Risk Assessment
Compound V2 Risk Assessment
Overview
Compound V2 launched in May 2019 as a complete rewrite of the original MoneyMarket protocol. V2 introduced individual cToken contracts for each asset (vs. V1’s monolithic contract), isolated risk models per asset, and dramatically improved gas efficiency. In June 2020, Compound launched COMP governance token, making it one of the first major DeFi protocols with token-based governance.
V2 sparked “DeFi Summer” in 2020 when it began distributing COMP tokens to users, catalyzing explosive growth across the DeFi ecosystem. The protocol remains one of the largest lending platforms with billions in TVL.
Smart Contract Risk
Contract Architecture:
- Each asset has separate cToken contract (cDAI, cUSDC, etc.)
- Comptroller manages risk parameters and markets
- Upgradeable proxy pattern (Unitroller proxies to Comptroller)
- Interest rate models are separate contracts per asset
- Isolated risk reduces systemic exposure vs. V1
- More modular and maintainable than V1
Code Quality:
- Extensively audited by Trail of Bits and OpenZeppelin
- Formal verification by Certora on critical components
- Open source with years of community review
- Battle-tested with 6+ years of operation
- Zero critical exploits of core protocol
- Code has been forked hundreds of times
Attack Surface:
- Upgradeability through Comptroller proxy
- Oracle dependencies for all price operations
- Interest rate model complexity
- Liquidation mechanism complexity
- Governance could upgrade to malicious implementation
- Cross-market risks through Comptroller
Admin/Governance Risk
Governance Structure:
- COMP token holders control governance (launched June 2020)
- Governor Bravo for proposal and voting
- 2-day timelock on all governance actions (minimum)
- Voting period: 3 days
- Quorum requirement: 400,000 votes
- Total process: minimum 1 week for any change
Key Controls:
- Governance can upgrade Comptroller implementation
- Governance can modify risk parameters (collateral factors, liquidation incentives)
- Governance can add/remove supported assets
- Governance can change interest rate models
- Governance can update oracle implementation
- Governance can adjust COMP distribution rates
Trust Assumptions:
- Users must trust COMP governance not to upgrade maliciously
- 2-day timelock provides warning but may be insufficient for complex changes
- Large COMP holders have significant influence
- Governance could theoretically access funds via Comptroller upgrade
- Proposal process is public and transparent
Governance Distribution:
- 10,000,000 total COMP tokens
- Distribution to users, team, investors, treasury
- Delegation mechanism allows representative voting
- Relatively concentrated among large holders
Oracle Risk
Price Oracle System:
- Initially used own price oracle (V1 style)
- Migrated to Chainlink and Uniswap V2 TWAP oracles (2020)
- Open Price Feed standard for community price reporters
- Governance can change oracle implementation
- Different assets may use different oracle sources
Oracle Security:
- Chainlink provides decentralization for major assets
- TWAP oracles reduce flash loan manipulation
- Open Price Feed allows community validation
- Still represents centralized dependency (oracle contracts controlled by governance)
- Oracle manipulation could cause improper liquidations
- Fallback mechanisms exist but are governance-controlled
Oracle Risk Level:
- Better than V1 (centralized) but not fully trustless
- Depends on Chainlink security and uptime
- Governance could change to malicious oracle (with 2-day warning)
- Medium centralization risk
Economic Risk
Liquidity Risk:
- ~$2.8B TVL on Ethereum
- Deep liquidity in major assets (USDC, ETH, WBTC)
- Some smaller markets may have thin liquidity
- Utilization-based interest rates provide economic incentives
Operational History:
- Launched May 2019
- COMP governance launched June 2020
- Sparked “DeFi Summer” 2020
- Hundreds of billions in cumulative volume
- Zero critical protocol exploits in 6+ years
- Successfully handled multiple market crashes
- DAI liquidity crisis (March 2020) handled without protocol failure
- Resilient through Luna, 3AC, FTX collapses
Protocol Risks:
- Liquidation cascades in extreme volatility
- Oracle failures could freeze liquidations
- Governance changes could destabilize markets
- Interest rate model changes could cause unexpected behavior
- Bad debt accumulation in undercollateralized positions
Stage Assessment
Stage 1 Criteria Met: ✓ Decentralized governance with COMP token ✓ 2+ day timelock on all changes (Governor Bravo) ✓ Extensive audits by Trail of Bits, OpenZeppelin, Certora ✓ 6+ years operational track record ✓ Significant TVL ($2.8B+) ✓ Improved oracle system (Chainlink + TWAP)
Why Not Stage 2: ✗ Comptroller is upgradeable (proxy pattern) ✗ Governance can upgrade to access funds ✗ Oracle dependencies (though improved) ✗ Not immutable ✗ Trust required in governance process
Why Not Stage 0: ✓ Decentralized governance (not admin EOA) ✓ 2-day timelock protections ✓ Extensive audits from multiple firms ✓ Long track record with billions in TVL ✓ Open, transparent proposal process
Justification: Compound V2 achieves Stage 1 (Assisted) status due to its upgradeable architecture balanced by decentralized governance and timelock protections. The protocol requires users to trust:
- COMP governance will not upgrade to malicious contracts (2-day warning via timelock)
- Chainlink/TWAP oracles will provide accurate prices
- Governance will manage risk parameters responsibly
- Interest rate models will function as intended
The 2-day timelock provides some protection—users can exit before malicious changes execute—but represents an assisted trust model rather than trustless immutability.
Compound V2 was revolutionary in bringing governance tokens to DeFi and establishing the “liquidity mining” model. The governance system is mature, transparent, and has functioned well for 5+ years. However, the fundamental upgradeability prevents Stage 2 classification.
V3 (Comet) introduced isolated markets for improved risk but maintains similar governance structure.