What is Compound (COMP)?
COMP is the governance token for the Compound Decentralized Finance (DeFi) protocol. DeFi networks seek to convert traditional financial systems over to decentralized versions. In this way, regular users gain a share in the profits that were once only available to large financial institutions.
Compound is an algorithmic money market protocol that lives on the Ethereum blockchain. Notably, this network is credited with starting the current DeFi craze. Compound was the first platform to introduce yield farming to the market in mid-summer 2020. Yield farming is similar to staking crypto in many ways.
Users lock their cryptocurrency into large farming pools. You receive rewards based on the amount of crypto you lock and for how long you participate in the pool. Unlike staking pools, yield farming pools feature much shorter lockup periods. Many offer no required lockup periods.
Benefits of Compound (COMP)
Compound brings a lot of benefits to the market. For one, it introduces a truly open lending environment to the blockchain sector. Anyone can borrow funds from Compound farming pools. There are no credit checks and the funds issue immediately. You just need to provide collateral.
Earnings
Compound allows regular users to secure a passive income. Anyone can earn lending out their idle crypto. In the past, users simply held these coins in the hopes their value would rise. Now they can leverage their holdings without completely relinquishing ownership of their coin.
DeFi Bitcoin
Another unique aspect of Compound is the ability to utilize Bitcoin in DeFi environments. This task is accomplished through the introductions of Wrapped Bitcoin (WBTC). Wrapped Bitcoin is an ERC-20 representation of locked Bitcoin. This new-age token provides Bitcoin HODLers with seamless access to the DeFi sector. A recent vote enabled these coins to function as collateral on the Ethereum-based Compound protocol. This addition was hard-fought. It took over two months of deliberation before the community finally approved the upgrade.
Fully Autonomous
Compound leverages audited smart contracts to accomplish these tasks in an autonomous manner. The network’s contracts take care of all vital functions on the network. Tasks such as storage, management, and the facilitation of all pooled capital are handled by these protocols.
Security
Compound maintains network security through various means. The network has undergone numerous security audits by reputable agencies like Open Zeppelin and Trail of Bits. These organizations have certified the network’s coding as sound and capable of handling the demands of the network securely.
Interoperability
Compound falls in line with the general consensus of DeFi in terms of interoperability. The network is open to the integration of third-party assets and platforms. Compound also supports the use of API protocols to simplify the UX. This interoperability has led other platform s to build upon Compound’s vision in unique ways. Today, Compound users can leverage third-party market management tools in a seamless manner.
How Does Compound (COMP) Work?
Compound leverages a variety of proprietary systems to provide users with an open DeFi experience. Using Compound doesn’t take any technical understanding. You simply need to understand what yield farming is and how to lock your funds up in the farming pools to start earning today.
Yield Farming
Yield farming protocols reside at the core of Compound’s functionality. Currently, Compound supports the borrowing and lending of a selection of cryptocurrencies. Specifically, you can lend and borrow Dai (DAI), Ether (ETH), USD Coin (USDC), Ox (ZRX), Tether (USDT), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), and Sai (SAI).
Notably, anyone can borrow from the lending pools with interest and a deposit. To borrow from a lending pool, you will need to put up collateral above a threshold defined by the project. Aside from being your collateral, your deposit also determines the total amount of funding you can borrow. Notably, if the value of your collateral begins to drop, the protocol will sell this deposit to cover your loss.
Compound Lending Pools
Compound leverages large lending pools to operate. All funds are added into a giant pool of that same token in a smart contract in the Compound protocol. Importantly, each asset has its own market in the network. As such, the amount of supply or demand in that market determines the interest rate. Also, some assets may enable more borrowing power than others.
Decentralized Governance
Compound relies on a decentralized governance model. Anyone can make a proposal in this network. You simply need to hold some of the network’s governance token, COMP, to participate. Only those who hold more than 1% of the supply can make new proposals. Notably, token holders can delegate their tokens to an address of their choice.
Decentralized governance protocols are now common in the DeFi sector. Compound was a pioneer of this strategy. In the compound network, users can vote on listing new cToken markets, updating market interest rates, updating oracle addresses, withdrawing cToken reserves, and choosing new admins.
cTokens
Compound relies on cTokens to function. New cTokens are created whenever a user deposits crypto-assets into the Compound protocol. Notably, cTokens are simply ERC-20 tokens representing a user’s funds deposited in Compound. Users can transfer, trade, and stake these tokens.
cTokens allow users to earn interest in pools. For example, you could stake your USDC and receive cUSDC tokens in return. These tokens could then move freely within the Compound network. Once you have made your interest, you can redeem your cUSDC for normal USDC plus interest paid in USDC. Best of all, cTokens can be redeemed at any time. When you convert these funds they instantly become available in the connected wallet.
Conclusion
As the first platform to introduce Yield Farming into the market, Compound holds a valuable position as a pioneering force within the DeFi sector. DeFi appears to be just starting. Consequently, Compound continues to see new users joining daily. The combination of easy returns and the ability to earn without trading is part of the lure this platform possesses. Additionally, it’s one of the safest and most reputable options available to users today. Consequently, Compound is set to remain a premier platform for years to come.
