Our opinion on Compound

Borrow and lend cryptos on Compound to earn interest, cTokens and COMP tokens.

The price of Compound is currently reaching historic highs, having risen steadily since the beginning of this year With an introductory price of €76, it was worth €467 in February 2021. Compound has therefore grown by 507%. 

According to the latest figures, the company's annual growth is 260.4%. Thus, among the DeFi cryptocurrencies, Compound (COMP) is booming. Find out everything you need to know about this company by reading this article. 

What is Compound ?

The development of Compound began in 2017, following the initiative of Robert Leshner and Geoffrey Hayes. The goal of the project was to create a protocol to provide a secure platform between a lender and a borrower. The protocol also sets interest rates dynamically. 

The launch of the first version of COMP was supported by a fundraising of 8.2 million USD. As a reminder, it was rolled out in September 2018. The second version introduced cToken, its native token.

As one of the applications of DeFi (Decentralised Finance), the Compound protocol aims to provide financial services that are not governed by a central authority. However, this does not involve any direct interaction with users. The protocol mainly serves as a base layer, on which dApps for users can be created.

Currently, Compound offers the following features :

  • Lending cryptocurrencies to earn interest worth between 0.1% and 7% per year.
  • Borrowing assets at a certain rate (3% to 12%).

With Compound, it is currently possible to lend and borrow the following digital assets : 

  • Ethereum (ETH), 
  • Basic Attention Token (BAT), 
  • Augur (REP, MakerDAO [DAI], USD Coin [USDC], 
  • Ox - ZRX - and 
  • Wrapped Bitcoin - WBTC.

Compound features

Compound is an algorithm that runs on the Ethereum network. It allows users to lend and borrow without intermediaries. Thus, lenders can deposit virtual currencies in lending pools. These pools are accessible to borrowers who accept the borrowing conditions automatically established by the protocol. 

Compound also offers other services. On Compound, members have the opportunity to earn cTokens for every asset deposited. A lender therefore also receives rewards in addition to the interest he or she will earn from his or her loans. 

Example : If a user deposits 100 ETH, the user receives an additional 100 cETH as soon as the deposit is made. 

Note : cTokens can be exchanged and transferred freely. However, they can only be exchanged with the tokens automatically deposited in the protocol. Thus, 100 cETH can be exchanged for 100 ETH.

What are the benefits of Compound ?

One of the advantages of Compound is that it gives lenders the freedom to withdraw their deposits as they wish. In addition, there is no risk of errors in trading, as the protocol is automatically managed by the code. 

To promote its services, Compound is issuing a second native cryptocurrency named COMP. With every transaction a user makes on the Compound platform, a reward in the form of COMP tokens is awarded. Thus, the subscriber obtains COMPs when borrowing, withdrawing, depositing or withdrawing.

How does Compound work ?

Compound is based on a combination of smart contracts supported by Ethereum aimed at matching lenders with borrowers. The protocol includes bonuses paid in the form of cryptocurrencies. This allows virtual currencies to be lent on Compound to generate interest. 

Concretely, it is enough to transfer tokens to an Ethereum address managed by Compound. Be careful: this is not a peer-to-peer protocol. Users are not directly connected. A loan is actually a payment in a smart contract.

On the other hand, in order to borrow on Compound, it is necessary to deposit collateral in the form of cryptocurrencies beforehand. These must be included in the list of virtual currencies supported by the protocol. The rate of the loan is displayed as a percentage at the time of the loan.

COMP tokens are used by the protocol to reward lenders and are paid out according to the amount of cryptos injected. The interest rate of the tokens paid into the pools is however based on a variable rate. This rate depends on the available supply of the asset. The protocol calculates the interest according to the quantity of available tokens and the level of demand for these tokens. Thus, profits decrease when market liquidity increases.

All users can borrow on Compound, including lenders. However, the amount of the loan must be less than the security deposit. For borrowers, however, there is a liquidation risk. The assets they borrow may increase in value and exceed the position of the collateral. The rule is a guarantee of 150% of the amount you want to contract. Example: in order to obtain a loan of 1000 BAT, it is essential that the security deposit be 1500 BAT.

Participating in Compound governance

Currently, Compound is DeFi's largest platform with nearly $700 million in deposited funds. Every day, there are 2890 COMPs issued by the Compound protocol to reward users of its services. 

The advantage of the COMP token is that it allows participation in the governance of the network. In particular, a developer can make proposals to improve the functioning of the protocol by submitting a code. This code is then put to the vote for a period of 3 days. When the number of votes is sufficient, the proposal is added in a queue. Its execution is effective within 2 days. On the other hand, the proposal is cancelled if the number of votes is insufficient.

How can you borrow and lend on Compound ?

If a trader owns ETH and thinks the price will rise, they can lend it via Compound. The trader also has the option of borrowing at the same time. Indeed, by paying tokens in a smart contract, the member deposits guarantees to be able to borrow. 

For both borrowing and saving, interest rates are algorithmically evaluated based on supply and demand. The evaluation of rates is done when a new block is added to the Ethereum blockchain. 

The big advantage offered by Compound is the non-imposition of minimum deposit period on the assets deposited as collateral. You can deposit cryptocurrencies for short periods of time, since you can retrieve them at any time. Once the funds are deposited and borrowed by third parties, annual interest is calculated with each Ethereum block creation.

Regarding the borrowing procedure, note that the deposit system is based on a superiority mechanism to the loan amount. This means that the amount of assets deposited must be greater than the amount of the loan. This is to ensure that the value of the collateral is always higher than the value of the debt. In the event that the position of the collateralized crypto drops sharply, the paid-in cryptocurrencies are likely to be liquidated.

Why borrow and lend on Compound ?

Compound is a blockchain network that allows its users to earn money from their cryptocurrency savings. As part of DeFi, the Compound protocol ensures instant, transparent and secure transactions globally. 

Compound offers many advantages over a traditional savings account. Once your money is saved in the bank, you no longer have the option of using it as you wish. With Compound, you can withdraw all or part of your guarantee at any time. Even after a withdrawal, you continue to receive interest. The same applies to loans: you can lend your savings as you wish.

Compound rewards its users with cTokens for every transaction made. So you can continue to use your collateralized cryptocurrencies without the risk of liquidating them completely. As ERC20 tokens, cTokens can be used on other apps, to be transferred and exchanged. 

ERC20 tokens represent the funds paid into a smart contract. As a result, placing ETH or USDC in the Compound protocol yields the same amount of cETH or cUSDC tokens. Indeed, USDC are also ERC20 tokens. The cETH and cUSDC can be exchanged for normal ETH and USDC at any time.

For various reasons, many people do not have the opportunity to borrow from a bank or lending institution. Compound enables these individuals to get a loan in cryptocurrencies. Moreover, there is no need for debtors to build a special case. The only requirement on Compound is to provide collateral in virtual currencies.