Chainrisk & Compound Finance have entered into a strategic partnership to improve the economic security of Compound V3 (Comet) markets. Compound V3 (Comet) is an EVM compatible protocol. This compatibility allows it to seamlessly integrate with the vast ecosystem of Ethereum-based applications & tools. The base asset for Compound V3 is USDC, a stablecoin that offers a stable value reference, which is crucial for borrowing & lending activities within the protocol.

The Chainrisk simulation platform is designed to replicate real-world conditions to the greatest extent possible. By forking the blockchain at specific block heights, the platform provides a realistic environment for testing protocol features & stress scenarios. This partnership aims to leverage Chainrisk's advanced simulation & risk management tools to ensure the stability & robustness of Compound's DeFi protocol.

Goals & Objectives

The primary goal of this partnership is to provide the Compound Finance community with sophisticated risk simulation & testing tools. These tools will help identify & mitigate potential risks in various market scenarios, ensuring the protocol's long-term stability & security.

The unified infrastructure supports comprehensive risk analysis, including cascading liquidations, oracle failures, gas fee variations, & liquidity crises. This holistic view helps protocol teams understand & prepare for a wide range of potential risks. Specific objectives include:

1. Onboarding the Compound community to the Chainrisk platform.
2. Stress testing Compound V3 modules such as interest rates, collateral, borrowing, & liquidations.
3. Improving transparency & providing publicly available analysis & results.

Stress testing protocols involve simulating extreme market conditions to assess the protocol’s resilience & robustness. Understanding the protocol’s reactions under adverse conditions allows for necessary adjustments, enhancing overall stability & security.

This ensures that the protocol is well-prepared to handle a wide range of market environments.

Simulation Framework

This framework includes various modules that help in assessing, optimizing, & managing risk parameters across different market conditions.

Interest Rates Module

It is a crucial component of the risk framework, designed to test & evaluate various interest rate scenarios. By simulating different interest rate environments, this module helps understand how changes can impact borrowing & lending activities within the protocol.

Factors such as market demand, supply of the base asset ($USDC), & external economic conditions are considered in these simulations. The insights gained assist in setting optimal interest rate curves that balance user incentives with the protocol’s stability, ensuring adaptive & resilient interest rate mechanisms.

Collateral & Borrowing Module

This Module focuses on the interactions between collateral assets & borrowing activities within Compound V3. It assesses the impact of various collateral factors, including the Borrow Collateral Factor & Liquidation Collateral Factor, on the protocol's health.

By simulating different market scenarios, the module identifies optimal collateral requirements to minimize the risk of under-collateralization, ensuring stability during market fluctuations. Additionally, it evaluates borrowing limits & their effects on liquidity & solvency, aiding in setting borrowing caps that align with risk management objectives.

Liquidations Module

It is designed to handle scenarios where users' collateral positions become under-collateralized. This module evaluates the efficiency & effectiveness of the liquidation process. It ensures that the protocol can swiftly handle liquidation events to maintain system health.

By simulating various market conditions, including high volatility & low liquidity scenarios, this module identifies potential weaknesses in the liquidation mechanism & suggests improvements. Understanding the impact of liquidations on reserves & user positions helps optimize the process, protecting the protocol from insolvency risks.

Risk Tooling

To improve risk coverage & transparency, Chainrisk proposes a comprehensive set of risk tools. These include parameters such as the Borrow Collateral Factor, Liquidation Collateral Factor, Collateral Safety Grade, Supply Cap, Target Reserves, Store Front Price Factor, Liquidator Points, & Interest Rate Curves.

Covering various chains like Ethereum, Polygon, Base, & Arbitrum, these tools ensure a holistic risk management approach. The platform also supports a wide range of assets, including $USDC, $WBTC, $WETH, $LINK, $UNI, & $COMP, each with tailored collateral requirements assessed through simulations.

Scaled Monte-Carlo Simulations

This is a statistical technique used to model & analyze the protocol's behavior under various market conditions. By simulating thousands of scenarios, this approach provides a comprehensive risk assessment, helping identify the best parameter settings to minimize risks & enhance resilience.

These simulations enable the protocol to test its stability against potential market shocks, ensuring preparedness for a wide range of conditions.

Economic Audit Report

This is a detailed document providing an in-depth analysis of the protocol’s economic security. It includes results from simulations, risk assessments, & recommendations for parameter optimization.

This report offers valuable insights into the protocol’s risk management practices, building trust & confidence among the community. The audit ensures that the protocol's risk parameters are optimized for stability & performance.

Conclusion

The Chainrisk & Compound Finance partnership significantly improves the risk management & economic security of the Compound V3 protocol. Utilizing Chainrisk’s advanced simulation & testing tools, the Compound community gains a robust platform for ensuring protocol stability under various market conditions. The detailed Economic Audit Report & stress testing provide actionable insights, optimizing protocol parameters to guard against potential risks. This partnership builds community trust & sets a new standard for economic security & transparency in DeFi, paving the way for future innovations.

About Compound Finance

Compound Finance is a decentralized lending protocol on Ethereum, enabling users to borrow or lend assets like USDC & WETH through single-collateral pools. Founded in 2017 by Robert Leshner & Geoffrey Hayes, it launched on Ethereum’s mainnet in 2018, with significant upgrades in 2019 & 2020. Compound III (Comet), launched in 2022, supports dynamic interest rates & collateral options including $ETH, $WBTC, $LINK, $UNI, & $COMP. Subsequent deployments on Polygon, Arbitrum, & Base have expanded its reach & enhanced user experience, driving innovation in the DeFi space.

About Chainrisk

Chainrisk is a comprehensive risk management platform focused on the DeFi sector. It aims to identify & mitigate economic risks associated with DeFi protocols. Chainrisk provides a suite of tools & services designed to stress test DeFi protocols under various market conditions, using agent-based & scenario-based simulations. This helps in uncovering potential economic exploits & vulnerabilities within these systems before they can be exploited maliciously.