The blockchain language is not always easily accessible to all users. Even with the expansion of DeFi amongst the “common people”, this universe continues to be an easier “habitat” for individuals who know how to code and have an easy time with cryptocurrency language.
Compound Finance is an Ethereum-based protocol that has come to make a difference in the scenario, allowing more people to get involved (and earn their part) in the lending cryptocurrencies market.
HOW DOES IT WORK?
Compound Finance is nothing more than a lending protocol based on Ethereum that enables users to borrow or lend cryptocurrencies in exchange for interest or debt. Users do not have direct access through a login but can connect to the protocol through web3 compatible wallets.
Compound establishes money markets, which can be defined as asset pools with derived interest rates. These interest rates are based exclusively on the supply and demand for a specific asset.
The process may be simple if compared to other platforms available today in the market. Suppliers and borrowers of assets have direct interaction with the protocol, where they earn (or pay, depending on the goal) a floating interest rate.
Assets supported by Compound include Ether, Dai, USDC, REP, ZRX, BAT, and WBTC.
DIG INTO IT:
To access the protocol a user needs a web3 compatible wallet, like Coinbase Wallet or Metamask, for example. Once you get within the ecosystem, you have the Account Overview section, where users can select the assets they want and unlock the market they wish to interact with.
Users can supply or borrow an asset once it is enabled, but never do both processes at the same time.
To supply the capital to the platform is remarkably simple as well. A user interested in lending assets just needs to enable a supported asset and sign a transaction, then approve the amount of capital he wants to supply for Compound. Instantly, those assets are added to the global supply pool.
COMPOUND HOMEMADE TOKENS:
When users supply assets to the protocol, they receive cTokens.
cTokens are Compound’s native tokens, and each one represents claims to a portion of a given asset pool. These tokens can be redeemed whenever the user wants.
Users that want to borrow first must supply collateral to earn so-called “Borrowing Power” within the platform.
Each asset has its Collateral Factor, so there are specific assets that may enable more borrowing power than other ones.
CTokens represent the user balance in a specific Compound market. When you supply a specific asset to the protocol, let us say cETH for example, you’ll receive the specific sToken that corresponds to that market (in this example, it would be cETH; if it was DAI, cDai and so on).
It means users earn interest based on the cTokens they hold on their respective wallets, all based on the respective lending rate of each market.
CAN I TRUST THE PLATFORM?
Security is not necessarily a problem for Compound users. The protocol’s smart contracts are audited constantly in search of potential risks or loopholes. Well-known agencies like Trail of Bits and Open Zepellin have already made security audits to ensure a more secure ecosystem.
Users that still concern with security can protect themselves taking insurance covers on smart contracts, an extremely popular service in DeFi today offered by projects like Nexus Mutual, per example.
Another particularly important aspect is the platform governance. Today the process is centralized, but the team (as well as the crypto community) hopes to make a transition to a more decentralized model soon.
Thanks to its open-source smart contracts and permissionless margin monitoring, Compound still considered to be amid a centralized/decentralized dual spectrum. However, in the current structure, all proposals are still made by Compound team (approved with the community’s opinion, of course).
WHO IS BEHIND THE COMPANY?
Located at San Francisco, the company’s project began back in 2018, when the team started a seed round that raised $8.2 million to get into the crypto hustle.
Company’s CEO Robert Leshner, who is a former economist and chartered financial analyst, has a lot of experience in the business and founded two important startups in the past.
CONCLUSION:
One of the most popular blockchain platforms today, Compound Finance is an Ethereum-based lending protocol for users that want to lend and borrow cryptocurrencies in exchange whether for interest or debt.
Supporting the favorite cryptocurrencies of the moment, the platform allows users to have access to protocol through web3 wallets, and then “lend and borrow magic” begins.
The project made a definitive impact on the blockchain scenario and has the potential to be one of the titans of this market for many years.