Key Points
- Cryptocurrency has become one of the most lucrative investment avenues. In this decentralized market, there’s an increasing need for decentralized finance platforms where crypto users can exchange tokens, save, trade, invest, lend and even borrow.
- Compound Finance has seamlessly emerged as one of the most sought-after decentralized finance (DeFi) applications on the market as it bridges several financial gaps. The platform offers its flocks of users numerous functionalities with which they can easily steer their way in the vast DeFi ecosystem.
- Its competitive advantage is its compound interest feature which permits users to earn compound interest on their assets.
- The ability to earn compound interest on stationary cryptocurrencies found in digital wallets wasn’t possible due to the outdated conventional finance system. However, protocols like Compound Finance have turned this outdated financial system on its head.
- From its features to variables interest rates, ROI to the pros and cons, here’s your very own guide to Compound Finance. Call it your Compound Finance review.
What is Compound Finance?
Founded in 2018 and headquartered in San Francisco, California, the Compound Finance protocol is an algorithmic open-source, decentralized finance application. It’s an autonomous interest rate protocol based on the Ethereum blockchain that enables developers and cryptocurrency traders to explore myriad financial opportunities related to the lending and borrowing of digital assets. Because it is decentralized, Compound Finance’s system is void of middlemen. So cryptocurrency transactions go directly from lender to borrower. However, several factors come into play which we’ll be discussing in detail.
Compound Finance Features
Compound Finance has features coveted by other DeFi platforms. Some of these include:
Community Governance
Compound Finance prioritizes the users in its community so much that these community members maintain the platform. At Compound Finance, users have more than a voice. They have the power to instigate changes within the forum through interactive user features like voting rights, delegation, or proposals. Through the platform’s protocol token, COMP, token holders can delegate and assign voting rights to themselves or other addresses. Holders of COMP can also charge votes sent from others to delegates. However, it’s important to note that the COMP balance of the sender determines the number of votes sent to any representative.
Compound Finance has opened up its governance so that anyone with 1% of COMP delegated to their address can propose a governance action. These proposed actions are executable codes to be implemented. They could be anything from changing a market’s interest rate model to changing the collateral factor of an asset or anything the administrator can modify. Once initiated, these proposals go through a three-day voting period during which enfranchised users, or fellow COMP holders can vote for or against the said proposed, aiming for a decentralized form of democracy. If at least 400,000 votes favor the proposal, it is placed in the Timelock and will be implemented after two days.
- Community Security
The Compound DeFi platform, like any other network, is subject to vulnerabilities by its users or other entities. The application employs fortified security measures to checkmate the manifestation of these vulnerabilities into threats. In addition to the platform’s advanced protocol security system, which includes high-profile security auditors like OpenZeppelin and Trail of Bits, Compound DeFi implores its users to find bugs on its site. Thus, increasing the site’s security priorities. As an incentive, Compound is offering $150,000 as a bounty to any individual or developer that can find bugs on the DeFi platform.
- Simple Interface
The user interface on the Compound Finance website is minimalistic and appealing. Its design features are advanced and intuitive too. The features and options on this site are legible and easily accessible. The labels are also self-explanatory. For instance, you can see how much you’re lending on the left and the amount borrowed on the right. The design also lets you see both types of markets at a glance.
- Improved Versions
According to its founder, Robert Leshner, Compound Finance is motivated by the need to create a financial infrastructure on which developers and applications can rely. This is why the platform is constantly being improved. Since its launch in 2018, the Compound protocol has updated versions twice. The most recent version, Compound III, launched in August 2022 and came with significant improvements to the previous versions. For instance, in this version, a user’s collateral remains their property and cannot be borrowed or withdrawn by anyone else, which makes it safer and reduces counterparty risk.
- Supported Crypto Assets
Compound supports financial activities via various cryptocurrencies called assets. Currently, the platform supports 20 cryptocurrencies, including USDT, UNI, WBTC, YFI, etc.
