MakerDAO and Compound are two of the most interesting projects in the crypto decentralized finance space. Both projects offer collateralized loans, however they have taken different approaches. MakerDAO has followed the model of a decentralized bank, while Compound has followed a decentralized money market model. As a result, comparing Maker with Compound is a bit like comparing apples and oranges. 

How MakerDAO and Compound are Similar

Both Maker and Compound are built on the Ethereum crypto network. They use smart contracts to execute their loans. This makes both of them decentralized, noncostodial and available to anyone in the world with an internet connection. Neither of them require AML/KYC (AntiMoney Laundering/Know Your Customer). Both are important players in making finance available to everyone in world and part of the revolution of freeing money and finance from governments. 

Similar to banks, before central banks took over, Maker issues loans against collateral in its own currency, called Dai. Dai is soft pegged to the US dollar, meaning one Dai is roughly equal to one US dollar. Compound also makes loans against collateral, however Compound allows the user to borrow in a number of different cryptocurrencies – 12 different cryptocurrencies at the time of writing this article. This leads to one of the big differences between Maker and Compound. Maker has a stablecoin (Dai) and Compound does not. 

Both Maker and Compound allow the user to deposit a variety of cryptocurrencies as collateral. There have been reports that Maker is considering musician’s royalties as collateral, which would be the first “real world” asset that can be used as collateral. 

Both Maker and Compound require that the borrower provide collateral that is greater than the loan amount. This is the same as happens with mortgages and car loans. The collateral in these cases is the house or car and your down payment insures that the collateral is greater than the amount of the loan. 

The amount of collateral required depends on the asset. More volatile assets require more collateral or alternatively allow you to borrow less against the asset. For instance, Dai and other stablecoins are considered to have very low volatility so you can borrow say 80% of what you deposit. While ETH (ethereum) is considered more volatile, so you can borrow less, say 66% of the collateral you lock up in the smart contract. 

In both cases, if the amount you owe is greater than the maximum amount you are allowed to borrow, the smart contract automatically sells some of your collateral to pay down the loan. This is one of the risks of borrowing from Maker and Compound. The key is to take out a loan that is significantly less than the maximum allowed. 

Interest on a loan in both cases is calculated and accrued each ethereum block, presently about every 15 seconds. Loans can be repaid at anytime. 

Differences Between Maker and Compound

One of the big differences between Compound and Maker is that Compound pays you interest on the collateral you deposit. Because of this it is possible that the interest you earn on the collateral you deposit or lock up in the smart contract can be more than the interest you pay of the crypto you borrow. In addition, presently under Compound you receive some COMP, the governance token for Compound, for both depositing crypto and for borrowing crypto. This can also adds to your returns. Note that this distribution of Compound will only last for the first four years. 

Compound allows you to earn interest on any crypto you deposit (lock up), whether you take out a loan or not. This is probably because Compound is imitating a money market. Money markets are designed to allow people who have excess money (crypto) they do not need immediately to lend it out for a short time. Alternatively, money markets allow people to borrow money (crypto) they need to meet short term needs. Note that you can withdraw your crypto (collateral) at anytime (the next ethereum block – about 15 seconds). 

Alternatively, Maker allows you to deposit your Dai and earn interest. When I looked up the interest rates that Maker pays, it appears you can make more interest locking up (depositing) your Dai in Compound. 

Another difference between Maker and Compound is that loans in Maker are paid in Dai and interest on deposited Dai is paid in Dai. While in Compound you earn interest in the crypto you deposited and have to repay any loans in the crypto you borrowed. 

Originally, loans in Maker required the borrower to pay the interest on the loan in Dai and a stability fee in MKR, however this is no longer the case. The MKR paid for the stability fee was burned. MKR is still burned, but it now it is based essentially on profits above the necessary working capital. So do not be confused if you see older articles that say the stability fee is paid in MKR.

