The act of lending and borrowing is as old as the creation of money itself, with the practice dating as far back as 2500 BC. Currently, almost everyone is well acquainted with the idea of borrowing and lending. Lenders make funds available for borrowers, and then borrowers will return the funds with additional interest to the lender.

Parties involved in lending and borrowing usually get involved in financial bodies for a more secure exchange. However, the system introduced by De-Fi makes the process a lot easier and ensures a seamless connection. One central platform in the DeFi space that is causing the process of lending and borrowing easier is Compound Finance.

What Is Compound Finance?

Compound Finance is a DeFi protocol for lending. It is built on the Ethereum network. Lenders can provide loans to borrowers by locking assets in the De-Fi protocol. It also allows users to transfer, carry out transactions, and use money in different De-Fi applications.

Compound Finance creates a large pool for lenders to deposit cryptocurrency for borrowers to access. Lenders are later rewarded with interest earned on their deposits. Due to its unique system, the protocol has amassed around $3 billion in crypto assets, making interest in 20 different markets.

It generally focuses on fully utilizing static crypto assets kept in wallets to earn and accrue steady passive income over time. In addition, compound Finance gives users access to gain from 20 Eth-based investments.

Compound Finance was founded early on in 2017 by Robert Leshner and Geoffrey Hayes. The protocol was later launched in 2018 by a team of professionals and experts in different fields under Compound Labs.

The protocol is not only beneficial to the lenders. Borrowers also gain from it too. Aside from the interest lenders gain from the cash pool, borrowers also have access to these funds without the hassle of dealing with financial institutions. Compound Finance uses a smart contract that automatically links both parties without both parties having to know each other or have contact with each other. The smart contract connects the lenders and borrowers and controls both parties’ interest rates and collaterals.

Compound III vs. Compound V2

Compound released the new version of its project in August 2022. The new project Compound III, also known as Comet, is focused on three essential areas; security, capital efficiency for users, and enhanced user experience. This varies from the earlier version released in May 2019.

Compound V2 was developed to introduce cTokens and a decentralized system that helped rebuild Compound into a protocol governed by the community through the use of COMP tokens.

Unlike its previous version Compound V2, Compound III allows users to borrow a single interest-earning asset. This means users can now only borrow one base asset rather than being able to borrow any asset from pools of assets on the protocol. This is a huge transition from the protocols pooled-risk model. While the user is able to borrow one interest-accruing asset, all other assets on the platform function as collateral.

Compound III was designed to solve the security issue of Compound 2 by protecting the borrowers from early liquidation and improving the risk management aspect of the platform.

Liquidators are not left out, as the protocol does not just focus on safety, it also works to preserve the incentives of the liquidator.

Compound Finance’s Features: From Interest and Rewards to Yield Farming

Compound has different features that distinguish it from other De-Fi projects in the system. For example, Compound lets lenders deposit funds into liquidity pools, and then the system comes up with the best plan to utilize the funds in those pools to maximize their profit and earn more interest. Compound also has other features like:

Compound Interest

The platform also uses an algorithm to calculate the compound interest of the lenders and offers an honest and trustless finance banking system. The Compound interest rates are run as decentralized functions dependent on market forces. This peculiar feature also relates to receiving loans or trading cryptocurrency on the platforms.

Compound Finance does not place a specific time for repayment of borrowed assets. Borrowers can pay back the loans at whatever time is most comfortable for them; however, the interest on the borrowed funds piles up per block on the Ethereum network.

Rewards

Compound rewards lenders and borrowers for using the platform’s services. Lenders and borrowers are given COMP tokens to reward their participation. This is used to pin-tease their involvement on the platform. The COMP token not only serves as a reward to users but also gives lenders and borrowers access to the protocol’s governance. This allows the users to participate in the protocol’s governing decisions. These decisions affect the protocol’s future.

Yield Farming

Compound began rewarding lenders and borrowers using the COMP tokens in June 2020. This led to the birth of yield farming in the compound protocol. This unique concept created an opportunity for users to increase their earnings through InstaDapp, which gives lenders and borrowers seamless access to the several DeFi platforms, all from a single interface.

Gateway and Treasury

This feature greatly increases the user’s experience. It gives the user access to several money management tools. This grants users access to crypto interest rates and eliminates issues like cybersecurity and volatility of interest rates.

How Do Lending and Borrowing Work in Compound Finance?

Compound is a decentralized borrowing and lending protocol built on the Ethereum network. Knowing how the lending and borrowing services work on the platform is essential to understand how Compound works.

