Compound

Compound is a Defi lending protocol that allows users to earn interest on their cryptocurrencies by depositing them into one of several pools supported by the platform.

What is Compound? 

  • Compound is a protocol on the Ethereum blockchain that establishes money markets, which are pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset. Suppliers (and borrowers) of an asset interact directly with the protocol, earning (and paying) a floating interest rate, without having to negotiate terms such as maturity, interest rate, or collateral with a peer or counterparty.
  • Compound protocol aggregates the supply of each user; when a user supplies an asset, it becomes a fungible resource. This approach offers significantly more liquidity than direct lending.
  • Individuals with long-term investments in Ether and tokens (“HODLers”) can use a Compound money market as a source of additional returns on their investment.
  • Compound allows users to frictionlessly borrow from the protocol, using cTokens as collateral, for anywhere use in the Ethereum ecosystem.

Key Metrics

TickerCOMP
Token NameCompound
Token Type/ProtocolERC-20
Total Token Supply10,000,000 COMP
Current Circulating Supply  See Coinmarketcap
Market Capitalisation See Coinmarketcap
Token Creation Date2017
Can it be mined?No

Who is behind Compound?

Compound started as a company founded by Robert Leshner and Geoffrey Hayes. Their goals are to improve the traditional financial system including transactions, inefficiency and centralized system. 

Then, they co-founded a software company named “Compound Labs” which is an open-source software building compound protocol.

What is the purpose of Compound?

Compound Finance token is a Governance token that allows holders to vote on system improvement’s proposals or update other policies such as Collateral Factor (increasing cToken volume), liquidation incentives (updating interest rate) and listing a new token in the pool, etc.

Insights:

  • Compound protocol is a protocol on the Ethereum blockchain that enables users to borrow and lend various digital cryptocurrencies in pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset.
  • Lending: Users deposit cryptocurrency to the Compound protocol to use as loan collateral, and users simultaneously become a lender. When it is staked in the Compound pool, the coins would change into cTokens, a medium currency in Compound protocol. If users deposit Ethereum, they will receive cETH. When users deposit their cryptocurrencies within a period, they will receive their asset and interest.
  • Borrowing: Compound allows users to frictionlessly borrow from the protocol, using cTokens as collateral, for anywhere use in the Ethereum ecosystem. After that, the system approves the Borrow Balance for borrowing assets. The borrow balance borrows cryptocurrencies from the pool, and the pool will transfer tokens to the borrower, and the borrower needs to pay the interest to the pool. In case, users need their collateral back, they need to pay the assets that they borrowed and to be charged a fee. Thus, the borrower must make a decision carefully before borrowing. If a user’s borrowing balance exceeds their total borrowing capacity due to the value of collateral falling, or borrowed assets increasing in value, the public function liquidator will sell all user’s collateral immediately.
  • Functions: Assets held by the protocol (represented by ownership of a cToken) are used as collateral to borrow from the protocol. Each market has a collateral factor that represents the portion of the underlying asset value that can be borrowed. Small-cap assets have low collateral factors so they do not make good collateral, while high-cap assets have high collateral factors. The sum of the value of an account underlying token balances, multiplied by the collateral factors. Users are able to borrow up to, but not exceeding their borrowing capacity that would raise the total value of borrowed assets above their borrowing capacity; this protects the protocol from default risk.

Risks:

  • Users can exceed the borrowing capacity because there is no exceeding capacity notification so users may lose their collateral.
  • The interest rate has always changed, users should keep tracking the crypto price and interest rate.
  • Some bugs of smart contract will cause the error of information flow.
  • Defi provides high interest rates, so users deposit or stake their money or digital assets. Therefore, scams can hack the Defi project and take the money and assets. For instance, DeFi100, a decentralized finance (DeFi) protocol built on the Binance Smart Chain. The website has been hacked by scammers, having taken investor’s funds around 32 million USD

News and Updates:

  • Mark Cuban recommended that Defi Lending protocol like Compound, AAVE, will  recreate traditional financial instruments with cryptocurrency without third parties in order to reduce process and cost.
  • MakerDAO and Compound are two emerging cryptocurrency services that have the potential to become a key infrastructure for the open financial system. The MakerDAO system provides a collateralised cryptocurrency, or a “stablecoin”, DAI. DAI is staked as cDai for earning DAI Saving Rate.
  • Ledger has partnered with Compound Finance to launch Ledger Live where users can lend stable coins like USDT, USDC and DAI via Ledger to Compound in order to earn interest securely.

Community & Whitepaper Links:

Disclaimer: 
All investment is speculative and involves substantial risk and uncertainty. Investors should understand the nature of digital assets including the terms of return and the risk of assets. We encourage investors to fully understand the assets and the risk associated with them prior to making any investment.  

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