Key Takeaways
- Compound allows people to earn money on their crypto savings.
- The project is part of Ethereum and more broadly, DeFi
- Users can also borrow crypto from Compound by providing collateral above a threshold set by the project.
With a traditional savings account, you deposit your money in a bank and earn interest on it. The problem is that once the money is in the bank, regular customers cannot use their deposited, interest-earning money in any other way. Wouldn’t it be great if you could spend the money your savings earned while still continuing to save? Essentially, that’s what DeFi, or decentralized finance, is seeking to solve.
Compound is one of the companies offering their services in the DeFi world. This article explains how the Ethereum-based project is helping people access their savings.
Compound, An Ethereum-Based DeFi Protocol
Compound, like most Decentralized Finance (DeFi) protocols, is a system of openly accessible smart contracts built on Ethereum. The protocol allows borrowers to take out loans and lenders to extend loans by locking in their crypto assets. The supply and demand of crypto assets determine the interest rates borrowers and lenders pay and receive. Interest rates are calculated with each mined block. One can repay loans and withdraw locked assets at any time.
Based on this principle, Compound’s native token, cTokens, allows users to earn interest on their money as well as transfer, trade, and use that money in other applications.
Compound Finance Founder
Robert Leshner, a former economist, is the founder and CEO of Compound.
Asset Tokenization With ERC20 cTokens
The concept of Compound is similar to other decentralized lending protocols in that crypto assets are used as collateral to borrow more crypto assets. A distinguishing feature of Compound is the tokenization of assets by using cTokens.
Compound Tokens or cTokens are ERC20 tokens that represent a user’s funds deposited in Compound. Users receive an equivalent amount of cTokens on adding ETH or an ERC20 such as USDC in the protocol. For instance, locking up USDC in the protocol generates cUSD–tokens that start earning interest automatically for you. cUSDC can be redeemed for normal USDC plus interest in USDC at any time.
Every asset has its own market, and the amount of supply or demand determines how much interest your cTokens will earn over time.
cTokens, Leading Crypto DeFi Space With Money Legos
By converting user’s locked assets into ERC20 form, they can be moved, traded, and used in other decentralized applications (dapps). The use of cTokens is at the heart of the DeFi movement, providing the ability to combine different protocols together as building blocks, or money legos.
For example, cUSDC has recently been integrated into TokenSet–a popular DeFi dapp, which automatically trades crypto assets based on pre-programmed conditions. By combining cUSDC with automatic trading algorithms, holders of the Set tokens not only get the benefit of automatic trades, but are also able to earn interest on them–double DeFi benefits. But It hasn’t all been smooth sailing for Compound.
Spankchain founder Ameen Soleimani was one of the most vocal critics of Compound, and wrote about the potential centralized point of failure in the protocol–a big no-no in the world of decentralized finance. In Soleimani’s view, users’ funds were vulnerable to both attack and manipulation because the protocol wasn’t fully decentralized.
The founder of Compound, Robert Leshner, responded to the criticism by promising that the protocol would eventually become the fully decentralized application that the Web3 community had always hoped for.
How are cTokens produced?
Every time a user deposits crypto-assets into the Compound protocol, a new cToken is created. When users take out a loan using ETH as collateral, they automatically receive cETH in return for their ETH. When users deposit USDC into the system in order to earn interest, they receive cUSDC automatically.
Mint Compound Tokens
CTokens can be minted or created by anyone using an Ethereum wallet, like MetaMask, Coinbase, or Huobi, and one of the crypto assets the Compound system currently accepts.
Compound Interest and Borrow Crypto Loans With Collateral
Aside from earning interest on your crypto assets, which is a pretty straightforward process of putting crypto assets on the platform and receiving cTokens, you can also borrow crypto on Compound. Borrowing crypto assets has the added step of ensuring the value of your collateral stays above a minimum amount compared to your loan. A significant drop in the value of your collateral puts you at risk for getting liquidated, which means that your collateral will be sold to repay your loan.
Decentralized Future and DAO Community
Compound, and DeFi as a whole, aims for people to have more control over their finances. Though Compound has been criticized in the past, its long-term goal is to eventually become fully decentralized. At present, the Compound team manages the protocol, but they plan on eventually handing control over to a Decentralized Autonomous Organization (DAO) governed by the Compound community.
Originally published here
Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
