Compound v3 Explained
Learn about the new Compound v3 single base lending market
Compound v3 changes the cross asset market into a single borrowing market model. In this model, the 'base asset' can be borrowed against other assets. For example, the USDC base market users can supply ETH WBTC, UNI, LINK and COMP to borrow USDC.
The only asset that earns interest in v3 markets is the base asset in this case USDC. In the future Compound can deploy other markets using different base assets like DAI, ETH, etc.
By shifting to a single borrowing asset, Compound can offer users increased security and increased collateral ratios on all assets. This also reduces the liability for each market as all debt is settled in kind.
Sample of how different markets are organized in Compound v3
Compound v3 markets no longer tie supply and borrow rates together. This allows Compound governance more granularity to manage the interest rates of an individual market.
Compound v3 liquidation system works a bit differently, more importantly when a position is liquidated on Compound the Compound protocol will settle the debt and close the position by converting your remainder to USDC. You cannot be both a lender and a borrower to a single Compound v3 market.
When a position is liquidated Compound will settle the position in the base asset. This means if you are liquidated no matter how small or large, your entire position will be in USDC after liquidation.
Let’s say you had deposited ETH, UNI, and LINK collateral and had borrowed USDC up to the point of liquidation. Let's say just LINK fell in price and you were liquidated, after the liquidation, the protocol would settle all your collateral assets and only return the remainder as USDC supplied to Compound.
The explanation of the liquidation process above focuses on the user prospective. If you would like to learn more about how liquidations work on the contract level see below:
Compound v3 has advanced features which will enable new use cases for Compound accounts; similar to Instadapp's Authority, users of Compound can grant access to parts of their accounts to other addresses or protocols. For example, you could whitelist another address to pay back debt in your Compound position or grant a protocol the ability to borrow from your account for a fee.
Increased access to accounts opens Compound v3 to new use cases!
At this time these functionality has not yet been fully explored we look forward to contributing to innovation on this end!