One of the most well-known projects now available on the DeFi market is called Compound. Decentralized financial infrastructure (DeFi) projects have the goal of using cryptocurrencies to build better financial products that do not rely on intermediaries.
This will give users more control over their own money. This method is utilized for lending purposes by Compound, which eliminates the need for an intermediary by matching borrowers and lenders through the use of an algorithm.
The idea of “liquidity mining,” which has since gained traction in the DeFi sector, was first introduced by Compound. Users of DeFi lend each other their bitcoin in order to earn interest. Some users may “yield farm,” which means they will look for places to lend their money that will provide them the highest return on their investment.
What Is Compound Token?
Compound is Ethereum-based software that tries to incentivize a decentralized network of computers to run a conventional money market.
Compound is one of a significant community of decentralized finance (DeFi) protocols that employs a variety of crypto assets to provide this service, removing the need for traditional financial intermediaries like banks in the process of lending and borrowing.
Simply put, Compound is a platform that facilitates the deposit and withdrawal of cryptocurrency lending pools. Depositors receive interest on their loans.
When a lender makes a deposit, Compound rewards them with a cToken, a new cryptocurrency. Tokens like cETH, cBAT, and cDAI are all cTokens.
Each cToken can freely be traded or transferred, but can only be exchanged for the cryptocurrency it was issued in. Lenders can withdraw funds at any time because the Compound code handles the entire process automatically.
Compound’s native coin, termed COMP, is used to incentivise this behavior. Users earn more COMP tokens whenever they participate in a Compound market (via borrowing, withdrawing, or repaying an asset).
Despite its complexity, the strategy has been successful in gaining users and influencing other DeFi coins to follow suit. DeFi Pulse, a data aggregator, reports that by 2020, more than $500 million in assets will have been locked in the Compound protocol.
Is Compound A Good Crypto Investment?
While most analysts expect a rise in COMP, the future is never able to be predicted with 100% certainty. Always do your own due diligence and remember that the value of your investment can go down as well as up.
You should never risk more money than you can afford to lose.
Who Owns Compound Crypto?
Robert Leshner and Geoffrey Hayes, who had previously launched the company Britches, which pooled inventory from local retailers to be sold on PostMates, went on to found Compound.
Andreessen Horowitz and Bain Capital Ventures, the VC arm of Bain Consulting, contributed to Compound’s $8.2 million fundraising round in 2018.
In 2019, Compound was able to secure an additional $25 million in funding from many of the same investors, as well as new entrants like the Coinbase co-founder-founded fund Paradigm Capital.
Initial COMP cryptocurrency distributions were made to corporate investors and personnel, each of whom received a proportionate share of the total supply.
How Many Compound (COMP) Coins Are There in Circulation?
There will be a hard cap on the total supply of COMP tokens, as is the case with other crypto assets. There is a maximum of 10 million COMP in circulation, although only around a third of that number (3.3 million) is actually in use at the time of writing.
There are a total of 10 million tokens in circulation, of which slightly more than 4.2 million tokens will be allocated to Compound users over a 4-year period. The Compound Labs, Inc stockholders will receive around 2.4 million COMP, the second largest allocation, while the Compound founders and current team will receive 2.2 million tokens with a 4-year vesting period.
Finally, 775,000 COMP tokens are set aside for community governance incentives, while the remaining 332,000 tokens will be distributed to the team’s future members.
Voters have the ability to increase or decrease the rate of COMP emission by passing a proposal through community governance, so the precise rate of COMP emission is subject to vary over time.
How Is the Compound Network Secured?
Smart contracts handle every aspect of Compound, from minting cTokens once Ethereum and ERC20 assets are deposited to allowing users to redeem their stake with cTokens.
Each asset pool will always be overcollateralized thanks to the protocol’s insistence on a collateralization factor for all platform-supported assets. If the collateral level drops below the minimum maintenance level, the loan will be partially repaid by selling the collateral to liquidators at a discount of 5%.
This approach serves to guarantee that borrowers keep up their collateral levels, protects the interests of the lenders, and opens the door to profit for the liquidators.
What Gives Compound (COMP) Value?
As was indicated above, a significant benefit of COMP is that its holders have a say in matters pertaining to the program’s development.
Additionally, a COMP holder may appoint another individual as their proxy in voting matters. When more delicate matters come up, the COMP holders can delegate their voting power to an impartial third party, such as a legal, financial, or other expert.
Is Compound Fully Decentralized?
Compound is an Ethereum-based decentralized application protocol. It uses its own native ERC-20 token, COMP, to incentivize a decentralized network of computers to run a financial/banking market in instead of a centralized one.
Compound (COMP) is one of many emerging decentralized finance (DeFi) protocols with the ability to collateralize a wide range of crypto assets. This essentially makes it possible for lending and borrowing to occur independently and decentrally.
That is, the Compound protocol enables users to contribute bitcoin they possess to lending pools from which other users can borrow cryptocurrency. Investors receive interest on their savings accounts.
