What Is Compound Finance in DeFi?

Compound Finance is one of the popular DeFi Platforms in the blockchain emerging industry whose purpose is as a place for lending and borrowing cryptocurrency assets. If you are going to borrow or lend cryptocurrency in this DeFi platform, you just need some funds, an Ethereum wallet and that’s it. It’s simple just like other DeFi platforms.

Getting your fund in Compound Finance is easy and simple, and the most important thing is, that your fund is not held by any third party or middlemen. Curious about Compound Finance? Let’s dig deeper!

Introduction

In the current era, where the digital world rules the real world, everybody is excited about the new emerging financial technology, the Decentralized Finance. DeFi makes everything easier since it eliminates the involvement of any third party while doing financial transactions such as borrowing, lending, and buying, even now many merchants have already offered the payment using the cryptocurrency.

Well, compound finance is one of the DeFi platforms in the DeFi industry which offer simple and easy UI in their app, with an also easy way to lend or borrow cryptocurrency asset. It is a platform for borrowing and lending cryptocurrency without the involvement of any third party. If you get your funds in Compound, you will have a saving account and then you can earn interest with that saving account.

The user experience of the Compound Finance app and website is considerably smooth. The Compound protocol has also been tested which has proven to work at least for now. Yield farmers usually take advantage of this DeFi platform by borrowing cryptocurrency assets and then distributing them to other Decentralized Finance protocols to gain more interest.

What is Compound Finance?

Compound Finance, in simple, is a Decentralized Finance lending protocol. In technical terms, Compound Finance is the algorithmic money market protocol. If you have trouble understanding this, then you can imagine this as a money open marketplace.

The users of Compound DeFi can deposit cryptocurrencies that are supported and earn a reward, not to mention users can also borrow cryptocurrency assets. The protocol uses smart contracts whose job is to automate the management and storage of the funds that are deposited to the Compound platform.

The compound is also called a permissionless protocol. Anybody that has a crypto wallet and internet can interact and use the platform. Compound users can earn interest as long as they are connected to the platform using Metamask, the Web 3.0 wallet. Users can actually connect to the platform as long as they have a web 3.0 wallet, Metamask is just an example of a web 3.0 wallet.

What makes Compound Finance interesting is that borrowers and suppliers do not have to deal with term negotiation just like in traditional lending and borrowing scheme. Both suppliers and borrowers can interact with the protocol directly in Compound DeFi. The protocol itself then handles the interest rates and collateral. There is no third party keeping your fund because the assets are kept safe in a smart contract which is usually called a liquidity pool.

The interest rates or rewards for borrowing and supplying assets in a Compound are regulated with an algorithm. The protocol that Compound uses will adjust the earnings and rewards based on demand and supply.

How Does Compound Finance Work?

The supplied assets (positions) in Compound DeFi are tracked which is called the cTokens. cTokens is the native token of Compound DeFi which runs on the ERC-20 token’s network. This token then represents the claim to an asset portion in the Compound pool. To understand this correctly, let’s put this into an example below.

Let’s say that you deposit your ETH asset into a Compound liquidity pool, and your asset is then converted into cETH. If you store DAI stable coin, then it will be converted into cDAI. If you store or deposit multiple cryptocurrencies, then each of the certain assets will earn a reward based on each individual interest rate. If you have a hard time understanding this then get this, your cETH will earn you cETH reward, and the cDAI asset will get the cDAI reward.

cTokens can be reclaimed for the part of the pool they address, which makes the provided resources accessible in the connected wallet. As the currency market earns revenue (the borrowing increases), cTokens acquire revenue and become convertible to a greater amount of the underlying resource. This essentially implies that acquiring interest on Compound is basically holding an ERC-20 token.

The process itself begins with the users connecting their Web 3.0 wallet, like Metamask through the Compound ecosystem. Then, at that point, they can unlock it by choosing any cryptocurrency asset to finally be able to interact with it. Assuming the asset is unlocked, the users can now both lend or borrow it.

Lending your asset is also easy and straightforward. Unlock or open the asset that you are going to supply the liquidity for, then sign the transaction with your wallet to begin supplying the asset/capital. The cryptocurrency assets go straight to the liquidity pool, and you can begin procuring rewards continuously. This is the point at which the assets will be switched over completely to cTokens.

While lending seems to be easier, the borrowing mechanism is considered complicated. First, users need to deposit funds that will be used as collateral for their loan. Afterward, the user will get the so-called “borrowing power” which then the user can finally be able to borrow assets in Compound. Each asset that is accessible for supply will add an alternate measure of Borrowing Power. Users can then do the “borrowing” which is adjusted by the amount of Borrowing Power they possess.

Read also : What Are Liquidity Pools in Decentralized Finance and How Do They Work?

What Assets Are Supported by The Compound DeFi?

There are many cryptocurrency assets that Compound DeFi supports right now. As of right now (will be updated when the list is added), the supported assets for borrowing and lending in Compound DeFi are as listed below:

• WBTC (wrapped bitcoin)
• ETH
• USDC
• USDT
• DAI
• BAT
• ZRX
• REP

There are more in the future since the Compound DeFi still keeps developing. Additional assets will be added later in the future when there is an update.