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What Is Compound (COMP)?

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by José Oramas · 5 min read
What Is Compound (COMP)?
Photo: Depositphotos

Despite being criticized for not being fully decentralized, Compound has offered several advantages for users in the crypto and DeFi space. Therefore, it is often referred to as a “crypto-economic miracle”.

Compound is a decentralized protocol with its own token COMP, a DeFi-related token with a total supply of 10 million. Like most tokens, COMP uses the Ethereum blockchain. The Compound protocol works as a decentralized application that takes the maximum out of the Ethereum network. Through this protocol, users can request loans or generate interest by lending cryptocurrencies through smart contracts.

Although Compound is not as popular as other high market cap cryptos like Bitcoin (BTC) or Ethereum (ETH), the protocol made returns in excess of 800 % in June 2020, even underscoring the predominant role of Ethereum in the financial industry. Since the entrance into the Ethereum Network and the DeFi, it has been described as one of the greatest events in the industry.

Team and Investors

The protagonists of the Compound protocol are Robert Leshner (CEO) and Geoff Hayes (CTO). They founded Compound Labs Inc, an open-source software company that builds Decentralized Applications (dApps), back in 2017.

The Compound project did not see significant movements in the first weeks. It was by mid-2017 that the company raised $910M from investors who saw great potential for the protocol, which started a DeFi Boom that year.

Attracted by how versatile the protocol is, users are reaching out to this platform to apply for loans or to invest their capital and feed the protocol’s loan machine. Since its founding, the company has seen major success, as it has always delivered accessible loans for all crypto-users.

The protocol has been so successful that well-known companies joined it as investors. They include:

  • Coinbase – one of the leading crypto exchanges;
  • Polychain Capital – a top crypto-investment fund;
  • Dragonfly Capital Partners – a cross-border, crypto-investment firm;
  • Paradigm – a crypto-investment firm;
  • Andreessen Horowitz / a16z – an investment firm founded by Marc Andreessen and Ben Horowitz;
  • Bain Capital Ventures – a fintech and DeFi investment firm.

How Does the Compound (COMP) Protocol Works?

The protocol works with the Ethereum blockchain, like most DeFi products and applications. Compound allows its users to borrow and lend tokens. Besides, it works as a crypto-exchange and a liquidity market. Compound users have several DeFi-related tokens they can work with. Currently, Compound supports:

Compound uses smart contracts to eliminate the need for a third party in the Ethereum blockchain. Due to that, anyone working with the protocol can borrow, lend, buy or sell their tokens efficiently.

Currently, Compound is the only protocol that offers a way to monetize through cryptocurrency lending. The versatility behind Compound also beckons crypto enthusiasts. The protocol not only works with ratios up to 1.5x for collateralized loans but also serves as a crypto exchange where users can trade their tokens and a liquidity market where users or firms can buy or sell assets without affecting drastically the asset’s price.

How Are COMP Tokens generated?

The system generates ERC-20 cTokens each time a user deposits cryptocurrencies in the protocol. For instance, if you want a loan using Ether as collateral, you automatically receive cETH from the exchange that generates interests for you, depending on the Annual Percentage Yield (APY) of the token you deposit.

Simply, when you deposit your crypto on their official website, all the work is done for you. For example, you deposit 100 USDC. You will receive the equivalent amount of those 100 USDC in cUSDC. Your interests will be based on the APY of the USDC, which makes up 0.12%. You can redeem your cUSDC for regular USDC at any time as well as on exchanges like Coinbase.

Despite working for the DeFi, the Compound protocol is not completely decentralized. The Compound Labs team has full control of the smart contracts and other parts of the system. At the same time, Compound has a governance protocol that allows users to present their own proposals and vote. The system welcomes the participation of the community and takes into consideration users’ ideas on how to enhance the protocol.

Pros/Cons of Compound (COMP)

Compound is one of the rare and recent instances of a fully functioning DeFi project which allows for decentralized, secure, and private cryptocurrency swaps between blockchains. It provides its users with the following pros:

  • Users can generate profits without having to make a large investment.
  • Users can trade their cTokens at any time and receive 5% on liquidations as an incentive.
  • Compound offers a fair governance model for its users, alleviating the centralization by the Compound Lab Inc.

It is safe to say that Compound is a bold step toward creating a fully-functional crypto economy. However, there are some things you should bear in mind when investing in Compound.

The protocol’s cons are as follows:

  • The inherent volatility of cryptocurrencies is an issue for lenders and borrowers, as it will not only affect users but also cTokens holders and the profits they make with it.
  • The DeFi ecosystem has proven to be quite vulnerable in the past 2020, with major scams, flash loans hacks, and many companies going bankrupt because of code vulnerabilities. The prime example is the case for Akropolis when a user executed a body of smart contracts in the saving pools.

The Future of Compound (COMP)

Compound has maintained a stable market value since its launch, with an average of $80 – 100 million. However,  the DeFi boom started on June 15, 2020, when it went from a value of $117 million to over $171 million in a single day.

Users refer to Compound as another “crypto-economic miracle”. Many digital assets can double their value in a short time, then fall to price corrections or even suffer a market crash. However, with Compound, there was not a correction factor since its creation.

Conclusion

Despite being criticized for not being fully decentralized, Compound has offered several advantages for users in the crypto and DeFi space. In the future, the Compound team plans to provide full control of the Compound protocol to the community through a Decentralized Autonomous Organization.

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FAQ

What is Decentralised Finance (DeFi)?

One of the hottest topics in traditional finance and crypto space is the entrance of Decentralized Finance (DeFi) into both ecosystems. DeFi has seen great adoption and investments from companies that believe it can transform the world of finance. 

Decentralized finance encompasses a movement or ecosystem of financial applications built on blockchains, with Ethereum being most used by DeFi products. DeFi offers modern financial services that allow the use of cryptocurrencies, smart contracts, decentralized processes regarding financial activities, and access to all the power of a bank directly from your wallet without the need for a third entity to manage everything.

DeFi applications are built on next-generation blockchains that are “programmable” through smart contracts. Currently, there is an exponential growth in the development of DeFi projects that rely on the Ethereum network. But other blockchains such as EOS, Cosmos, Ontology, Tron, among others, are also joining. At present, there are several platforms available, growing each year to be part of the DeFi ecosystem.

Who invented Compound?

Robert Leshner (CEO) and Geoff Hayes (CTO) founded Compound Labs Inc, an open-source software company in San Francisco, that builds Decentralized Applications (dApps). They created the Compound protocol back in 2017, with a native ERC-20 token (cToken) that works as a collateral lending token in the Ethereum blockchain.

In the first weeks, the Compound project did not see significant movements. It was by mid-2017 that the company raised $910M from investors who saw great potential for the protocol, which triggered a DeFi Boom at that time.

By mid-2020, Compound has significantly expanded. Attracted by how versatile the protocol is, users are reaching out to this platform to apply for loans, or to invest their capital and feed the protocol’s loan machine. Since its founding, the company has seen major success, as it has always delivered accessible loans for all crypto-users.

What's so special about Compound?

Currently, Compound is the only protocol that offers a way to monetize through cryptocurrency lending. The versatility behind Compound also beckons crypto enthusiasts. The protocol not only works with ratios up to 1.5x for collateralized loans but also serves as a crypto exchange where users can trade their tokens and a liquidity market where users or firms can buy or sell assets without affecting drastically the asset’s price.

What cryptocurrencies does Compound support?

Currently, Compound supports: DAI Stablecoin (DAI), Ethereum (ETH), USD Coin (USDC), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), Sai (SAI).

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