Coin Insights: What Is Compound Finance

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What if there was a way for you to lend your money to others and earn excellent returns? You’d probably jump at the opportunity, right? Fortunately, Compound Finance offers such an option. With this unique crypto protocol, you can lend or borrow digital assets in an online marketplace.

Compound Finance is a decentralized finance (DeFi) protocol developed on the Ethereum blockchain. Also known as a decentralized application (dApp), this exciting project provides crypto investors, lenders, and borrows a way to circumvent the pain points associated with traditional finance.

For those unfamiliar with it, decentralized finance is an ecosystem within the crypto industry dedicated to decentralizing the way users interact with financial services. With decentralized finance, there is no need for a centralized body – like a bank – to validate transactions or hold funds.

Who Created Compound?

Compound was developed in 2017 by founders Robert Leshner and Geoffrey Hayes, but the project didn’t go live until May 2019. Currently, Leshner is the CEO of the company and is often viewed as the face of Compound. Hayes serves as CTO, which makes sense given his background in engineering and development.

Why Was it Created?

Compound was created as an alternative to the way crypto assets are typically held. Most cryptocurrency investors keep their digital assets on an exchange or in a digital wallet. With Compound, these same users can earn interest on their crypto by loaning their crypto to others within the industry. 

Additionally, frustrated with the current system, Leshner and Hayes sought to offer alternatives to the restrictions often implemented by third-party institutions. By removing these obstacles – and providing a faster and more efficient system – they aimed to give crypto users the means to lend and borrow funds without the need to deal with paperwork or negotiate terms.

The result is a protocol that allows anyone to borrow and lend their cryptocurrency, at various rates, without the need for an intermediary.

What Does Compound Do?

A simple way of explaining Compound is as an account that allows you to earn interest without trusting your funds with a centralized bank or other financial institution. But there’s much more to Compound than that. 

It gives users a way to easily lend and borrow cryptocurrencies, by simply connecting your wallet and depositing funds. It’s really that simple. From this point, lenders can start earning returns of various interest rates depending on the asset they’re lending, and depending on the going borrow rate in the market.

On the flip side, borrowers can use the platform to borrow cryptocurrency at variable rates, taking out various assets depending on their needs at the time.

The compound effect, pun intended, is that both borrowers and lenders are able to participate in the marketplace as they see fit – gaining interest on their assets, or borrowing at the rates that are favorable to them.

Borrowing and Lending with Compound

When a user provides liquidity (assets for lending) to Compound, they are rewarded with cTokens. These are tokens that determine how much interest users receive based on the selected asset. cTokens represent the contribution a user makes to a liquidity pool. Liquidity pools are a collection of funds that manage lending and borrowing on the Compound platform. These funds are locked into a smart contract. This is how users earn interest by lending out their crypto assets.

Borrowing, on the other hand, occurs when users take out loans against these liquidity pools. Interest rates are predetermined, so borrowers know exactly how much they’ll need to pay back in fees. Repayments from borrowers are distributed amongst the liquidity providers based on how much they’ve contributed. 

Compound Governance

Compound uses its COMP token for platform governance. Holders of the site’s native token can vote on improvements, interest rates, asset collateralization, and market listings. Each COMP token represents a single vote, so the more you hold, the greater your voting power. 

The intention of the COMP token is to create a governance framework powered by the community, not by a centralized entity. Anyone holding COMP can propose changes which are then subject to voting by the community. In this way, Compound is making its platform truly decentralized.

Why is Compound Important to Investors?

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Photo by Anna Nekrashevich from Pexels

One of the coolest things about Compound is that it gives investors a way to earn interest on popular cryptocurrencies that don’t usually have that option. For example, on the Compound platform, users can lend or borrow wrapped Bitcoin (wBTC), Ethereum, DAI, Tehter, USD Coin, and Uniswap. 

For those unfamiliar, wrapped Bitcoin is an ERC-20 ‘version’ of Bitcoin that is actually tied to the price of BTC. Using ERC-20 as a wrapper around your Bitcoin allows investors a way to earn returns in the decentralized markets that run on the Ethereum blockchain. Remember, Bitcoin cannot be used on the Ethereum blockchain, thus, if you chose not to wrap your Bitcoin in an ERC-20 (or Ethereum based) wrapper, you simply wouldn’t be able to earn interest on your Bitcoin at all, or partake in most of the DeFi opportunities that exist in the market.

Compound gives investors a way to increase their investments without the need for a middleman. It’s a great way to earn passive income on those digital assets that are just sitting idly on an exchange or in a wallet.

Why Does it Matter to Finance?

Compound is an easy way for those new to decentralized finance to get their feet wet in the space. The platform makes borrowing and lending crypto a simple and straightforward process. Removing the complexity associated with cryptocurrencies attracts more investors, which helps drive adoption in the industry.

The platform also gives advanced traders and investors a way to leverage and grow their already existing assets. In this way, Compound is making finance appealing to both novice users and experienced investors. 

What Does This Mean for DeFi?

The innovation and advancements made by Compound mean good things for decentralized finance. With new services and protocols like Treasury and Gateway, Compound is doing its part to bring positive attention to the DeFi world. Individuals and businesses will have access to stable, reliable markets while earning consistent returns.

Decentralized finance is often criticized as the ‘Wild West’ of finance. Compound takes the accusation head-on by creating innovative financial tools for investors and traders. As a result, the DeFi market builds credibility as a legitimate alternative to traditional finance.

Earn Returns on Those Stagnant Digital Assets

Compound is a platform that provides users a way to lend or borrow digital assets in a decentralized manner. By providing liquidity to certain cryptocurrencies, investors earn interest on their assets. Additionally, borrowers have the opportunity to take out loans without the hassle of negotiations, paperwork, and credit checks.

The innovation and forward-thinking Compound displays through its Gateway protocol and Treasury application mean the platform is in it for the long haul. It has made significant contributions toward decentralized finance, which makes the industry more appealing to both individual investors and large institutions.

What is the Future of Compound?

Compound has shown that it’s not willing to stand still with its existing platform. For example, with its Gateway project, Compound is creating an “open, distributed ledger for cross-chain interest rate markets.” The intention of this project is to establish a bridge through which digital assets on different blockchains can communicate with one another. Inter-blockchain operability is a significant hurdle in the crypto industry. Compound is aiming to solve this problem with its Gateway protocol.

Another exciting way Compound is moving forward is through its Treasury application. The intention of this service is to drive crypto adoption through corporations and institutions. Treasury bypasses the high-risk returns associated with many cryptocurrencies, giving companies a way to earn steady, stable passive income on their investment.

Will Compound Continue On Its Current Path?

This is a tough question to answer as Compound doesn’t have a project roadmap per se. However, it’s hard to see the company sitting back and resting while there’s still work left to be done. 

Leshner is hands-on with the project, and you’ll often find him engaging with both the Compound and crypto communities. As a result, it’s easy to see how Compound will continue to be a major player in the DeFi market.

To learn more about Compound, its organization, and its governance tokens, check out the following links and resources:

Links & Resources

https://www.bloomberg.com/opinion/articles/2018-05-17/put-your-bitcoins-in-the-money-market

https://www.crunchbase.com/organization/compound-labs

https://medium.com/compound-finance/compound-governance-5531f524cf68

Resources

Compound Finance – https://compound.finance/

Compound Markets – https://compound.finance/markets

Compound Gateway – https://compound.cash/

Compound Treasury – https://compound.finance/treasury