Aave & Compound are both the leading lending protocols in the market, both have their own development plans in the future, respectively, Aave V3 & Gateway (Compound Chain).
In this article, we will review, analyze & evaluate the pros and cons of Aave V3 & Gateway (Compound Chain).
Overview of Aave V3
Aave Request for Comment (ARC) proposes a new upgraded version called Aave V3, the proposal has been enthusiastically responded and approved by the Aave community recently. Here are some of the outstanding features that Aave V3 promises to deliver:
Portal
By combining with cross chain bridges such as Connext, Hop Protocol, Anyswap, xPollinate, Aave V3 allows user assets to easily flow seamlessly between Aave V3 marketplaces across different networks.
For example: In Aave V2 version, users who deposit ETH on Ethereum can only receive aETH on Ethereum. In V3, users who deposit ETH on Ethereum can easily receive aETH on Polygon or aETH on Avalanche C - Chain.
High Efficiency Mode (eMode)
Simply put, this feature allows borrowers to achieve the highest possible borrowing capacity with their own collateral.
To do this, Aave V3 supports classifying assets according to the following parameters;
- LTV.
- Liquidation threshold.
- Liquidation bonus.
- A custom price oracle (optional).
In the event that the assets users use as collateral and the assets they borrow are in the same category, eMode can provide borrowers with greater access to capital.
For example, USDT, USDC, DAI are in the category of Stablecoins eMode. If users deposit USDT as collateral and borrow DAI, they can borrow more DAI and lower liquidation fees, CF = 98% & LP = 1%.
Isolation Mode
Money markets for new assets on Aave V3 only allow users to borrow up to a specific debt ceiling, which limits risk to users & protocols from new assets listed on Aave .
More specifically, when an asset is listed in “Isolated”, users can only borrow stablecoins approved by Aave Governance, which will have a certain debt ceiling restriction.
For example, TOKEN2 is an Isolated listed asset with USDC, USDT, DAI and a maximum debt of $10M. After providing TOKEN2 as collateral, borrowers will be able to borrow up to $10M in USDT, DAI and USDC.
Risk management mechanisms : Aave V3 provides more advanced risk management mechanisms to protect Aave from protocol insolvency. Some of the adjustments include:
- Supply & Borrow Caps: Aave Governance will determine borrowing and lending limits. The loan limit minimizes the liquidity pool's insolvency, while the supply cap reduces the protocol's exposure to a given asset and helps prevent calls. attacks like infinite minting or price manipulation oracle.
- Collateral factor control: Aave Governance will have the ability to change the collateral factor for future loan transactions without affecting existing loan positions or triggering liquidation.
- Risk Admins: Entities that have the ability to change certain risk parameters without requiring admin votes (e.g. RiskDAO, Gauntlet). Naturally, Anyone who wants to be added to “Risk Admins” has to go through the normal admin recommendation process.
Gateway (Compound Chain) Overview
At the end of 2020, Compound Finance launched their next roadmap - Compound Chain. Although there are a lot of mixed opinions around Compound Chain, I personally think this is still an extremely ambitious move by Compound Finance that we should also consider carefully. Compound chain has the following important components:
Gateway (Compound Chain)
Gateway is a money market built on Polkadot's Substrate framework and written in RUST. Gateway is an App Chain.
Gateway uses PoA ( Proof of Authority ) consensus, a variant of the PoS ( Proof of Stake ) consensus mechanism, where validators are selected based on the identity & reputation of the participants, not based on the token value they hold.
It is the duty of the Validators to keep the Gateway network secure. In return, the Validator receives a portion of the interest paid by the borrower (in the form of a CASH token). To become official validators, a node must be approved by the Compound Finance community in the Compound Governance Proposal.
CASH
CASH is a $1 pegged stablecoin, CASH token is issued by Gateway through a collateral and borrowing process, similar to Maker & DAI.
Even so, CASH is a bit different from DAI, in addition to being able to be used as a Stablecoin it can also be used to pay transaction fees on the Gateway (Compound Chain) and Validator will earn a portion of the interest. which the borrower pays in the form of CASH tokens.
Starport
Starport is a collection of smart contracts on other Blockchains that act as the interface on the supported Blockchain to facilitate easy and smooth cross-chain asset transfers.
Each supported L1 has its own Starport that is used to lock and extract assets derived from that L1 to connect to the Gateway.
