Cash in crypto just sitting around, earning nothing? Say no more.
Coinbase has created a venture fund called Compound which will allow investors to accrue interest on cryptocurrencies.
The San Francisco digital currency exchange has successfully raised more than $8.2 million dollars in seed capital funding for the project.
Compound’s business model is to create an “overnight” liquid money market for investors and speculators to buy, sell and earn interest on cryptocurrencies.
The first cryptocurrency that will be used in this new venture is Ether. More digital currencies will debut as the project progresses.
Most cryptocurrencies are stored in digital wallets or in the vaults of exchanges and can’t accrue value. They are dead money unless the trading value moves in a positive direction and the holder decides to sell to realize the gain.
In comparison, many stocks pay a regular dividend while still having the potential for showing gains. The same can be said for bonds, which pay interest and can increase in value too.
In addition, cryptocurrency hoarding keeps most digital currencies out of circulation. That continually destabilizes coin pricing.
Digital currency hoarding makes cryptocurrency unpredictable and volatile, subject to the whims of hype-fueled speculation.
Compound co-founder and CEO Robert Leshner stresses the last point to potential clients of the fund.
“We think it’s a game changer. Ninety percent of assets are sitting in people’s cold storage, or wallets, or exchanges. They aren’t being used or traded,” said Leshner.
Compound wants to lessen the investment and speculation fears associated with cryptocurrency volatility.
An algorithm perpetually analyses the current supply and demand for cryptocurrencies and automatically sets interest rates.
In effect, you will loan or borrow directly from Compound instead of peers, negating arbitrary negotiation.
How it works
Cryptocurrency trading value is based on the supply and demand of the accumulated global cryptocurrency market.
However, hype and the current global craze over cryptocurrency investing has a lot to do with it too.
Financial transacting in digital currencies affords no opportunities for accruing interest, like happens with a traditional bank.
Compound looks to rectify this problem by offering clients the chance to participate in overnight lending in digital currency money markets.
It is a self-centralized overnight market that allows for extreme short-term lending — though it’s not a bank.
Compound’s business system features an algorithm which continually sets interest rates for the cryptocurrency tokens in its system. Clients who loan out their cryptocurrencies can earn interest.
Those who borrow must put up 100% collateral equivalent to the borrowed value against assets that Compound will support.
If the cryptocurrency that a client borrows accrues more worth than the collateral, some collateral can be sold via a pre-agreement repo pact to sustain parity.
“When Compound launches its first money markets on the Ethereum blockchain, individuals, institutions and applications will earn interest on Ether, stablecoins and utility tokens, with complete liquidity — similar to the overnight rate for dollars and government currencies,” said Leshner.
Compound is expected to launch in October.
Compound’s seed investors include Abstract Ventures, Bain Capital Ventures, Andreessen Horowitz and Polychain Capital and Danhua Capital, among others.