On a traditional savings account, you put money in the bank and earn interest on it. The problem is that the bank’s customers cannot use the money they have deposited and thus receive interest on once it is in the bank. So you have to choose one or the other, and that’s a shame. Because what if you can spend the money you earn and still keep saving, so that you then receive interest on it? This is one of the many problems that will hopefully be solved by Decentralized Finance (DeFi).
One of the companies that offers this service in the DeFi world is Compound (COMP). Below, we’ll talk about how this Ethereum -based project tries to help people access their savings, while still earning interest on them at the same time.
- 1 What is Compound (COMP)?
- 2 How does Compound (COMP) work?
- 3 There are risks to using Compound
- 4 Security of Compound
- 5 The different cryptocurrencies available at Compound
- 6 The cTokens
- 7 How are the tokens created?
- 8 How do I get tokens?
- 9 Protocol v2.2
- 10 Voting for the future of Compound
- 11 Composite use cases
- 12 PoolTogether
- 13 COMP rate and forecast
- 14 Is it possible to buy COMP?
What is Compound (COMP)?
Compound is a major player in Decentralized Finance (DeFi), and runs in the Ethereum blockchain . The principle is very simple: users can lend their Ethereum against interest. The simplicity for the end user, the possibilities and the numerous integrations make Compound one of the market leaders in this field.
Today it is also an interface, but before that Compound was mainly known as a public protocol. It is thus through various interfaces that end users can access the services that Compound offers. There are many different interfaces, starting with the Compound application itself of course. But there are also other interfaces, such as Zerion or InstaDapp for example. See below where Boxmining explains what Compound actually means.
How does Compound (COMP) work?
Compound is not a peer-to-peer lending protocol. By this we mean that two users do not interact directly with each other to take out a loan. It works through a system of pooling resources made available by users. These pools have different parameters depending on the type of token being made available on them. These parameters include the different interest rates of the loans of these funds, which are determined algorithmically. It still sounds very difficult now, but it will be easier to understand after reading this article.
The interest is calculated by examining supply and demand in relation to the resources available on the protocol. These rates are unique to each available token, and are of two different types. After all, the interest that the borrower will pay will not correspond to the interest that a user who bets his funds on Compound will receive. On the other hand, the interest that the lenders receive is half.
Borrowing is possible by placing a deposit. The coins as collateral must be larger than the borrowed coins, with a factor that differs based on the type of token. This borrowing capacity changes based on the various factors of supply and demand in the market. That is why you must first bring money to the protocol in order to borrow from it. You can decide at any time which coins can or cannot be used as collateral. This will therefore affect your ability to borrow additional cryptos. See a video below of how COMP is used.
There are risks to using Compound
Borrowing crypto coins is not easy and there are many risks, especially that of liquidation, if the borrowed money exceeds your borrowing capacity on the protocol. But there can also be other risks, such as flaws in the smart contracts that make up the protocol, and in the oracles that bring information to the protocol.
Liquidation can take place if the value of the borrowed funds exceeds the value of the collateral. If you are liquidated, an outside user can buy back up to 50% of your loan with a 5% reward. So rest assured, you won’t lose all your funds. In fact, Compound only offers for sale the number of tokens needed to bring the collateral back at a rate higher than the required 150%.
Security of Compound
When it comes to smart contracts and technical issues, Compound has its code checked regularly. The audit of smart contracts is now a standard in the blockchain, and makes it possible to limit the risks of smart contracts. All code and information is public, so any user can verify what he or she is using. But only certain users can really study the code, as it is necessary to master the concepts and have some programming knowledge. Rewards are available for users who find bugs or other flaws in the protocol.
But auditing is more than just a code review, and from this point of view Compound does a pretty good job. The report also addresses two issues related to decentralized financing. The Compound is currently managed by a small group of administrators, who arbitrarily decide on many parameters. Even if the community votes (as we’ll see in the rest of the article), these privileges can lead to censorship of transactions, or even theft of funds.
The different cryptocurrencies available at Compound
Quite a few Ethereum tokens are currently available on the Compound protocol. But the most important are the stable coins . It is these tokens that seem most interesting in the context of a cryptocurrency loan to the users. For example, on the various platforms we also find the possibility to borrow/borrow tokens in addition to Ethers, DAI and USDCoin. But other tokens are also available, even if the volumes and available funds are much less important than the three main tokens of the protocol.
Compound has developed a special kind of token for its protocol. Technically nothing revolutionary, because they are just ERC20 tokens, an Ethereum standard that can be used by everyone. It is when one studies the workings and uses of these tokens that one understands their particularities. There is a cToken for each token that can be lent on Compound, and these tokens are distributed among users who contribute money to the protocol. The main operation is simple: for example you lend DAI to Compound, you receive cDAI. If you want your DAI back, you can exchange your cDAI for DAI. You get a number of DAI back, depending on the current interest rate.
