Down the Rabbit Hole: Compound, Creator of decentralized money markets!

In the latest edition of Down the Rabbit Hole, Meet Compound - Creator of decentralized money markets. Learn more here!

Down the Rabbit Hole: Compound, Creator of decentralized money markets!

Every time you borrow from Compound, you must put up crypto as collateral worth more than the amount you borrow, ensuring that the loan you take is over collateralized. Because the cryptocurrency you use as collateral is similarly volatile, it may lose value. The cToken smart contract automatically closes the trade when the value of the crypto you borrowed approaches. This is referred to as liquidation (or margin call). In that instance, you keep the money you borrowed but lose your security.

Interest rates are low when there is a large pool of crypto locked in Compound because there is plenty to be borrowed, so you aren't getting paid much to add to that large pool. Interest rates are more significant, and you earn more if the pool is small. Interest rates that fluctuate (also known as floating) incentivize lending fresh coins to small pools (to earn more interest) and returning borrowed crypto to small pools while borrowing from large pools (to pay less interest).

Interest rates are determined by the amount of crypto available in each market and vary in real-time to reflect current market conditions. The interest rates displayed are yearly interest rates, which accumulate each time an Ethereum block is mined. For example, every 15 seconds, the value of your cTokens will increase by 1/2102400 of the current annual interest rate (which is the number of 15-second blocks in a year).

It's important to remember that whether you're lending or borrowing, you must first lock-in crypto using Compound. In exchange, you will receive Compound tokens (cTokens), which represent your crypto balance. CTokens are ERC-20 tokens developed from Ethereum and are one of the many advantages and innovations of a crypto money market based on blockchain technology; they may be transferred, exchanged, or programmed into other DeFi Dapps in the same way that other Ethereum tokens can, all while generating (or paying) interest. Furthermore, you can control these cTokens exactly like any other digital asset on the Ethereum network with your public and private keys.

You get paid interest for lending. You pay interest when you borrow money. Let's take a moment to discuss how the Compound protocol calculates and automatically implements those interest rates.

Interest for Compound Lending and Borrowing

The purpose of Compound is to become a completely decentralized autonomous organization (DAO), with network control distributed evenly among COMP stakeholders. According to Robert Leshner's roadmap to complete decentralization, part of the COMP reserves are being given to protocol users through liquidity mining.

Compound encourages more and more developers to incorporate the Compound protocol into apps and services to provide more flexible financial infrastructure to customers worldwide. Meanwhile, holders of COMP tokens steer the network, with stakeholders reaching an agreement on key governance choices. The Compound Gateway, which allows for cross-chain interest rate markets, is one exciting development on the horizon.

The following are some examples of decentralized apps that use the Compound's COMP coin and cTokens:

Loans on the Compound network are particularly advantageous for speculative traders looking to capitalize on short-term opportunities, in addition to offering passive interest income to lenders who deposit in supported cryptocurrencies. For instance, a trader who expects the value of ETH will climb may deposit ETH in a Compound lending pool as collateral for a loan in a more stable currency like USDC. The trader can use it to buy more ETH and then reclaim the collateral ETH by repaying the loan with interest. If the price of ETH has increased during the loan duration, the trader will profit (taking interest into account).

  • Augur
  • Sai
  • Basic Attention Token
  • 0x
  • Compound Governance Token
  • Uniswap
  • Tether
  • Wrapped Bitcoin
  • USD Coin
  • Dai
  • Ether

The Compound was developed by Geoffrey Hayes and Robert Leshner through their San Francisco-based company Compound Labs: the protocol began development in 2018, and the latest version, Compound v2, went online in May 2019. Leshner and Hayes' vision was to address the legacy financial system's speed and efficiency issues while also removing the constraints placed by intermediary organizations. Compound raised more than 30 million USD in funding between 2018 and 2019 and distributed 4 million+ of its native COMP tokens upon debut. Currently, the Compound protocol allows loan markets in the following coin types:

Compound Status and Use Case

There is nothing noteworthy that can be linked to the current spike. This movement, though, could be the start of a minor price correction. COMP hasn't performed well in recent months, prompting many investors to wonder when the downturn will end. When attempting to return to a bullish bias, positive movement is always beneficial. However, it appears that this is merely a bandage for Compound's recent price movement.

Why is COMP Shifting Positions?

The market volume for COMP for the 24 hours has been 11.9 billion USD, with a circulating supply of 5.5 million, which is 55% of the total supply. Its all-time high value has been 67,233.09 USD so far. Moreover, the Total Value Locked for COMP has been more than 11 billion USD.

