Repositories
https://github.com/compound-finance/
https://github.com/Uniswap
Note
Excuse my ignorance in case I misunderstand key concepts, supply vs. demand scenarios in either party's value proposition :)
Components
Borrowing (adding demand) on Compound.finance to leverage pool size on Uniswap, for use by arbitragers and traders, increasing usage, fees and returns on Uniswap with minimal additional risk.
Proposal Description
The founding principles of these two Decentralized Finance applications (DeFi), along with non-custodial wallets controlling the user experience, compliment one another almost infinitely.
On Compound.finance, borrowers take liquidity from the funds supplied by lenders - the more borrowers = the higher lending rates, and there's currently millions $USD lent/borrowed on their version 2, and the rates are higher than centralized 'decentralized' finance applications, day in and day out. This network effect happens on a protocol level, and no one user is engaged with trading funds with another user - you lend or borrow from the protocol, which requires over-collateralization of loans and liquidation is open to other users for a % discount on the collateral - in a win-win-win.
On Uniswap.exchange, people volunteer an amount of Eth and an amount of another Eth-based token to add to the pool of funds on the system. This pool is used to allow arbitragers to use other key features of the application - specifically, swapping tokens - to take advantage of ineffeciencies in inter-exchange markets, on top of all the other users using Uniswap to swap tokens in an easy-to-use and easy-to-lean interface, and pay a low 0.3% fee to do so. The fees are collected per token and added to the liquidity that was provided by the pooling parties, increasing their share of their tokenized interest in the pool - and by and large increasing in value so much that the returns for a given token are generally positive daily, monthly, or on any timeframe.
If you combine the two...
... you can have a world where the pooled amounts on Uniswap could borrow against themselves on compound. This increases the amount of funds that create fees on uniswap, while adding demand to compound such that interests rates rise and it becomes more attractive for additional people to loan their hard-earned wrapped eth, stablecoins, or other tokens to the ecosystem. Origination fees abound for Compound, trading fees abound on Uniswap, and the funds can be borrowed against more than once for more exposure and a larger total.
The inherent risk is no greater than using the systems individually to their intended ends - that is, the value of the underlying decreases to the point where the loans default. That is to say, an over-collateralized loan's LTV becomes unattractive, then nets a negative return, and liquidators on Compound take back the collateral by paying down the debt. This can be abated by over-collateralizing to a higher degree, and adding more collateral to those coins that start to become unattractive over time (or maybe with a % of fees generated from this new configuration on Uniswap).
It's a win-win...win-win....win-win?
Functionally, this can be accomplished by either parties or a third party.
- Fork both party's smart contracts
- Rewrite them so that funds sent to Uniswap pools are a. used as (very over-collateralized) leverage to secure additional crypto, b. be collateral in a Compound sense, c. and be pooled funds in the Uniswap sense
- Create automatic funds transfer to increase collateralize-ation by increasing the collateral in the Compound sense
- Eventually, all else remaining equal, based on collateral vs lent amount, increase the loan
- In the case of a huge movement in underlying price, emergency move a set of pooled funds into collateral
Benefits
More liquidity, more fees on Compound, making higher returns for people contributing to pools. More borrowing demand, higher lending rates, increased interest in lending as a result of higher rates on Compound. It's money begetting money by having my money first beget some other money. Win-win, win-win, win-win?
GitHub Issues
https://github.com/Uniswap/uniswap-frontend/issues/311
https://github.com/compound-finance/compound-money-market/issues/11