Asset Lending in Compound Finance

Compound has several crypto assets for lending on its platform. These assets can be easily lent out without both parties meeting and without wasting time on lengthy discussions with third-party members. This is possible because of the lending system set up by Compound, which allows users to deposit, lock, lend, and send any amount of an asset in the compound protocol.

Locking up your token is similar to saving your money in a savings account. The major difference is that your assets are not going into a bank; they are sent into a compound wallet, and interest will be accumulated over time on the locked assets.

These locked assets are tracked in tokens called cTokens (Compoud’s native token). cTokens are ERC-20 tokens that serve as evidence of a part of the liquidity pool of a particular asset on the compound platform. This simply means that once an asset is locked in Compound, it is converted to ctokens. So, for example, if ETH is locked down, it becomes cETH.

This ensures that interest earned on an asset is transferred in the denomination of that asset. So, for example, if you lock down USDT on the platform, you would make interest in USDT. Once an asset is locked in Compound Finance, it is added to a giant pool of similar tokens created by other users locking the same asset.

Asset Borrowing in Compound Finance

The other aspect of Compound’s service is the borrowing aspect. Once a user has locked an asset on the compound platform, he/she has the right to borrow against it. A key feature of Compound is how easy it is to get an asset without any credit check. This means anyone in any part of the world with cryptocurrencies can borrow assets from Compound.

This would be a giveaway to underhanded individuals, so Compound verifies the assets’ quality by calculating how much an individual could borrow compared to the asset. In addition, Compound employs over collateralization, which means the user’s collateral has to be higher than the number of assets planned to borrow to avoid liquidation. The standard collateral ratio for altcoin is between 60% and 85% of the total amount of assets you have deposited.

Interest Rates on Compound Finance

One major part of Compound Finance is its interest rates. The two services rendered by the protocol revolve around its interest rates. Lenders who have locked down certain assets earn interest, and borrowers who borrow these assets pay interest.

Every user of Compound has to deposit crypto assets in compound finance. Once these assets are locked, you get the value of your assets in cTokens. These cTokens show the balance of your cryptocurrency assets. cTokens are ERC-20 tokens on Ethereum, adding a lot of innovation to a market for blockchain-based financial assets.

The level of interest rates is determined mainly by the forces of demand and supply. They decide the value of rates in real-time. When there is excess liquidity, interest rates go down, but as demand increases, so does the interest rate.

The interest rates on Compound are shown as annual rates, which go up every time an Ethereum block is mined. Every 15 seconds, the value of cTokens goes up by an amount equal to 1/2102400 of the quoted annual interest.

Compound Finance Governance

Compound V2, the project’s current version, is decentralized thanks to the protocol token. Holders of these tokens are entitled to fees and have governance rights over the protocol. This allows token holders to change the protocol through o-chain voting and proposals. Each token is seen as one vote, and holders use their token holdings to vote on improvement proposals ad decide the next step of the protocol.

Most governance proposals in Compound are available as code that can be run, and the voting period is three days. Changes to the protocol’s governance that are approved by the community could take about two days to take effect. In a DeFi ecosystem that is growing very quickly, the native COMP governance token shows the value of blockchain for lending and borrowing applications.

Source: Governance - Compound

What Is the COMP Token?

COMP token is the native token of the Compound protocol. It is used as the governance token of the protocol. A specific amount of COMP tokens are distributed between lenders and borrowers on Compound. Anyone holding a COMP token can vote on a proposal, make improvement proposals, and debate on future updates to the platform.

Tokenomics

The amount of COMP that can be made is limited to 10 million, which is one-third of the total amount that can be made. As a result, users will get 4.2 million tokens, while Compound Lab’s stockholders will get about 2.4 million COMPs. Also, the people who started Compound and the people who work there now will get 2.2 million COMP tokens that will become theirs after four years.

Over 700,000 COMP is to be used for the advancement of the community, and 72,000 COMP tokens belong to future team members.

How to own Compound Finance (COMP)?

One way to own COMP is to go through a centralized crypto exchange. COMP is available on crypto exchanges like Gate.io. The first step is to create a Gate.io account and complete the KYC process. Add funds to your account, and check out the steps to buy COMP on the spot or derivatives market.

Is Compound Finance (COMP) a Good Investment?

Compound has opened the lending and borrowing service to the world. It serves as one of the major De-Fi protocols out there, and it has shown great value. In addition, the gradual removal of third parties from the financial sector will make it easier for people who don’t have bank accounts to get money through the Internet.

Useful References

For the latest updates about Compound Finance, you can visit:

• The official website
• Twitter
• Discord
• GitHub
• Telegram
• Medium

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