Compound gives its users a new cryptocurrency, called a cToken, whenever they deposit cryptocurrency for lending. cETH, cDAI, and cBAT are all cToken examples.
cTokens can be freely traded and transferred, but can only be exchanged for the cryptocurrency represented by that protocol. Withdrawals of user deposits can be made at any moment thanks to the Compound protocol’s usage of autonomous smart contracts to manage the system.
How to Use Compound
At compound.finance, users using a dApp browser or a standard browser and MetaMask or another wallet choice can interact with the Compound protocol without any intermediaries.
Once users are joined, they can take out collateralized loans or deposit cryptocurrencies to earn interest through Compound’s lending platform.
Compound Crypto Borrowing
Borrowing is the other part of the equation. When you deposit your cryptocurrency to Compound, you can use it as collateral for loans. Borrowing on Compound is available to anyone, regardless of their credit history, provided they have some form of cryptocurrency. How much you can borrow from Compound is dependant on the quality of the asset you’re borrowing against. If Compound’s collateral factor (borrowing limit) for BAT is 50%, then you can borrow $250 worth of any other cryptocurrency supported by the Compound protocol if you send 1,000 BAT with a total value of $500. (see list above). Borrowing money online is similar to borrowing money from a bank in that interest must be paid.
So, we have lending and we have borrowing, both of which concern themselves with interest rates. You get paid interest for lending money. For borrowing you pay interest. Let’s break down how the Compound procedure figures out and applies interest rates automatically.
Why Compound Borrowing and Lending Rates Fluctuate
When using Compound for any cryptocurrency transaction, whether loan or borrowing, remember that locking in crypto is a prerequisite. In exchange, you receive Compound tokens (cTokens), which stand in for your remaining cryptocurrency balance. One of the significant advantages and breakthroughs of a blockchain-based crypto money market is CTokens, which are created from Ethereum as ERC-20 tokens and can be exchanged, transferred, and programmed into other Dapps in the DeFi ecosystem just like any other Ethereum token. You have complete authority over these cTokens, just as you would over any other Ethereum-based digital asset, thanks to your possession of both the public and private keys.
Interest rates are determined by the current supply and demand for a currency and adjust in real time to reflect the state of the market. All interest rates are quoted annually and are compounded each time a new Ethereum block is mined. In order to keep up with the market, the value of your cTokens will increase by 1/2102400 of the yearly interest rate at any given time, or every 15 seconds.
How Compound Crypto Liquidity Pools Work
Interest rates are low when there is a large pool of crypto locked in Compound because there is plenty there to be borrowed, so you aren’t getting paid much to join to that large pool. In general, interest rates and returns are better when there are fewer borrowers competing for a limited amount of funds. Floating interest rates encourage lending fresh cryptocurrency to smaller pools (where interest is higher) and encouraging borrowing from larger pools to repay smaller ones (to pay less interest).
In order to ensure that your loan is over collateralized, Compound requires you to pledge cryptocurrency equal to or greater than the amount you borrow. Your collateral cryptocurrency may potentially lose value if it is also highly volatile. When the price of the cToken falls below the value of the cryptocurrency you’ve borrowed, the cToken smart contract cancels your position automatically. The term for this is “liquidation” (or, margin call). In this scenario, you get to keep the borrowed funds but will forfeit the security.
How to Choose a Compound Wallet
Whether you need a small or large COMP wallet will depend on your intended purpose and the amount of data you expect to store in it.
Hardware wallets, also known as cold wallets, are the safest choice because they are kept offline and backed up often. Both the Ledger and Trezor provide COMP storage options, with the former providing native COMP lending. However, hardware wallets have a steeper learning curve and are more expensive than software wallets. Therefore, they may be more suitable for more advanced users to store substantial volumes of COMP.
There is also the option of using a software wallet, which is convenient due to its low cost and ease of usage. The apps can be either custodial or non-custodial, depending on the user’s needs, and can be downloaded to a smartphone or computer. Custodial wallets are those where the service provider takes care of safeguarding and managing your private keys. With a non-custodial wallet, the private keys are stored in the device’s secure element. Although they’re easy to use, software wallets aren’t as safe as hardware wallets, thus they’re probably best for storing less money or for inexperienced users.
Web wallets, also known as online wallets, are a convenient and secure way to store and transfer money between numerous devices. However, hot wallets aren’t as safe as their hardware or software counterparts, so you might want to think twice before using one. You should go with a trusted service with a proven track record in security and custody if you plan on entrusting the platform with the care of your COMP. Smaller quantities or more frequent traders with greater experience will find them more suitable.
Anyone interested in making extra money through crypto lending or borrowing might consider using Compound (COMP).
Users of the Compound protocol have an additional motive to hold the token besides its monetary value. Everyone who has COMP tokens has a voice in the platform’s destiny. Among these decisions is the setting of future interest rates for Compound, which could have a direct effect on their income.