A stress test commissioned by DeFi lending protocol startup Compound suggests that it can scale its total borrowed value by as much as 10x with a less-than-1% chance of going default – even when ETH is at its maximum historical volatility.
The stress test, conducted by blockchain simulation platform Gauntlet Networks, subjects Compound’s protocol to various simulation-based stress tests that replicate how users interact with the lending platform in the live environment. The tests sought to establish whether Compound’s lending mechanism will fall into default risk, defined here as loans being under-collateralized, under extreme conditions.
On Compound, loans are usually over-collateralized, meaning that the value of the collaterals users put down when borrowing assets are greater than the value of the loans themselves.
However, various market risks, such as a large drop in ETH price, can suddenly render these loans under-collateralized and hence trigger liquidation, performed by liquidators who are incentivized by Compound’s lending scheme to identify under-collateralized loans in the pool and liquidate them for profit.
Gauntlet’s study deploys various slippage models, projected price trajectories for different digital assets, liquidator strategies, borrower strategies, etc, and allows them to interact with each other under the simulation. The simulation sought to address three main questions:
- Is the protocol safe when the total outstanding debt is high?
- Is the protocol safe under volatile market conditions?
- If Compound wants to support a new asset, how should one set the liquidation incentive and collateral factor so that the system will have a large enough margin for safety?
“Our conclusions show that the Compound protocol can scale to a larger size and handle high volatility scenarios for a variety of collateral types,”