The DeFi room has seen many ups and downs in the past few months. The May crash was devastating to tokens from this room, but somehow they made it and recovered in time.
However, while the COMP token is making an effort to return to its previous highs, the reality is not as expected. Some fundamental factors stopped the price rally.
COMP 4-Hour Price Chart | Source: Tradingview
Compound is a DeFi credit protocol that allows users to earn interest on cryptocurrencies by depositing them into one of the pools. When a user pays tokens into the compound pool, they basically receive cETH. Over time, the exchange rate of these tokens against the base value will gradually increase. This is how users make money.
On the other hand, the borrower can opt for a secured loan from any pool by putting on some collateral. The loan-to-base ratio varies depending on the security, but is currently between 40% and 75%. In fact, the interest payable varies depending on the asset being borrowed. Here borrowers are often automatically liquidated if their collateral falls below a certain retention threshold.
Since its launch in 2018, Compound’s platform has attracted a lot of attention and is growing in popularity. People lock their assets on the platform all the time. The increase in TVL (locked value) from $ 1 billion to $ 11 billion last year is most evident.
TVL (USD) on link | Source: DefiPulse
Compound activity gradually accelerated in June and July, and according to Messari, the outstanding loans and deposits on Compound reached a new ATH by the end of the third quarter of this year.
Outstanding loans increased 57% in the third quarter due to increased liquidity in the COMP market. In contrast, values plummeted during the May crash as liquidity and interest rates collapsed.
However, in recent months, favorable market conditions and high lending rates have attracted people again. In fact, the COMP token value also increased slightly. Compared to the same period (Q3), deposits outstanding also increased by 48%.
The above numbers could have been even higher had it not been for the mistake in the reward distribution, as reported by Bitcoin Magazine.
Total outstanding deposits | Source: Messari
However, since the beginning of 2021, the total usage rate has fallen from 58% to 38%. Simply put, the ratio provides some insight into the extent to which the compound is being used. The deterioration in this metric is clearly not a good sign.
It is at this stage that depositors receive the least amount of interest in the history of Compound. This is likely one of the reasons that contribute to the decrease in usage performance.
Compound daily deposit rate | Source: Messari
It is not surprising that the volume of loans and deposits has also declined significantly compared to the previous year, despite the recent strong growth in loans and deposits.
Total composite usage rate | Source: Messari
Although Q3 was a relatively “quiet” quarter for COMP, a bullish reversal is likely in Q4. The compound community can look forward to a lot. For example, the introduction of compound chain will attract newcomers to the compound ecosystem. In fact, this will improve the health of the usage metrics.
Likewise, Protocol revenues are expected to return to their previous highs. Only if the above factors come together as expected should new entrants expect the COMP valuation to return close to the May highs of $ 900.
Otherwise, this DeFi token will have a hard time breaking the $ 300 mark.
Compound quarterly profit | Source: Messari
Despite the 57% increase in quarterly loans, log profits fell 17% due to historically low interest rates.
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According to AMBCrypto