Coinbase is putting money to work as part of a bid to grow the decentralized finance (DeFi) ecosystem.
Announced Tuesday, the US cryptocurrency exchange is investing 1 million USDC each in lending protocols Compound and dYdX. Called the “USDC Bootstrap Fund,” Coinbase says the new fund will support developers by “investing USDC directly in the protocol.”
USDC is a dollar-pegged stablecoin launched last year by Coinbase in partnership with crypto finance startup Circle. According to data from Etherscan, there are currently $443 million USDC tokens in circulation.
Putting USDC tokens into DeFi protocols is a novel form of investment for the San Francisco-based startup. The move differs in important ways 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 like salaries or user acquisition. It simply provides more liquidity in the protocol, making it easier to attract borrowers (for decentralized lending protocols) and takers (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 the participating DeFi platforms, according to dYdX Head of Operations Zhuoxun Yin.
“It’s a totally different kind of investment,” said Yin. “They are supplying funds in a protocol to help bootstrap liquidity on that protocol and drive usage of USDC.”
Compound CEO Robert Leshner added that the USDC Bootstrap Fund can also be seen as “the starting point for the legitimization of open finance.”
“Coinbase is a financial institution and the fact that it’s engaging with open financial applications is going to be seen as a rallying cry for other institutions to [do the same],” said Leshner.
Other DeFi applications that want to integrate USDC for the first time or increase the asset’s liquidity 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 with the security of the smart contracts on which DeFi sites rely. Yin said the Coinbase due diligence team did a thorough investigation of the dYdX code before committing to the $1 million USDC investment.
For dYdX, the concern is that major liquidity providers may choose to stop providing that liquidity.
“Any asset that gets added to dYdX is helping to collateralize the system as a whole,” said Yin. “There is some risk that USDC can be [withdrawn] at any point by Coinbase. So, there’s risk on both sides. We’re both comfortable that we’re in this in good faith and we all take [user] security really seriously.”
Even so, Coinbase’s Dalal emphasized that any investment through the USDC Bootstrap Fund should not be considered an endorsement of the DeFi protocol in question.
“All investors in their protocols should conduct their own diligence before depositing tokens into a decentralized finance protocol,” said Dalal.
That said, there is some immediate upside for Coinbase in investing USDC tokens on both Compound and dYdX: returns are promised to all users of these DeFi applications – including Coinbase.
Calling it a “prudent financial decision for Coinbase,” Leshner said USDC on Compound produces the second-highest earnings rate for users (DAI generates a 9.68 percent interest rate). Even so, 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