Paper: arXiv 2410.04085

Authors: Rik Ghosh, Samrat Gupta, Arka Datta, Abhimanyu Nag, Sudipan Sinha

Abstract

Compound Finance is a decentralized lending protocol that enables the secure and efficient borrowing and lending of cryptocurrencies, utilizing smart contracts and dynamic interest rates based on supply and demand to facilitate transactions. The protocol enables users to supply different crypto assets and accrue interest, while borrowers can avail themselves of loans secured by collateralized assets. Our collaboration with Compound Finance focuses on harnessing the power of the Chainrisk simulation engine to optimize risk parameters of the Compound V3 (Comet) protocol. This report delineates a comprehensive methodology aimed at calculating key risk metrics of the protocol. This optimization framework is pivotal for mitigating systemic risks and enhancing the overall stability of the protocol. By leveraging Chainrisk’s Cloud Platform, we conduct millions of simulations to evaluate the protocol’s Value at Risk (VaR) and Liquidations at Risk (LaR), ultimately providing recommendations for parameter adjustments.

Complexity vs Empirical Score

  • Math Complexity: 3.5/10
  • Empirical Rigor: 6.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a clear, practical economic audit of Compound V3 using agent-based simulations to evaluate VaR and LaR. While the underlying mathematics consists primarily of standard protocol arithmetic and empirical simulation logic, the empirical setup focuses heavily on practical risk parameters for DeFi.

Research Flowchart

  flowchart TD
    A["Research Goal: Optimize Compound V3 Risk Parameters & Mitigate Systemic Risk"] --> B["Data Inputs: Smart Contract Parameters, Digital Asset Data & Market Metrics"]
    B --> C["Methodology: Agent-Based Simulation via Chainrisk Cloud Engine"]
    C --> D["Computational Analysis: Millions of Simulations to Evaluate VaR & LaR"]
    D --> E["Key Outcomes: Parameter Adjustment Recommendations to Enhance Stability"]