Coinbase is putting money to work as part of an attempt to grow the decentralized finance ecosystem (DeFi).
Announced on Tuesday, the US cryptocurrency exchange. UU. You are investing 1 million USDC each in the Composite and dYdX loan protocols. Called the “USDC Bootstrap Fund,” Coinbase says the new fund will support developers by “investing the USDC directly in the protocol.”
The USDC is a stable currency linked to the dollar launched last year by Coinbase in partnership with the crypto finance startup Circle. According to Etherscan data, there are currently $ 443 million USDC tokens in circulation.
Putting USDC tokens on DeFi protocols is a novel form of investment for the San Francisco-based startup. The movement differs significantly from the typical investments made by Coinbase Ventures, according to Coinbase product manager Nemil Dalal.
“The USDC tokens we deposit cannot be used for items such as salaries or user acquisition. It simply provides more liquidity in the protocol, facilitating the attraction of borrowers (for decentralized loan protocols) and policyholders (for decentralized exchanges), “said Dalal, adding:
“The USDC Bootstrap fund’s goal is to make the supply side easier, allowing the protocol to grow.”
Doing so is mutually beneficial for both Coinbase and participating DeFi platforms, according to the dYdX Chief of Operations, Zhuoxun Yin.
“It’s a totally different type of investment,” said Yin. “They are providing funds in a protocol to help boost liquidity in that protocol and boost the use of the USDC.”
Composite CEO Robert Robert Leshner added that the USDC Bootstrap Fund can also be seen as “the starting point for the legitimation of open finance.”
“Coinbase is a financial institution and the fact that it interacts with open financial applications will be seen as a war cry for other institutions [to do the same],” said Leshner.
Other DeFi applications that want to integrate the USDC for the first time or increase the liquidity of the asset on their platforms are encouraged to apply for the USDC Bootstrap Fund through an online form.
Risk on both sides
For Coinbase, the concern is the security of the smart contracts that DeFi sites trust. Yin said Coinbase’s due diligence team conducted a thorough investigation of the dYdX code before committing to the $ 1 million USDC investment.
For dYdX, the concern is that the main liquidity providers may choose to stop providing that liquidity.
“Any asset that is added to dYdX is helping to guarantee the system as a whole,” Yin said. “There is some risk that the USDC can be [withdrawn] at any time by Coinbase. So, there is risk on both sides. We are both sure that we are in this in good faith and we all take [user] security really seriously. ”
Even so, Dalal de Coinbase emphasized that any investment through the USDC Bootstrap Fund should not be considered an approval of the DeFi protocol in question.
“All investors in their protocols must perform their own diligence before depositing tokens in a decentralized financial protocol,” said Dalal.
The current interest rates in USDC accounts are 5.03 percent and 5.35 percent in Compound and dYdX, respectively.
Calling it a “prudent financial decision for Coinbase,” Leshner said USDC on Compound produces the second highest profit rate for users (DAI generates an interest rate of 9.68 percent). Still, those returns, according to Yin, are not the main motivation behind Coinbase’s decision to launch the USDC Bootstrap Fund.
“Any interest [Coinbase] can earn on the side is potentially helpful. But if you think about Coinbase’s revenue, the earnings on interest is a drop in the ocean.”
Brian Armstrong image via CoinDesk archives