Usually, in a traditional savings account, you put your money into the bank and then earn interest on it. The main issue is that the regular bank customers cannot use the deposited, interest-earning cash in any other way once this money is in the bank. Now it is possible to spend money on savings earned while still saving, and this is the idea decentralized finance is trying to solve. The Compound is among the companies that are working to offer such a service in the DeFi world.
What is Compound?
Like most Decentralized Finance protocols (DeFi), Compound is an openly accessible smart contracts system built on Ethereum. It focuses on allowing the borrowers to take loans and the lenders to offer loans by locking the crypto-assets into the protocol.
The interest rates that the borrowers and lenders pay are determined by each crypto asset’s supply and demand. With every block mined, the interest rates are generated, while the loans can be paid back, and one can withdraw locked assets at any time.
How Does Compound Work?
The lenders and borrowers are connected by Compound using a combination of smart contracts that run on Ethereum and the incentives paid in Cryptocurrency. The two primary users of Compound are:
Anyone who would like to lend a cryptocurrency on Compound can send the tokens to an Ethereum address, which Compound controls to earn interest.
Borrowers are the ones who post Collateral on Compound in cryptocurrency form. They are permitted to borrow the cryptocurrencies that Compound supports at the assigned value percentage.
Compound uses the COMP Token to reward the user when they interact with the Compound market in order to incentivize activity on the marketplace. COMP Token is an Ethereun token that enables the community to propose and vote for any changes to the protocol. This helps every COMP holder to vote on what can happen with the protocol & what changes can be added to the system.
What Can You Do with Compound?
The lenders are rewarded with COMP tokens based on the number of cTokens held in the wallet, based on the varying rate of interest that is dependent on the available supply of the asset. The interest rate gets lower when there is more liquidity in the market.
Those users who lend assets to the protocol can take out the loan in other Cryptocurrency offered by Compound, up to the amount of collateral posted. The borrowers can get liquidated if the value of the asset increases and becomes much more valuable than the posted collateral.
Compound and DeFi would like to help people control and access the money that these people earn and save. Though some people criticized the project, the long-term goal of Compound was to become fully decentralized over time. The Compound team currently manages the protocol, but they do have a plan to transfer all the authority to a Decentralized Autonomous Organization (DAO) that is governed by the Compound Community.