COMP has recently failed to keep up with the rest of the market, and the current recovery is unlikely to be a turning point for the stock. Since May, the price has dropped from a high of well over 900 USD to a current level of roughly 290 USD. With a 75 percent price decline, it was one of the worst-affected coins during the recent market crisis. COMP is the governing token for the compound protocol, which enhances markets decentrally. Liquidations and market troubles will significantly impact the token's price because it is utilized to run the COMP system.

Current Status of Compound (COMP)

In a fast expanding DeFi ecosystem, Compound and its native COMP governance token are bringing the benefits of blockchain to crypto lending and borrowing.

Compound governance proposals are executable codes that must be voted on within three days. Suppose the community approves a governance modification to the protocol; in that case, it will take effect two days later, providing everyone an opportunity to close any open positions before the changes take effect. As a result, Compound is an entirely self-contained ecosystem.

COMP is the Compound network's governance token, and every day a predetermined quantity is awarded to all Compound protocol lenders and borrowers. In addition, COMP payouts are made every 15 seconds when an Ethereum block is mined in an amount equivalent to the interest earned by each asset. COMP token holders suggest and agree on protocol improvements and manage the protocol's treasury and the reserves; each COMP token equals one vote that you can delegate for some other party on your behalf.

An Overview of COMP

So there's lending and borrowing, both of which are concerned with interest rates.

  • A mandatory collateralization factor ensures that each pool will get its tokens back with interest when borrowing from the Compound pool. If the value of your collateralized holdings falls below the collateralization factor, they will be liquidated to repay the loan, including the majority of the interest. This ensures that all pools are always paid back and that your cToken grows over time.
  • Depending on the quality of the underlying asset, users can borrow up to 50% to 75% of the value of their cTokens. Users can add or remove extra funds, but anyone can liquidate their debt if it becomes undercollateralized; a 5% discount on liquidated assets serves as an incentive for liquidators. The Compound protocol saves 10% of all interest payments as reserves.
  • You can borrow against your crypto once you've locked it to Compound. The Compound does not require a credit check; therefore, anyone possessing crypto from anywhere in the world can borrow.
  • When you give Compound an asset, you immediately start earning interest on that deposit. The value of the collateral you've provided is then used to set a borrowing limit. Interest in cTokens and prizes in native COMP tokens are presently available for the crypto you put into Compound. Each Compound market's interest rate is dynamic and solely determined by supply and demand.
  • Putting your coin in a Compound account is similar to putting money in a savings account, only it's done through a decentralized, blockchain-based protocol. Rather than depositing your money in a bank, you send your cryptocurrency to the Compound wallet. And, just like when you lend money to a bank, you start earning interest on your cryptocurrency right away. The interest you get is priced in the same token you lent, so if you sent BAT, you'd get interested in BAT, and if you sent DAI, you'll get interested in DAI, and so on.

Here's more on borrowing and lending via Compound:

The Compound was launched in 2017 and is a central decentralized lending platform. Smart contracts over the Ethereum network manage its protocol automatically. Tokens are exchanged for a cToken equivalent of a coin when they are deposited into the pool. Whereas the real tokens are borrowed from the pool, these cTokens reflect the initial crypto. Over time, you'll earn more cTokens, which you may exchange for the underlying cryptocurrency at any time.

Ethereum, a decentralized blockchain that enables smart contracts and on which additional decentralized blockchain-based applications (dApps) with native cryptocurrencies can be developed, is the core backbone of today's DeFi movement. On the other hand, the Compound protocol is primarily focused on financial services such as crypto borrowing and lending.

When it comes to payments, cryptocurrencies are recognized for working as decentralized money. On the other hand, financial services include checking and savings accounts, borrowing and lending, insurance, taxes and accounting, and so on. The goal of DeFi should now be clear: to use blockchain protocols and cryptocurrencies to decentralize all financial services.

First, let's talk about decentralized finance (DeFi) for a moment so we can understand where the Compound protocol fits into the larger crypto ecosystem.

An Overview of Compound

Lending tokens on Compound is a terrific method to earn compound interest on your crypto assets over time. Compound presently hosts 14 pools of various cryptocurrencies, including Uniswap, Ethereum, and DAI stable coins. Each of these pools has its borrowing and lending interest rates, which are the same regardless of how many tokens are supplied or borrowed. In addition, you are allowed to keep your position in a pool when you want to and then withdraw your funds whenever you wish.

The bulk of cryptocurrencies are currently dormant in a wallet. These dormant tokens have worth, but they aren't doing much to be valuable assets. Compound refers to a DeFi protocol that allows users to join lending pools to earn interest on various coins. Token holders can lend their tokens to those who can borrow them at algorithmically determining interest rates based on supplies and demands.

Check Compound Analytics below: