[Strategy Paper] COMP Leveraged Mining

The Serenity Research
3 min readDec 1, 2020

Disclaimer: This is an active strategy of the fund but due to the attack that happened in later Nov, we have stopped it until the oracle issue of Compound is fixed.

Compound is the largest lending/borrowing platform and is the cornerstone of many other defi services. Compound gives out 2312 COMP (approximately 250k USD in value), its platform tokens, a day. https://compound.finance/governance/comp

​The COMP rewards are distributed to each market (ETH, USDC, DAI…), proportional to borrowing demand in that market. Within each market, 50% of the distribution is earned by suppliers, and 50% by borrowers. The Compound website has real-time calculation of the Mining Reward yield.

​A market-neutral strategy is then simple:

  1. Lend in one stablecoin pool
  2. Borrow from another stable coin pool
  3. Control the leverage to buffer for the market fluctuation (since stablecoins do not fluctuate much, you can leverage up to 60%~70%, slightly below the liquidation level of 75%).
  4. The earnings are Lending APY — Borrowing APY x leverage ratio + Mining Rewards from both pools.

Whilst the strategy theoretically works, its based on the assumption that stablecoin prices do not relatively move much. However, in late Nov, Compound was attacked with hacker manipulating its price oracle, Coinbase Pro price feeds. The Dai price was momentarily 1.3 USD and causing vaults in Compound to be liquidated. If someone has borrowed DAI against other stablecoins with the above strategy, his vault would have been liquidated (not losing all money, but the liquidation costs and inflated DAI of 30%, approximately 30% of total value).

Arguably, hacking (including price oracle manipulation) is a risk to all platforms, and then it’s a systemic risk that cannot be avoided and therefore justifying the high premium of defi mining. Nonetheless, anyone would have reduced the exposure of this strategy, after this incidence.

Alternatively, investors could also buffer a small amount of emergency money (in liquid DAI or USDC, e.g.), and use programs to monitor the risk level of each strategy, reacting to market volatilities when necessary. This however subjects the investors to higher risk exposures; and also have execution risk due to the fickle gas prices.

Disregarding the hacker risk, the returns are reasonable and consistent, compared to other direct-deposit strategies (e.g. putting into Curve). The chart below is the theoretical return from this strategy for the week before 1 Dec 2020.

(Serenity Team, 1 Dec 2020)



The Serenity Research

Zero market risk and stable return - risk neutralised cryptocurrency fund.