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Contagion in Decentralized Lending Protocols: A Case Study of Compound

Author

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  • Natkamon Tovanich

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Myriam Kassoul

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Simon Weidenholzer

    (University of Essex)

  • Julien Prat

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

Abstract

We study financial contagion in Compound V2, a decentralized lending protocol deployed on the Ethereum blockchain. We explain how to construct the balance sheets of Compound's liquidity pools and use our methodology to characterize the financial network. Our analysis reveals that most users either borrow stablecoins or engage in liquidity mining. We then study the robustness of Compound through a series of stress tests, identifying the pools that are most likely to set off a cascade of defaults.

Suggested Citation

  • Natkamon Tovanich & Myriam Kassoul & Simon Weidenholzer & Julien Prat, 2023. "Contagion in Decentralized Lending Protocols: A Case Study of Compound," Post-Print hal-04221228, HAL.
    • Handle: RePEc:hal:journl:hal-04221228
    DOI: 10.1145/3605768.3623544
    Note: View the original document on HAL open archive server: https://hal.science/hal-04221228v1
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    References listed on IDEAS

    as
    1. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
    2. Saengchote, Kanis, 2023. "Decentralized lending and its users: Insights from compound," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 87(C).
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    Keywords

    systemic risk; decentralized finance; financial contagion; financial network; stress test;
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