Some highlights & limitations of Aave V3 & Gateway (Compound Chain)
Highlights of Aave V3 & Gateway (Compound Chain)
With Aave V3, they leverage Cross Chain Bridge infrastructures to achieve cross-chain interoperability and capital efficiency . These two properties are highlighted through 3 main features of Aave V3:
- Portal: Supporting cross-chain lending & borrowing.
- Emode: Support users can borrow the most capital with their collateral.
- Isolation Mode: Allows creation of different money markets with new assets. At the same time limit some of their risks.
With Gateway, they achieved cross-chain interoperability using Starport, a product that the Compound team built themselves. In addition, Compound Finance is also very ambitious when choosing to build an App Chain on Polkadot, this choice brings with it certain pros and cons;
Advantages: Autonomy in many things such as technology, product development direction.
Limit:
- The workload is very large, requiring the level and capacity of the team to be very high.
- Depends on Polkadot development progress.
- The gateway chain will also be very centralized, which is exacerbated when they choose to use PoA consensus.
- The ability to combine and communicate with other interfaces will be limited because they are not the EVM chain .
Before that, there were also extremely successful projects when choosing a challenging path like Compound Finance:
- Terra: They started building an App Chain from scratch, a specific L1 for e-commerce payments in Korea.
- Axies: start from a GameFi on Ethereum, then build your own app chain to scale.
Personally, I find Compound's position quite similar to Axies when they have products and users first on Ethereum, and then started to build their own App Chain with the main product being Stablecoin CASH. Want to know the growth potential of CASH? Take a look at the Terra ecosystem!
See also: Overview of Terra . ecosystem
Limitations of Aave V3 & Gateway (Compound Chain)
Basically, the more complex your protocol, the greater the chance of potential bugs in your code , Aave V3 & Compound chain is no exception, as their final product is a combination of many components. difference.
In addition, the risk comes from third-party protocols . In the case of Aave V3, they use external Cross Chain Bridges. Most of them work on the simple principle of lock-mint-burn.
- Users deposit tokens in chain A to the bridge.
- Bridge when receiving the asset will mint the wrapped version of the token on chain B for the corresponding wallet address.
- When the asset needs to be withdrawn, the user sends back the wrapped token to the bridge.
- Those tokens will be burned and the bridge will unlock tokens on chain A for users.
So what happens to Aave and their users when the bridge that Aave integrates is exploited or faulty causing tokens to be unlocked on different blockchains without locking the corresponding amount on the respective blockchains?
Of course, I think these risks have been thought of by Aave and have a backup plan for them, so we don't need to consider much. What I want to emphasize here is that the risk of deep integration of a 3rd party protocol exists.
In the case of Gateway, their limitations & challenges are more encountered than Aave V3, as I mentioned above, one of the biggest limitations is that Gateway has to depend on Polkadot's progress .
If they want to go into operation, Gateway will have to bid for a parachain slot on Polkadot, then they have to wait for Polkadot to update some important features such as XCMP and Parathread for the Polkadot network to work smoothly. In my opinion, this could take 1 - 1.5 years to complete.
Next, Gateway uses PoA, although this option will help Gateway to have low fees but in return it will be less decentralized because validators are selected by COMP whales. Is the trade-off of decentralization, security for scalability the correct choice in the case of Compound?
The Future of Aave V3 & Gateway (Compound Chain)
For simple visualization, you can imagine that:
Aave V3 is trying to be a “best milk tea shop”, their milk tea can satisfy any customer, and Gateway (Compound Chain) they are trying to create “a chain of stores” milk tea”, their milk tea may not be as good as Aave V3 but has a great expansion potential, they can sell many other products that are not milk tea, as long as it is expensive, generating revenue is fine. .
Naturally, the challenge faced by Gateway Aave V3 is many, both subjectively and objectively. At the moment it is difficult to be more than anyone else because both are not on the mainnet, all analysis and evaluation are based on the basic documents provided by Aave & Compound.
But in my opinion, both Aave V3 and Gateway (Compound Chain) are viable plans, if they persist in doing it and produce the same results as described, then I believe both deserve to be in the top 20 tokens. highest market capitalization.
summary
Above is some analysis, assessment of the pros and cons of Aave V3 & Gateway (Compound Chain). If you have other questions related to the above topic, please comment below for Coin98 to support right away!
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