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Compound is a DeFi lending protocol that allows users to earn interest on their cryptocurrencies by depositing them into one of several pools supported by the platform.
When a user deposits tokens to a Compound pool, they receive cTokens in return. These cTokens represent the individual’s stake in the pool and can be used to redeem the underlying cryptocurrency initially deposited into the pool at any time. For example, by depositing ETH into a pool, you will receive cETH in return. Over time, the exchange rate of these cTokens to the underlying asset increases, which means you can redeem them for more of the underlying asset than you initially put in — this is how the interest is distributed.
Compound Finance is a decentralized finance (DeFi) platform, focusing on removing the middleman such as a bank or any banking institution in financial transactions. The Compound is the first company to introduce the concept of yield farming.
What is Compound Finance?
Built on the Ethereum blockchain, Compound made its debut in 2018. Compound raised a big chunk of funds in the past few years, including 8.2 million USD in a seed funding round in May 2018 and 25 million in 2019 respectively.
Users put their cryptocurrencies into the liquidity pool where they are able to earn the rewards for “depositing” cryptos there. It works similar to traditional banking institutions where you make deposits to the saving accounts and you get a certain percentage of interest. On the other hand, the bank takes your money to make other investments, like lending to others with higher interest rates.
The easier way to explain the complexity of how Compound works is that you make profits by pouring money into the liquidity pool. People can also borrow money from the pool. There is a cycle that the money comes into the pool and then money comes back to you. Hence, you can further reinvest your assets that got paid out back into the pool. This is where the platform’s name Compound came from since users can compound their returns over time.
If you make a deposit on Compound, you as a lender will be rewarded a new crypto named a cToken and the cToken represents the deposit. Some examples of cTokens are cETH and cDAI. It depends on what assets you deposit. Each cToken can be traded or transferred without restriction but it is only redeemable for the cryptos originally locked in the protocol. This entire process is automatic and handled by the Compound code.
You can see much higher APYs from Compound Finance than you see from any other traditional banks. It is quite usual to see as high as 100 times APYs. Plus, no credit check is required and anyone can borrow cryptos from the pool or lend your money into it. Fast, streamlined and decentralized are the three features in DeFi as well as in a lending platform like Compound and Aave. Compound is also a fully autonomous platform where the management and facilitation are all run by smart contracts.
There is no guarantee that users are 100 percent able to withdraw their cryptos whenever they want. Therefore, users had better make sure that you take part in yield farming with a deep enough liquidity pool.
Total loss is Possible
Without any governmental backing or endorsement, users do not have any guarantee that their investments are protected. However, there have been numerous audits done on Compound from prominent institutions, including OpenZeppelin and Trail of Bits who certify that Compound has enough liquidity to meet the current needs
How to Make Profits with Compound?
First of all, users can go directly to the main product of the platform which is the liquidity pool. Users can put some assets in or borrow some from the pools. The second option is to invest in the COMP crypto and investors can benefit from the rising popularity of Compound Finance. To buy its native token COMP, you have to go to trading platforms such as FAMEEX that offer a wider range of cryptocurrencies.
The COMP Token
The COMP token is a governance token for the Compound Finance platform which means users can share the profits of the platform and also can have a say in the future of it. Trading at around $134.5, COMP is now ranked 20th among the DeFi tokens by a market capitalization of $885 million with a maximum of 10 million COMP tokens.
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