and other tail risks associated with tokens with unfavorable liquidity profiles. Compound previously suspended the use of four tokens — 0x, basic attention token, yearn, and MKR — as lending collateral. These tokens are among the list of ten tokens with borrow limits. Aave has also paused the use of 17 Ethereum-based tokens in its lending platform.
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