Compound’s B.Protocol Fixes Undercollateralized Loans

The new feature will reward participants who support Compound's liquidators.

Shutterstock photo by jamakosy

Key Takeaways

  • Undercollateralized loans are an issue on Compound.
  • In response, Compound has introduced a new platform called B.Protocol in order to solve the problem.
  • B.Protocol rewards users who support Compound's loan liquidators.

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Compound Finance’s long-awaited liquidity backstop, B.Protocol, has gone live, as announced in a Medium blog post.

Undercollateralized Loans

Compound Finance allows users to borrow and lend cryptocurrency. The project’s total locked value has soared above $5 billion, making it the second largest DeFi platform by that measure.

Though users must typically overcollateralize their loan by putting in more than they borrow, undercollateralized loans are commonplace as well. B.Protocol aims to prevent this by giving liquidity providers the ability to liquidate such loans from the outset.

This process “recycles” bad loans. If a borrower cannot pay their loan back, the loan is liquidated, returning funds to Compound’s contracts. This allows other borrowers and lenders in the community to receive greater yield on top of their usual interest rate.

How to Use B.Protocol

Conpound users who manage their accounts through B.Protocol will receive points toward a user score. Liquidation proceeds will be distributed to those users at the end of April. B.Protocol has approximately $30 million of funds in reserve; voting on the distribution of those funds will occur in the future.

Users will also gain the ability to vote on matters such as proceed distribution and development decisions. Users with a higher score will gain a relatively larger vote.

According to the Compound community, B.Protocol will benefit all participants, including users and liquidators, and will strengthen the Compound platform as a whole.

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