Exploring the Potential Synergy Between Chainlink and Compound
This post was meant to be posted in the Compound Governance Forum under the Proposal to Integrate Chainlink Price Feeds post made by ChainlinkGod. I made the post over 36 hours ago, yet it is still pending approval at the time of writing this for reasons I don’t know. I am posting it here instead as I think an integration between the two protocols can create synegery that benefits both communities.
As already stated by ChainlinkGod in his post here, Chainlink’s multiple forms of data aggregation at the data source, individual node response, and oracle network level will provide Compound with the strong levels of market coverage and manipulations resistant needed to mitigate price oracle attacks as experienced by the DAI liquidation event. Outside of the technical considerations around better market coverage, I think there are a few other benefits from integrating Chainlink that the Compound community should consider, which can help Compound scale to support larger lending markets across a wider array of assets, both at a cheaper price and with broader community support.
Proven, Production-Ready Solution
Chainlink provides an oracle solution that is already live on mainnet and proven to secure major protocols like Aave and Synthetix over an extensive period of time. As such, Chainlink can be quickly integrated across all of Compound’s existing markets to swiftly fix this price oracle vulnerability, saving the community considerable time, money, and mental energy that would otherwise be spent thinking about, debating, building, and testing an in-house solution that isn’t guaranteed to be successful. It also has a multitude of other price oracles already live in production for a variety of crypto-assets that the Compound community may look to integrate in the near future.
Future Scalability of Compound
Compound will undoubtedly look to scale to support more assets in the future and potentially even go beyond traditional cryptocurrencies/tokens, such as digital commodities, NFTs, and more. Being able to quickly innovate and launch new markets will be important to all DeFi protocols as a means of retaining and growing market share in an increasingly competitive environment for yield. By offloading oracles to Chainlink, which specializes solely on oracles and has both a strong academic research team to continually innovate better oracle solutions and a full-time engineering team to ensure all projects have round the clock internal and external monitoring, Compound can focus on its core business model of lending/borrowing and launch more markets across a variety of different asset classes at an accelerated rate. This will help Compound retain its position as the leading lending protocol in an increasingly competitive DeFi market, which is only going to continue as existing protocols scale, new startups enter, and traditional financial players begin to vie for market share.
With Chainlink Price Feeds already being widely used by the DeFi ecosystem, they offer a shared cost model where a variety of independent protocols/projects collectively support and fund commonly used price feeds. For example, the Chainlink ETH/USD Price Feed already has 26 projects collectively using and supporting it. This financing model lowers the per-user costs as more users join the network, which is likely to rapidly increase as Chainlink continues to be adopted across a variety of use case verticals and blockchain networks. In fact, many large projects are aleady within the Chainlink ecosystem like Aave, Synthetix, Yearn, Cream, Nexus Mutual, ENS, Set Protocol, bZx, Kyber Network, etc. Since Chainlink is blockchain agnostic, the shared cost model extends beyond just Ethereum projects too, creating strong network effects that further lower costs for users. Also, the Chainlink team has expressed their intention of employing a decentralized governance model in the future, in which Compound could and should clearly have a voice in should they integrate Chainlink.
Circuit Breaker Security
Integrating Chainlink doesn’t mean that Compound has to remove its circuit breaker mechanism either. Compound can integrate Chainlink as its primary oracle solution, while its own oracle mechanism and/or the Uniswap oracle serves as its circuit breaker protection against the outside chance that Chainlink experiences any issues. This way Compound benefits from the market coverage that Chainlink provides, yet still retains the circuit breaker safety net should the community feel it’s important to keep in place. As such, Compound gets all the benefits of Chainlink, with the added guarantee that at the very least it won’t be any less reliable than the your circuit breaker.
While I know there has been some competitive energy between the Chainlink and Compound communities that may at times rub some people the wrong way on both sides, I think ultimately we are all in this together and have a lot of shared interests in seeing DeFi succeed as a whole as well as the success of each other’s protocols. In fact, we have a lot in common with each other, given that 99% of the world still has no idea whatDeFi even is. Having been a part of the LINK community for a while, one thing I do know is that they are quick to put the past behind and support teams entering the Chainlink ecosystem, even if there was bad blood or mixed feelings beforehand. While the LINK Marines may be a little eccentric at times, I think the Compound protocol could benefit from the Chainlink community’s passionate energy as a means of furthering Compound’s brand and awareness as a leading on-chain money market to the wider world. This clearly benefited Aave, as upon its Chainlink integration they were able to innovate quickly and grow in market share/awareness, with LINK becoming the largest market by value locked. Not only do I believe that Compound could benefit from this Link Marine effect, but I think it’s a perfect way to launch a LINK market on Compound that has a chance of being immediately adopted by a community with deep knowledge in the DeFi space and the funds to engage in these protocols. LINK is increasingly being seen as a reliable form of collateral, but the LINK community tends to only trust protocols which use Chainlink to secure their oracles.
In short, I think such a collaboration between the two would benefit both ecosystems. Compound could innovate / launch new markets faster, obtain more price oracle security, and utilize social support from the LINK Marine community to help it reach wider audiences. At the same time, Chainlink could clearly benefit from supporting Compound, as Compound is undoubtedly an OG in DeFi, secures a large amount of value, and has a large community of many smart and innovative thinkers that could contribute to the continued development of Chainlink to the benefit of both projects. While competition may be intense at times, it’s drawn from the passion and drive both communities have around winning, and I think combining those two forces would lead to an accelerated amount of winning for both ecosystems than what would otherwise occur as separate entities.