Compound: Revolutionizing Crypto Lending and Borrowing with Decentralized Finance (DeFi)

Compound: Everything You Need to Know

Compound is a decentralized protocol that allows users to lend or borrow selected cryptocurrencies on the Ethereum blockchain. It establishes money markets by pooling assets together and algorithmically setting interest rates based on supply and demand of assets. Compound also has its own governance token, COMP, which enables the community to propose and vote on changes to the protocol. In this article, we will explore what Compound is, how it works, who is the team behind it, and what are the use cases for this cryptocurrency.

What is Compound?

Compound is a software running on Ethereum that aims to incentivize a distributed network of computers to operate a traditional money market1. A money market is a type of financial market where participants can lend or borrow short-term loans, usually with a maturity of less than one year. Money markets are typically used by individuals, businesses, and institutions to manage their liquidity and cash flow needs.

Compound is different from traditional money markets in several ways. First, Compound is decentralized, meaning that it does not rely on any intermediaries or centralized entities to facilitate the lending and borrowing process. Instead, Compound uses smart contracts, which are self-executing agreements that run on the blockchain, to enforce the rules and terms of the loans. Second, Compound is transparent, meaning that anyone can view the code, data, and transactions of the protocol on the blockchain. Third, Compound is permissionless, meaning that anyone can participate in the protocol without needing to register, verify, or trust anyone else.

How does Compound work?

Compound operates on two main roles: suppliers and borrowers.

Suppliers are users who want to lend their cryptocurrency on Compound in order to earn interest. Suppliers can do so by sending their tokens to an Ethereum address managed by Compound. In return, they receive cTokens that represent their share of the pool and accrue interest over time. Suppliers can redeem their cTokens for the underlying asset at any time, plus the interest earned.

Borrowers are users who want to borrow cryptocurrency from Compound in exchange for paying interest. Borrowers can do so by depositing some collateral (another cryptocurrency supported by Compound) into the protocol. The amount of collateral required depends on the collateral factor of each asset, which is a percentage that determines how much one can borrow relative to their collateral value. For example, if the collateral factor of ETH is 75%, then one can borrow up to 75% of their ETH value in other assets. Borrowers can repay their loans at any time, plus the interest accrued.

The interest rates on Compound are determined by a supply and demand model that adjusts dynamically based on the utilization ratio of each asset pool. The utilization ratio is the percentage of the total supply that is currently borrowed. For example, if the total supply of DAI is 100 million and the total borrowed amount is 50 million, then the utilization ratio of DAI is 50%. Generally speaking, the higher the utilization ratio, the higher the interest rate for both suppliers and borrowers.

Who is the team behind Compound?

Compound was founded by Robert Leshner and Geoffrey Hayes in 2017. Robert Leshner is the CEO and co-founder of Compound Labs, Inc., the company behind Compound protocol. He has over 10 years of experience in finance and technology, having worked at Postmates, Safe Shepherd, and Ernst & Young. Geoffrey Hayes is the CTO and co-founder of Compound Labs, Inc. He has over 15 years of experience in software engineering and architecture, having worked at Google Cloud Platform and Palantir Technologies.

Compound also has a team of engineers, researchers, designers, and community managers who are working on developing and improving the protocol. Compound has received funding from several investors and partners, including Andreessen Horowitz (a16z), Bain Capital Ventures (BCV), Polychain Capital (PC), Paradigm (P), Coinbase Ventures (CV), Dragonfly Capital Partners (DCP), Huobi Capital (HC), Winklevoss Capital (WC), among others.

What are the use cases for Compound?

Compound aims to enable new use cases and monetization models for crypto assets that do not have native lending or borrowing functionality or access to decentralized finance (DeFi). By integrating these assets with Compound’s lending protocol, users can create new opportunities for earning passive income, leveraging their positions, or accessing liquidity. Some of the use cases for Compound include:

Passive income: Users can earn interest on their idle crypto assets by supplying them to Compound. For example, a user can supply USDC to Compound and earn interest in cUSDC, which can be redeemed for USDC plus the interest earned.

Leverage: Users can borrow crypto assets from Compound to increase their exposure or hedge their risk. For example, a user can borrow ETH from Compound and use it to buy more ETH, effectively doubling their ETH position.

Liquidity: Users can access liquidity from Compound without selling their crypto assets. For example, a user can deposit WBTC as collateral and borrow DAI from Compound, which can be used for other purposes.

Arbitrage: Users can exploit price differences between different markets or platforms by borrowing or lending on Compound. For example, a user can borrow DAI from Compound at a lower interest rate and lend it on another platform at a higher interest rate, earning the difference.

Compound is also compatible with existing DeFi protocols and applications, which means that users can leverage the composability and interoperability of the Ethereum ecosystem to create more complex and innovative financial products and services.

Conclusion

Compound is a decentralized protocol that allows users to lend or borrow selected cryptocurrencies on the Ethereum blockchain. Compound establishes money markets by pooling assets together and algorithmically setting interest rates based on supply and demand of assets. Compound also has its own governance token, COMP, which enables the community to propose and vote on changes to the protocol. Compound is backed by a team of experienced engineers, researchers, and investors who are working on developing and improving the protocol. Compound is one of the leading DeFi protocols in terms of total value locked (TVL), which is a measure of how much crypto assets are deposited in the protocol. As of September 2023, Compound has over $3 billion worth of assets locked in its protocol.