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Introduction to Compound

Aug 16, 2021

Introduction to Compound

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Compound finance is a Defi lending platform on the Ethereum blockchain that allows users to earn interest on their cryptocurrencies by depositing them into one of several pools supported by the platform. It is a decentralized protocol that establishes money markets with algorithmically set interest rates based on supply and demand, allowing users to frictionlessly exchange the time value of Ethereum assets. Put simply, all that compound finance does is match those who want to borrow money and those who wish to supply money (Ethereum based assets) to earn interest. Compound allows users to deposit cryptocurrency into lending pools for access by borrowers. Lenders then earn interest on the assets they deposit.

BACKGROUND

Compound finance was developed by the parent company, compounds labs, inc. Founded in 2017 by Robert Leshner and Geoffrey Hayes, they aimed to change the slow, inefficient, traditional finance system constrained by intermediaries. According to Compound, most cryptocurrencies sit idle on exchange platforms, doing nothing for their holders. Compound looks to change this with its open lending platform, which allows anybody who deposits supported Ethereum tokens to easily earn interest on their balance or take out a secured loan in a completely trustless way (without the need of any form of third parties or intermediaries). In 2018 Compound raised $8.2 million in funding from notable venture capital firms Andreessen Horowitz and Bain Capital Ventures, the venture-capital arm of the consulting firm Bain. Compound raised an additional $25 million in 2019 from many of the same investors, along with new participants like Paradigm Capital, a fund started by a co-founder of Coinbase.

HOW DOES COMPOUND WORK?

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Everything on Compound is handled automatically by smart contracts. Compound connects lenders and borrowers using a combination of smart contracts running on Ethereum and incentives paid in cryptocurrency.

Compound supports the borrowing and lending of a specific set of cryptocurrencies. As of this writing, it supports the following cryptocurrencies; (DAI), Ether (ETH), USD Coin (USDC), Ox (ZRX), Tether (USDT), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), and Sai (SAI). Regardless of whether you are lending or borrowing, you first have to lock in crypto with Compound. When you do, you get Compound tokens (cTokens), which represent your crypto balance, in return. cTokens are one of the great benefits and innovations of the blockchain-based crypto money market; they can be transferred, traded, or programmed into other Dapps in the Defi ecosystem similar to other Ethereum tokens, all while earning (or paying) interest. You control these cTokens just like you would control any digital asset on the Ethereum blockchain, with your public and private keys.

  • Lending: You can deposit any amount you wish inside the compound protocol. Depositing your money in Compound is like putting your money in a savings account but decentralized. And just like that, you immediately begin to earn interest on your cryptocurrency. Anyone wishing to lend a cryptocurrency on Compound can send their tokens to an Ethereum address controlled by Compound to earn interest. By locking up ERC20 assets in the Compound protocol, depositors receive an equivalent amount of respective cTokens as collateral. Positions (supplied assets) in Compound are tracked in tokens called cTokens, Compound's native tokens. cTokens are ERC-20 tokens that represent claims to a portion of an asset pool in Compound. For instance, if you deposit DAI, you earn cDAI. cTokens serve as redemption tokens and represent your claim of real tokens in compound finance.

  • Borrowing: Once you've locked your crypto to Compound, you are able to borrow against it. Compound does not require a credit check, so anybody anywhere in the world with crypto has the ability to borrow. Compound determines how much you are allowed to borrow based on the quality of the asset. Anyone who posts collateral on Compound in the form of a cryptocurrency is allowed to borrow cryptocurrencies supported by Compound at a percentage of the posted value. For instance, if you deposit $500 worth of a cryptocurrency and Compound sets the borrowing limit for that cryptocurrency at 50%, you can borrow $250 worth of any other cryptocurrency that is supported on Compound

COMP Tokens

COMP is the governance token of the Compound protocol. Holders of the platform’s native governance token COMP can propose changes to the protocol, debate, and vote whether to implement changes suggested by others without any involvement from the Compound team. This can include choosing which cryptocurrencies to add support for, adjusting collateralization factors, and making changes to how COMP tokens are distributed. COMP tokens are also used to incentivize lending and borrowing activities. Every time a user interacts with a compound market, either by borrowing an asset, withdrawing it, or repaying it, they are rewarded with additional COMP tokens. It has a circulating supply of 5,452,259 COMP coins and a max supply of 10,000,000 COMP coins.

POSITIVES

  • Since the launch of the Compound mainnet in September 2018, the platform has skyrocketed in popularity and recently passed more than $800 million in total locked value.

  • Compared to centralized institutions that offer very meager interest rates (the best interest rate you can get from some of the best banks is 2.5%), Compound offers up to 8% per annum for users that deposit DAI cryptocurrency into the compound protocol.

  • It is the second-largest Defi platform.

  • Investors may further find COMP of interest should they want to gain exposure to emerging Defi coins that offer good investment returns.

  • Compound would be of interest to anyone who wants to earn additional income by lending or borrowing cryptocurrency.

NEGATIVES

  • The crypto assets available on the platform are limited. However, there are plans to expand in the future.

  • It doesn’t offer impressive interest rates for some crypto assets like ETH with just 0.1% and Wrapped Bitcoin with 0.5% interest per annum.

  • The Defi space isn't user-friendly for newcomers in the crypto world.

EXCHANGES WHERE YOU CAN BUY COMPOUND

  • Binance

  • Huobi global

  • Coinbase exchange

  • HitBTC

  • WhiteBIT

  • Phemex

  • Uniswap

  • Gemini

  • Kraken

  • Sushiswap

Learn more from here.

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