Let’s take a simple example, you have 2500 DAI wagering on the protocol. In exchange, you will receive 2500 cDAI divided by the current interest rate. If the rate is 0.02, which is the original rate, then you will receive 2500 / 0.02 which is 125,000 cDAI. A few months later you want to get your DAI back, and do the reverse trade. The interest rate fluctuated during this period and is now 0.025. So you will receive 125,000 × 0.025 DAI, or 3125 DAI. You can also withdraw a portion of your Compound funds, such as your original stake.
But beyond this simplicity, there are some very interesting possibilities. These cTokens are ERC20, so they can be used in most Ethereum applications that support this standard worldwide. So we could see a new blockchain appear around these tokens, representing your tokens and coins that are in the Compound protocol. And that is already the case on Compound, as owning cTokens allows you to borrow cryptocurrency on the protocol.
How are the tokens created?
Every time a user deposits crypto coins into the Compound protocol, new cTokens are created. If users want to take out a loan with ETH as collateral, they will automatically receive cETHs in exchange for the ETH deposited. If users want to use the USDC to earn interest, they will receive the cUSDC when they deposit the USDC into the system.
How do I get tokens?
Anyone can create cTokens using an Ethereum portfolio such as MetaMask, Coinbase or Huobi, as well as any of the crypto coins that the Compound system currently accepts. On the Compound website you can see which cryptocurrencies and tokens are currently accepted by the protocol.
In October 2019, the Compound team presented an improvement package to reduce the impact on the protocol. These include, for example, a system of terms for changes by an administrator of a composite smart contract. This delay is at least two days and can be up to 14 days for major changes. In case of system vulnerability, Compound introduces a new feature, the ‘Guardian Pause’. It makes it possible to disable certain protocol functions, such as lending, transfer or liquidation. On the other hand, Pause Guardian cannot prevent users from closing their positions or removing their funds from the protocol.
These new features and changes have been verified by OpenZeppelin, as well as by the community. This shows that despite the fact that management is still heavily concentrated around the team, the latter tends to decentralize, or at least be more transparent to its users. For Compound, any reduction in the power that administrators have over the protocol is a step toward decentralization.
Voting for the future of Compound
Compound users can decide the future of the Compound protocol. Or not quite, because it is just the choice of the future tokens available on the protocol. For example, there was once a vote where users could choose from 12 different tokens. Among these candidates were tokens such as Loom, the Tether USD or the Maker . The vote resulted in the Maker and Tether tokens being chosen by the community.
Composite use cases
Borrowing cryptocurrencies may seem like an unappealing feature to users these days. Society is not yet very mature and cryptocurrency is still relatively little used in everyday life. Most platforms that allow the use of leverage or betting down are centralized. If you want to do this kind of action, you can do it very well with Compound. Let’s look at a few examples.
If you want to bet on the Ether, you can. You have to borrow two Ethers and immediately sell them for 400 euros. You wait after which the two Ethers are only worth 300 euros. You buy the two Ethers and then return them to the protocol. Ultimately, you will have a capital gain of 100 euros, minus the interest. So you just shorted in a decentralized way. This can also work to take positions with leverage. For example, if you use a lever in the BAT If you want to invest, you can use BAT tokens as collateral to borrow other BAT tokens. This means that you now own a larger amount of BAT tokens, and thus are more exposed to changes in their price. The chance of making big profits has suddenly become many times greater by using Compound.
Companies can borrow these various tokens for use on their respective platforms instead of buying large quantities to protect themselves from price drops of these tokens. But today, and this is the main interest, Compound is widely used as a decentralized financial market protocol. And therefore, in general, the use will be more financial.
PoolTogether is a fun way to use Compound if you are a gamer. Indeed, this big no-lose lottery allows the lucky winners to win about $350 a week. The principle is very simple. You bet DAI on their system and for every blocked token you get a ticket for the draw. The winner will receive the prize of the week, which will be financed by the interest of the DAI forming the pool. Indeed, these DAIs do not remain inactive and are put on the protocol by PoolTogether. Would you be willing to sacrifice your interests to enter a lottery where you cannot lose? At least for some it is, as there is approximately $360,000 worth of DAI currently in the PoolTogether system.
Throughout the history of currencies, there have always been systems that created interest, which allowed money to be transferred from those who owned it without doing anything with it, to those who used it for their own business. The Compound protocol brings these types of systems to cryptosystems in a decentralized way.
COMP rate and forecast
Is it possible to buy COMP?
If you’re looking to buy Compound(COMP), the best options, unsurprisingly, are decentralized exchanges like Uniswap . The best centralized exchange alternatives are Coinbase, OKEx and Poloniex. The liquidity of the latter two seems questionable, meaning you could still pay a premium to buy there due to the shallow depth of the order books.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com