What is Compound?

Compound is an Ethereum-based lending platform that allows users to borrow or lend from a pool of assets without requiring authorisation. Interest rates on this decentralised finance (DeFi) platform are decided algorithmically, depending on the percentage of assets loaned out. The platform’s native cryptocurrency, COMP, is an Ethereum-based token that allows the community to govern the project’s protocol.

A brief history of Compound

Currently located in San Francisco, Compound first appeared on the market by raising US$8.2 million in investment at a seed round in May 2018. Compound's founder and CEO, Robert Leshner, is a former economist who served as a member of San Francisco's Revenue Bond Oversight Committee. He is especially aware of the subtleties of centralised finance (CeFi) to decentralised finance (DeFi) conversion.

In November 2019, Compound raised an additional US$25 million in its Series A fundraising round, with strong support from venture capital company Andreesen Horowitz. During the same year, the protocol received US$1 million in USD Coin (USDC) from Coinbase's 'USDC Bootstrap Fund'.

On 16 June 2020, Compound launched its COMP governance token, which quickly emerged as the largest DeFi token by market capitalisation after just one day of trading. Less than a year later, on 13 May 2021, Compound reached a record-high in total value locked (TVL) of US$12.45 billion. As of June 2022, Compound’s TVL was above US$4 billion.

How Compound works

Compound's functionality is built on yield farming procedures. It makes use of a number of proprietary systems to provide an open DeFi experience to consumers without them needing technical knowledge. To begin making money quickly, users only need to learn what yield farming is and how to invest their money in farming pools.

For starters, Compound provides the blockchain industry with a lending environment completely open to the public, and anybody may borrow money from them with proper collateral. There are no credit checks, and the cash is available right away. Regular users of Compound may earn a passive income, but anyone can make money by leasing out their unused cryptocurrency. Previously, consumers merely kept these coins with the expectation that their value would grow, but they may now leverage their holdings without giving up their currencies' possession.

Compound uses certified smart contracts to perform these activities autonomously. Its contracts handle all of the network's critical functions, covering tasks like storage, administration, and the facilitation of all pooled wealth. Compound ensures network security by using a variety of techniques, as the network has been subjected to multiple security examinations by renowned organisations like Open Zeppelin and Trail of Bits. These organisations have validated the network's code as solid and capable of safely managing network needs.

Additionally, Compound enables a borrowing and lending feature for a variety of cryptocurrencies. Users may specifically lend and borrow Dai (DAI), Ether (ETH), USD Coin (USDC), Ox (ZRX), Tether (USDT), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), and Sai (SAI).

Notably, anybody may borrow from the lending pools with interest and a deposit. To borrow from a lending pool, users must put up collateral that exceeds a project-defined level. In addition to serving as collateral, their deposit affects the total amount of financing they may borrow. If the value of a user’s collateral begins declining, the protocol will sell this deposit to compensate them for their loss.

What is Compound used for?

The COMP token is an ERC-20 asset that empowers holders to participate in the community governance of the Compound protocol. COMP holders and their delegates debate, propose, and vote on all changes to the protocol. Compound placed its COMP tokens directly into the hands of users and applications, which form an increasingly large ecosystem that is able to upgrade the protocol. These token holders are also incentivised to collectively steward the Compound protocol into the future with good governance.

In addition, COMP holders who use Compound to supply or borrow assets will automatically begin accruing COMP tokens. Each day, Compound distributes approximately 1,139 COMP to users of the protocol, and this distribution is allocated to markets for each token involved in the lending and borrowing functions. Within each market, half of the distribution is earned by suppliers, and the other half by borrowers.