Maker uses a sophisticated set of incentives to keep Dai pegged to the dollar. Essentially, if the price of Dai is above $1.00 market participants are encouraged to take out more loans, which locks in a profit between the difference in the price of Dai and the dollar. This also creates more Dai, which drives down the price of Dai. On the other hand if Dai is below a dollar, then borrowers are encouraged to pay back their loans and lock in the price difference as profit. Dai are destroyed (removed from the market) in this process, reducing the supply which drives up the price of Dai. 


COMP and MKR are the governance tokens for Compound and MakerDAO respectively. The total number of COMP is fixed at 10 million, with about 40% distributed initially and the rest paid out to people who lockup collateral and people who take out loans, in a complicated formula. The distribution rate is about 2,880 per day and all the COMP will be distributed in about 4 years.

The total amount of MKR is not fixed. Unlike COMP, MKR is constantly burned as long as the project is profitable. On the other hand if there is insufficient collateral for all the loans, then MakerDAO automatically issues and sells additional MKR. MKR acts more like standard stock with voting rights (governance), participation in the profits through buy backs, and as the final source of capital if the project becomes insolvent. 

This excellent article, Evaluating MKR’s Tokenomics, goes through the math of how much MKR is burned. At the time that article was written the author said that 10% of the market for MKR was being bought up. I did not check the articles math, but the logic looked correct. 

The more loans MakerDAO issues and the more profitable it is the more MKR is burned (bought back). On the other hand the higher the price of MKR the slower it is burned. This buy back is the only way MKR holders are compensated. 

COMP on the other hand is only a governance token and does not pay interest and is not burned. Because of this it is hard for me to see why COMP should appreciate overtime. COMP is not even mentioned in the original white paper and appears to have been added as a mechanism to compensate the developers and initial investors as well as provide decentralized governance. 

MakerDAO and Compound Investment Thesis

This is my opinion on the rational investment thesis when using MakerDAO and Compound. The best way to profit from Maker is to purchase MKR, which is essentially like buying stock in a bank, however a decentralized bank that is essentially run through smart contracts (software) or a Decentralized Autonomous Organization (DAO). Since profits are used to buy back MKR (burn it), the return is in the form of price appreciation not in cash flow (interest/dividends). One important thing to note is that the higher the price of MKR, the less MKR is burned and vice versa. 

Another way to profit from Maker is to originate and payoff loans when Dai deviates from its price target of one US dollar. This is essentially an arbitrage type of opportunity. My guess is that there are already automated (software controlled) organizations that are taking advantage of this arbitrage. This opportunity is probably only available to large, sophisticated investors. 

Finally, you can loan your Dai to the Maker project. The interest rates at this time appear to be very low. You can probably get a much better interest rate if you lockup your Dai in Compound.

I do not see any rationally investment thesis for COMP, the governance token. However, Compound provides higher interest for locking up your crypto. If you are looking for a way to get a return on your cryptocurrencies you are not planning on using, then loaning (locking up) them to the Compound protocol is way to earn interest on these idle assets. In addition, you get paid interest on the collateral you provide even if you take out a loan. Since you have to provide more collateral than you can borrow, you may actually make money while taking out a loan. This is sort of mind blowing.

Both Maker and Compound provide investment opportunities for crypto investors. The present distribution of COMP to borrowers and loaners, provides an additional return. If you want to earn a return on your idle crytos, then Compound appears the way to go. While if you are looking for long term appreciation then holding MKR may be the way to go. 

The biggest risk in both cases is that an error is found in the smart contracts (code). Decentralized finance is new and these smart contracts have not been tested in the real world for very long. Already there have been a number of errors found in other DeFi projects, even in projects with thoroughly audited code. If you invest in either project, you are being a pioneer with all the associated risks and rewards. 

Conclusion: MakerDAO vs Compound

Both MakerDAO and Compound are amazing experiments in decentralized, autonomous finance organizations. They started with different models from the centralized finance world and most of their differences are the result of these initial decisions. 

MakerDAO and Compound are part of fulfilling the goal of Bitcoin to wrest control of money and finance from corrupt central banks and politicians. They have both contributed to making the world a better, more inclusive place. Both teams deserve praise for their incredible inventiveness. They have built financial systems that no one could even fantasize about just over a decade ago. 


Maker white paper

Compound white paper