Compound is an Ethererum project that focuses on allowing borrowers to access loans and lenders to provide loans by locking their assets into the protocol.
In a traditional savings account, you put money in the bank and earn interest on it. The problem is that regular bank customers cannot use their deposit, their interest in any way once the money is in the bank. What makes it possible for you to spend the savings you earn while still being able to save? That is the idea of DeFi, which decentralized finance is aiming to solve.
One of the companies that is working to provide this service in the DeFi world is Compound. Let’s find out how this ETH-based project is trying to help people access their savings.
What is Compound?
Like most other DeFi protocols, Compound is a system of publicly accessible smart contracts built on Ethereum. Compound is focused on giving borrowers access to loans and lenders providing loans by locking their crypto assets into the protocol. The interest paid from the borrower and received back by the lender is determined by the supply and demand of each crypto asset. Interest is generated with each block mined. Loans can be repaid, and locked assets can be withdrawn at any time.
Built on the ethos of cTokens, Compound’s native token allows users to earn interest on deposits, and to be able to transfer, trade, and use that money in other applications.
Who created the Compound?
A former economist, Robert Leshner is the founder and CEO of Compound.
What’s so special about Compound?
On the surface, Compound resembles other decentralized lending protocols in that it uses crypto assets as collateral to borrow more crypto assets. Compound stands out in that the tokens of assets are locked in the system through the use of cTokens.
Compound tokens or cTokens are simply ERC20 tokens representing a user fund deposited in Compound. By injecting ETH or another ERC20 like USDC into the protocol, users will receive an equal amount of cTokens. For example, locking USDC in the protocol generates cUSD tokens, which automatically earn you interest. At any time, you can exchange your cUSDC for regular USDC plus interest paid in USDC.
Each asset has its own market and where the supply or demand in the market determines the interest rate your cTokens will accrue over time.
Is there anything else different?
Once a user’s assets are locked up and converted to an ERC20 form, they are freely portable, transacted, and usable in other decentralized applications (dapps). The use of cTokens represents a fundamental feature of DeFi – the ability to combine different protocols as different building blocks, known as currency lego blocks.
For example, cUSDC was recently integrated into Token Set, a popular DeFi application that automatically trades crypto assets based on pre-programmed conditions. By combining cUSDC with automated trading algorithms, Set token holders not only get the benefit of automated trading, but can also earn interest on deposits – a double benefit of DeFi. But things are not as easy as you think.
One of the most public criticisms of Compound came from Climbchain’s founder, Ameen Soleimani, who focused on writing about a potential weakness in the protocol. According to Soleimani, user funds are very vulnerable to attack and manipulation because the protocol is not completely sophisticated.
Compound founder Robert Leshner was answer critique with the promise that Compound would eventually become the fully decentralized application that the Web3 community had always hoped for.
How are cTokens produced?
New cTokens are generated whenever a user deposits crypto assets into the Compound protocol. If a user wants to get a loan and get ETH as collateral, they will automatically receive cETH in place of their deposited ETH. If users want to deposit USDC to earn interest, they will receive cUSDC when they deposit USDC into the system.
How to hold cTokens?
Anyone can mint or generate cTokens using an ETH crypto wallet like MetaMask, a Coinbase wallet or a Huobi wallet plus one of the crypto assets that the Compound system currently accepts. As of December 2019, Compound users can borrow or lend BAT, DAI, ETH, REP, USDC, WBTC, and ZRX.
What can you do with Compound?
By depositing crypto assets on the platform and receiving cTokens, earning interest on your crypto assets is a fairly straightforward process. Alternatively, you can also borrow crypto on Compound. There is an extra step when taking out a crypto asset loan to ensure that your collateral value is above the bare minimum of your loan. If the value of your mortgage falls too drastically, it runs the risk of being liquidated, meaning your collateral is automatically sold to pay off the debt.
Toward the future
Compound or DeFi in general aspires to help people have more access and control over the money they earn and save. While the project has received criticism, Compound’s long-term goal has always been complete decentralization over time. Compound’s team is currently managing the protocol but they have plans to move all authority to a Decentralized Autonomous Organization (DAO) managed by the Compound community later.
Dislaimer: This information is provided as a personal blog, not general information or investment advice. We are not responsible for your investment decisions.
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