Decentralized lending and its users: Insights from Compound

TL;DR

This paper analyzes Compound, a leading DeFi lending platform, revealing user behaviors, short loan durations, and systemic risks due to concentration and interconnection, highlighting challenges for traditional risk management.

Contribution

It provides an empirical analysis of Compound's user base, transaction patterns, and systemic risks, offering insights into DeFi lending dynamics and risk factors.

Findings

Average loan duration is 31 days

Many users engage in leveraged yield farming

Systemic risk stems from concentration and interconnection

Abstract

Permissionless blockchains offer an information environment where users can interact privately without fear of censorship. Financial services can be programmatically coded via smart contracts to automate transactions without the need for human intervention or knowing user identity. This new paradigm is known as decentralized finance (DeFi). We investigate Compound (a leading DeFi lending protocol) to show how it works in this novel information environment, who its users are, and what factors determine their participation. On-chain transaction data shows that loan durations are short (31 days on average), and many users borrow to support leveraged investment strategies (yield farming). We show that systemic risk in DeFi arises from concentration and interconnection, and how traditional risk management practices can be challenging for DeFi.