Understanding Compound: A Comprehensive Guide to the Cryptocurrency Lending Platform

The Ethereum blockchain provides the foundation for the decentralized finance (DeFi) protocol Compound. It enables users to lend and borrow different cryptocurrencies in an anonymous, decentralized fashion. The compound uses smart contracts to provide collateralized loans and interest-bearing deposits, fostering an open financial ecosystem where users may communicate with one another without the need for intermediaries.

Compound utilizes smart contracts to manage the lending and borrowing of assets. The company has approximately $3.4 billion of customer funds as of July 2022, and pays interests across 18 different markets. Aside from its cryptocurrency lending operations; it also stands out because of its locked assets tokenization using its tokens (ERC20). cTokens is capped at  10 million units and has returned over 35% on average towards the end of 2021. Compound currently has low lending and borrowing requirements, a situation that has exposed many users to leverage the opportunities in the platform more. 

Compound is designed to support lending and borrowing of major cryptocurrency assets, including the top ones like the Ethereum (ETH), with an Annual Percentage Yield (APY) of 0.09%. Dai (DAI) has an APY of 1.67%, while USD Coin (USDC) has a 2.06% APY. However, the platform doesn’t have Bitcoin lending and borrowing options. Other cryptocurrency assets that qualify for this service and their Annual Percentage Yield (APY) include:

Maker MKR – 0.07% APY

Tether USDT  – 2.58% APY

Wrapped Bitcoin WBTC – 0.02% APY

Basic Attention Token BAT – 0% APY

0x ZRX – 0.52% APY.

Procedure for Using Compound Lending Platform

Prospects are expected to supply assets. By adding compatible coins to the Compound protocol, users can become liquidity providers. They get tokens (such as cETH and cDAI) in exchange, which stand in for their share of the pool. The second step is to earn interest. And this is where the assets that are provided are combined and made accessible to borrowers. Interest is paid to lenders in the form of tokens and is compounded monthly on their deposits.

The third stage is the assets borrowing stage. By pledging other approved assets as collateral, users are able to  use their desired cryptocurrency. The collateral component, which varies for each asset, determines the maximum amount that can be borrowed. This stage is where the participants repay their loans. In order to reclaim their collateral, borrowers return their loans plus interest. Collateral may be sold to cover loan repayment if its value drops below a predetermined level.

Key Features and Benefits

The Compound lending platform is decentralized and permissionless. Compound is completely decentralized, meaning that it doesn’t have a central command; anyone can use it without requiring permission or an intermediary. Also, users can earn interest while on the platform. Lenders have the opportunity to make passive revenue by earning interest on their unused assets.

The platform works with a collateralized borrowing feature. This means that borrowers who use their assets as collateral for loans can acquire liquidity without having to sell them.

Also, the presence of a smart contract feature makes all transactions on this platform transparent.

This is because on the Ethereum blockchain, every transaction and smart contract operation is transparent and verifiable. With the compound governance features, holders of COMP tokens are able to vote on ideas and modifications to the protocol, taking part in its governance.

 Pros

• Decentralization

• Interest Earnings

• Liquidity

• User Control

• Governance

Cons

• Volatility

• Smart Contract Risks

• Complexity

• Overcollateralization

• Regulatory Uncertainty.

Security and Audits

The compound emphasizes security heavily. Third-party companies conduct routine security audits on the protocol in order to find and fix any vulnerabilities. The platform also provides bug bounties to encourage the community at large to find and report security flaws.

Final Thought 

The compound’s decentralized structure, capacity to generate interest, and user-controlled governance make it an appealing choice for cryptocurrency owners who want to get the most out of their investments. Potential users should be informed about the dangers of volatility, weaknesses in smart contracts, and changes in regulations. Users are advised to take into account the unique collateral element, interest rate, and risk profile of each asset when using the platform.