Presently, the Compound III version permits users to borrow USDC using assets like ETH, WBTC, LINK, UNI and its very own COMP as collateral.
How Does Compound Crypto Work?
Compound Finance is a killer DeFi protocol with about $2.3 billion worth of assets locked up and accruing yield across 20 markets. As expected, this platform works much differently from other types of loan markets. On Compound Finance, lenders lend cryptocurrency assets to borrowers via a liquidity pool. Essentially, they fund this pool, and the borrowers borrow from it.
Compound Finance’s liquidity pool is not a bank account but a chain of smart contracts. These smart contracts are automatic and contain conditions of the buyer-seller agreement represented by digital algorithms, with which the agreement is executed void of any third party. Through these algorithms, Compound’s smart contracts automatically generate interest rates with due consideration of the demand and supply of assets at any given time.
Like any other market, there are fluctuations in the value of cryptocurrencies, affecting their demand and, thus, interest rates. These fluctuations incentivize lenders to lend more. It also discourages borrowers from over-borrowing even though Compound Finance has no limit for lending or borrowing.
What you can do on Compound DeFi
Compound permits users and developers to perform several types of financial transactions. Here’s how to earn interest on Compound:
Deposit
Compound users can make deposits into their wallets which can accrue interest. Here’s how it works. First, you’ll need to connect a crypto wallet to the platform. There are a handful of funding institutions which Compound supports, like Ledger, Anchorage, etc., as seen below.
Once connected, users can access their funds in these wallets, with which they can then purchase cryptocurrency assets. However, users can only make deposits through these Ethereum web wallets as the Compound DeFi operates in the Ethereum blockchain. Also, on this platform, assets are called cTokens. So, if you deposit ETH into Compound DeFi, it becomes cETH. Likewise, other assets like DAI, which becomes cDAI, etc. These cTokens are redeemable 1:1 with the underlying asset as they represent a portion of the liquidity pool. As borrowing increases, these cTokens accrue interest and are redeemable to more of the underlying asset. Hence, users earn compounded interest on their cryptocurrencies by leaving them in their wallets.
Compound Crypto Lending
Compound crypto lending is relatively easy on Compound DeFi. It’s one of the easiest ways to earn compounded interest on the platform. To lend assets on Compound Finance, you’ll need to unlock said cryptocurrency asset and sign a transaction through your web wallet. So, assuming you want to supply AAVE, you’ll need to enable it, as seen below.
Once done, Compound will add your capital to the liquidity pool, and you’ll start earning interest in real time after the assets are converted to cTokens. It’s worth noting that lenders on the Compound Finance protocol earn interest every Ethereum block, which translates to 15 seconds. Hence, if you lend on this platform, your interest accrues every 15 seconds, which compounds significant amounts.
Borrow
Compound Finance users can borrow cryptocurrency to their heart’s content. These assets could vary as the platform offers flexible interest rates and repayment plans. On Compound, the value of assets you lend influences your borrowing limit. Hence, the more you lend or invest, the more you can borrow. Previous versions of Compound Finance operated under this over-collateralization principle which made borrowers supply more in collateral than they needed to borrow. The Compound Finance III version prevents collateral from being borrowed or withdrawn by someone else. In this version, users can borrow more with lower fees, less liquidation risk, and lower penalties.
You might ask yourself, ‘what do you need to borrow crypto from Compound?’
To borrow cryptocurrency like AAVE tokens, you’ll need to deposit collateral to cover this Compound crypto loan. After this, you’ll earn a borrowing power or limit, influencing the value of assets you can borrow. It’s imperative to note that each cryptocurrency asset adds a different amount of borrowing power. The process only takes a few minutes, and your wallet will be credited in no time.
Repay
After borrowing an asset, the next course of action would be its reimbursement. To repay an asset on Compound Finance, users have to enable it first. Here’s an image representing what repaying a stablecoin as DAI looks like:
After you’ve clicked on ‘Enable’, you’ll be required to approve the transaction using your chosen web wallet. Then click on ‘Repay’ and approve the transaction.
