Most recent update: [March 3rd , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Compound, made available on the VirgoCX Platform, including an opinion that Compound is not itself a security and/or derivative.
What Is Compound?
Compound is an algorithmic, decentralized, autonomous protocol running on the Ethereum blockchain that was built for developers to unlock an entire universe of decentralized financial (DeFi) applications. A simpler way to describe Compound would be a decentralized protocol that deploys lending pools to facilitate various crypto loans.
Decentralized finance protocols like Compound are permissionless and open source by design. This encourages and allows developers to assemble and unite various DeFi protocols together in different combinations to build out the DeFi ecosystem and add more layers of versatility and usability.
What Is the History of Compound and Who Is the Founder?
Compound was founded by Robert Leshner and Geoffrey Hayes back in August of 2017 and is headquartered in the Bay Area. The firm raised a USD $8.2 million seed round in May 2018 and went on to raise another USD $25 million seed round in late 2019 led by some industry heavyweights including Andressen Horowitz (a16z), Bain Capital Ventures, Coinbase Ventures, and Polychain Capital, among others. Compound was the first investment made by Coinbase Ventures in 2019 and is one of the earliest DeFi projects that introduced interest earning assets to the crypto ecosystem.
Robert Leshner holds an Economics degree from the University of Pennsylvania and has a strong financial background as he also holds the coveted CFA Designation. On that front, Leshner was also a former chair of the San Francisco Revenue Bond Oversight Committee. Prior to that, in 2011 Leshner co-founded a company called Safe Shepherd, which helped pioneer a personal information opt out service for consumers. He sold that company in February of 2015 before going on to co-found Compound Labs in 2017. He is also an investment partner of Robot Ventures and an angel investor in 13 startups, which includes a USD $9 million investment in Phantom, a digital wallet project for DeFi and NFTs. Leshner is the current CEO of Compound and resides in San Francisco, California.
Geoffrey Hayes is also a graduate from the University of Pennsylvania with a Computer Science degree and has a strong technical background. Hayes was a software engineer at Applied Predictive Technologies. He then went on to co-founder Safe Shepherd with Leshner in 2011 and was appointed CTO of that startup, where Leshner and Hayes built their first successful startup. Hayes would go on to leave Safe Shepherd 5 years later and become an Engineering Manager at Postmates, before the duo reunited in 2017 to co-found Compound Labs. Hayes is the current CTO of Compound and also resides in San Francisco, California.
Compound is the 3rd company that Leshner and Hayes have started together after a couple successful exits.
What Makes Compound Unique and What Gives the COMP Token Its Value?
Compound was one of the DeFi protocols to launch a decentralized governance token (COMP) in 2020 with the help of Coinbase Custody. Since the launch of the COMP token in 2020 there have been over 15 governance proposals created and at least 12 implemented. One of the more significant governance proposals that make Compound unique was that COMP token holders voted to change to price oracles to allow open price feeds rather than using centralized price feeds. This decentralized governance model has allowed Compound to shift being run by a decentralized team to be run by the community, and is on track to eventually become fully decentralized and operate as a Decentralized Autonomous Organization (DAO) over time as it transfers authority to the community.
The primary value driver of the COMP token lies in the decentralized governance model of Compound. COMP token holders can participate in governance decisions of the protocol by voting on proposals. They can also assign their voting rights to someone else on their behalf, like a legal or blockchain expert.
What Issue Did Compound Solve?
Compound has solved one of the key issues in the preliminary stages of DeFi that helped define the protocol. In the initial stages of DeFi there was an over-reliance on centralized data feeds to provide price data as DeFi projects like decentralized exchanges require price feeds to be able to display real-time quotes. This was a major risk point as using centralized feeds in DeFi could potentially allow hackers to tamper with the feeds. Compound introduced an Open Oracle System based on Chainlink that decentralizes price data among a community of data providers that are incentivized to produce accurate data.
What Is the COMP Token Supply?
The current circulating supply of COMP tokens is just under 5.5 million. The total supply is capped at 10 million tokens. It’s important to note that almost 2.4 million COMP tokens go to the Compound Labs investors and shareholders, while 2.2 million tokens are to be distributed to the founders and current team over a 4- year vesting period. There are 332,000 tokens reserved for future team member incentives, and 775.000 tokens reserved for community governance.
What Are the Risks or Drawbacks of Compound?
There are a few risks one needs to consider when using DeFi protocols like Compound.
- The COMP token is an ERC-20 token and is thus exposed to the risks of scalability and interoperability of the Ethereum blockchain. One key issue that may arise until the deployment of ETH 2.0, is that periods of high network congestion on Ethereum may lead to high gas fees to transact, possibly making it unfavorable to trade COMP tokens based on gas fee prices.
- Risk of a potential hack that exploits the smart contracts or any code vulnerabilities on the platform. This risk is not specific to Compound but applies to all projects that use smart contracts in dApps and DeFi.
With these risks outlined, it is key to note that Compound has many publicly disclosed security audits by reputable agencies and has not yet had any security breaches of its smart contracts. Nexus Mutual also has insurance policies that can be taken out to cover Compound smart contracts, to protect against the case of loss.
Recent Developments for Compound
Compound Treasury – This is one of the latest initiatives of 2021 to help support and drive the adoption of institutional DeFi. Compound Treasury allows institutions to get involved in the higher yields presented by DeFi over traditional finance. Firms can earn a 4% APR in their Compound Treasury account. Compound is in cooperation with Fireblocks, Circle, and Coinbase to create a rail for institutional flow to easily convert US dollars to USDC, which is the stablecoin created by Circle, backed by US dollar reserves, and administered by Coinbase. Compound and Fireblocks are also in partnership which recently introduced Institutional Crypto Saving Accounts.
Prior to listing Compound on the VirgoCX Platform, VirgoCX performed due diligence on Compound and determined that Compound is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Compound and/or its primary development team;
- The supply, demand, maturity and liquidity of Compound; and
- Legal and regulatory risks associated with Compound.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.