Compound Finance has been a leader in the DeFi space as a lending and borrowing protocol in crypto. All you need is an Ethereum wallet, some funds, and you can start accessing the Compound services right away. It is quite simple to supply assets on Compound, and your funds are never held by any third party. This article will discuss how Compound works, the assets it supports and the pros and cons of using it.
What is Compound Finance? It is an algorithmic money market protocol. It enables users to deposit cryptocurrencies and earn interest, or borrow other cryptoassets against them. Also, it is a permissionless protocol, meaning that any user with a crypto wallet and an internet connection can interact with it. The interest rates for supplying or borrowing on Compound are adjusted algorithmically. A user’s supplied assets are tracked in tokens called cTokens, which are ERC-20 tokens that represent claims to a portion of an asset pool.
How does Compound work? First and foremost, a user connects their web 3.0 wallet such as Metamask. Then, they can select any asset to interact with and can choose to either borrow or lend it. If a user wishes to lend, they unlock the asset and sign a transaction to start supplying capital. Thereafter, the asset is instantly added to the pool and start earning interest in real-time. Similarly, if a user wants to borrow, they deposit funds as collateral and earn ‘borrowing power’ which is required to borrow on Compound.
What assets are supported by Compound? As of 01/09/2020, the supported assets include Ethereum (ETH), Wrapped Bitcoin (WBTC), USDC, DAI, USDT, ZRX, BAT and REP. Other tokens may be added in the future. Moreover, Compound’s governance is currently being decentralized thanks to its native token COMP. Every token is equal to one vote, and token holders can vote on proposals with their token holdings. The most common issues or proposals include what new assets to list and what interest rates or collateralization should be required for each asset.
What are the pros and cons of Compound? On one side, earning interest on Compound is easy and the user experience is quite beginner-friendly. In addition, Compound can also be a good way for more advanced traders to increase leverage on a position. On the other hand, there are risks associated with it. Bugs may bring unexpected issues and traders should never risk more funds than they can afford to lose.
To summarise, Compound has been a leader in the DeFi space providing users with a much smoother experience when it comes to lending and borrowing cryptocurrencies. It is a permissionless protocol, meaning that any user with a crypto wallet and an internet connection can interact with it. Moreover, it supports a wide range of assets and its governance is slowly being decentralized due to its native token COMP. All in all, it is a promising project and many people might increasingly consider using it in the future.