Withdraw
Withdrawing on Compound Finance is easy. After repaying all your loans, you can withdraw your collateral or interests. All you need to do is select withdraw to your previously chosen web wallet.
Rates On Compound Finance Protocol
As previously mentioned, Compound Finance’s computerized algorithms determine one’s APY and interest rates. However, the rule of thumb does influence the calculation of these rates. Here’s an overview of the interest rates on a handful of cryptocurrencies in supply and borrow markets.
Compound Finance Fees
Compound Finance fees are minimal and affordable. First off, the platform charges zero trading fees. It also charges zero slippage fees. Thus, Compound Finance charges its users nothing to buy, sell, withdraw or deposit their cryptocurrencies. The only fees developers and users of Compound pay are the transaction fees or gas, which differ depending on the transaction day, time and market conditions. Gas fees are applied whenever a user initiates either of the following transactions:
- Minting
- Borrowing
- Transfers
- Asset Liquidation
- Repayment.
In addition to this, the Compound Finance Protocol does not require a minimum deposit on registration.
Pros and Cons Of Compound DeFi
What is the key benefit of using Compound? What drawbacks can you expect on Compound? This is the section you’ve been waiting for:
Compound Finance Pros
- Range of Earning Opportunities
There are several ways to earn interest on Compound. You can lend multiple types of cryptocurrency with varied rates of return and accrue interest every 15 seconds! You can also try yield farming which earns you a high APY.
- No Verification Assessments
Unlike traditional financial institutions, which require lengthy documentation and verification processes like KYC, credit records, or AML, Compound doesn’t require such paperwork. This gives a liberating experience and is the platform’s competitive advantage.
- No Trading Fees or Slippage
Compound doesn’t charge its users trading or slippage fees. Users are, however, subject to affordable gas fees.
- Support Forum
Compound Finance has a collaborative forum on Discord where users can receive support in real time.
- Fortified Security
Compound is one of the safest DeFi platforms on the market. Its advanced team of security verifiers and auditors, formal verifications and bug bounty programs keeps the platform tightly secure.
- Rewards! Rewards! Rewards!
Compound traders can easily earn COMP rewards on all transactions they make.
- Simple UI/UX
Compound’s design, user interface and experience is simple and promotes easy navigation.
Compound Finance Cons
- Ethereum-exclusive
Compound Finance operates solely on the Ethereum blockchain and doesn’t support other chains.
- Limited cryptocurrencies
Compared to its competitors, Compound offers a limited number of crypto ERC-20 options for users to lend or borrow.
- Unstable markets
Like the stock market, the cryptocurrency market is equally unstable and unpredictable, increasing traders’ risk.
- No mobile app
Compound Finance operates via its website. The platform has no mobile application.
Final Thoughts
Overall, Compound Finance enables developers, traders and crypto enthusiasts to earn compounded interests in several tokens at minimal gas fees. Its smart contracts, decentralized nature, security measures and numerous functionalities have taken the blockchain beyond payments, thus making it a preferred choice in the DeFi space. Compound Finance is bridging the gap of seamless, peer-to-peer crypto investments and is a force to be reckoned with in the DeFi ecosystem.
FAQs
What does Compound Finance do?
Compound Finance is a decentralized peer-to-peer finance platform where users can earn interest on their crypto assets by depositing them in their wallets. Compound Finance permits traders to borrow, lend and trade cryptocurrencies, thus maximizing their earning potential.
Does DeFi give interest?
DeFi, or decentralized finance, allows financial products to be built on a public blockchain, offering interest rates to lenders and the ability to take loans for borrowers. The absence of a middleman and the unprecedented financial control over one’s assets make DeFi’s interest rates higher in comparison.
Is Compound Finance safe?
The security measures established by Compound’s protocol make it almost impenetrable. It is one of the safest DeFi platforms in the blockchain, as the tendency for a hacker to gain control of the smart contracts (liquidity pool) is highly unlikely.