The release of the Ethereum blockchain network, which is open-source or can be used by many people, makes this network rich in innovations. This is felt with the emergence of a new protocol on the Ethereum network called Compound (COMP).
So, simply Compound is a project on the Ethereum network that allows users to take out loans and act to facilitate other users in providing loans, with their assets collateral locked into the protocol.
In the current ordinary banking system, when a person saves in a regular savings account, he will get interested in his savings later. However, that means the existing funds cannot be used by the person and must remain in the savings account. Interest will no longer be earned if the stored funds are later withdrawn.
Compound Finance is trying to solve this problem by developing ideas in the world of Decentralized Finance (DeFi) or Decentralized Finance by creating a protocol or a smart contract that can later be accessed and built on the Ethereum network.
The Compound itself offers an asset lending facility where lenders and borrowers are required to lock their crypto assets into the protocol. Later, the interest rate is paid and received by the borrower and lender. Then, this interest rate will be determined by the supply and demand of each crypto asset. It also refers to each asset block that is mined.
The advantage of this Compound is that loans can be repaid, and crypto assets locked in the protocol can be withdrawn at any time.
What is cToken?
In its development, Compound also has a native token called Compound (COMP). On the platform, its use is called cToken.
Built on the cToken principle, Compound’s native token allows users to earn interest on their assets while transferring, trading, and using those assets in other applications.
Later, these new cTokens will be generated every time users deposit their crypto assets into the Compound protocol. Users who want to take out a loan using ETH as collateral automatically receive cETH in return for the ETH deposited. Users who wish to use USDC to earn interest will later receive cUSDC when they deposit USDC into the system.
What can be Borrowed and Used in This Compound?
The asset balance provided will later be represented by cTokens, a representation of the underlying asset that earns interest and serves as collateral. Users can borrow up to 50-75% of the value of their cTokens, depending on the quality of the underlying asset.
Later, this Compound protocol set aside about 10% of the interest paid as a reserve; the rest to the supplier. The Compound was initially launched on mainnet in September 2018 and was upgraded to version two in May 2019. This protocol supports BAT, DAI, SAI, ETH, REP, USDC, WBTC, and ZRX.
Who Invented This Compound Concept?
The proponent of the concept of the Compound protocol is Robert Leshner.
He is an economist who became the founder and CEO of Compound.
How Does Compound Work in Crypto?
Each decentralized lending protocol has a different approach to its lending and loan repayment models. Unlike the regular loan format, where the user’s funds are equalized to the available loan, and the interest rate earned is only distributed after the loan is repaid, this Compound allows anyone to supply the assets listed on his liquidity pool. As soon as a deposit occurs, he will earn interest.
Interest is accrued every Ethereum block, so the total balance will be credited with interest every 15 seconds (this is the average time to earn Ethereum blocks). This Compound also ensures that there is always excess liquidity, providing easy access to withdrawals and borrowing of funds. Assets can be withdrawn anytime, provided sufficient funds exist in this liquidity pool. However, this model also has side effects.
Interest on loans distributed to all suppliers will continue, even when their funds are no longer used. This makes the interest rate obtained will be lower.
Risks from Compound
Before using a new financial system like this, you should also review the potential risks that come with it. Like intelligent contracts, this Compound has bugs that irresponsible people can exploit. Moreover, this Compound is still relatively new in the world of DeFi and has not stood the test of time.
On the other hand, this Compound has been audited by Trail of Bits and involves additional auditors in making sure the smart contract is a bug and keeps the system vulnerable to a minimum.
Conclusion
The Compound is a pioneer where anyone can be a lender or a borrower of funds. Working on DeFi principles, Compound wants to help people have more access and control over the assets and funds they generate and store without fear of power from others.
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