One of the major challenges with cryptocurrency is that prices constantly fluctuate. DeFi is a young solution for balancing the price optimization in the crypto space. It is governed by its own rules. Earning interest on stablecoins is better than the interest rate offered by your bank account. Compound Finance is a lending platform that provides a way to earn interest on stablecoins. Compound Finance allows you to store money in the app and earn an interest rate higher than you can potentially earn anywhere else.
Blockchain technology is changing the way people are making money. But depositing money on it can be extremely volatile as the prices keep swinging. Here you do not trust a person or deal with a physical institution. You trust a code susceptible by hacking activities online. Compound finance is a decentralized solution for the frictionless borrowing of stablecoins like Ether, DAI, USDC, Tether, etc. Compound Finance makes it easier to earn higher interest rates and withdraw money anytime. The protocol does not guarantee liquidity; instead, it relies on the interest rate model to incentivize it.
What is Compound Finance?
Compound Finance is Ethereum- based protocol bridging the gap between those who want to sell and buy money at high interest rates. It lets your crypto grow with the minimum effect of price volatility. Compound Finance establishes money markets, which are pools of assets with algorithmically derived interest rates. Meaning that interest rates depend upon the regular demand and supply.
Governance
Governance in blockchain refers to a structure that participants abide to follow. Compound will begin with centralized control of the protocol managed by the admin who has the authority to list a new cToken market and update the oracle address. Governor Alpha is the governance module of the Compound protocol. Addresses with more that 100,000 COMP propose changes to this protocol. Addresses with high votes in the beginning of the proposal are allowed to submit their votes during three day voting period. If a majority, and at least 400,000 votes are casted for the proposal, it is queued in the Timelock, and can be implemented after 2 days. The traders and customers can vote against the governance framework to replace it.
Collateral Assets
Money here simply refers to Ethereum- based assets. You can lend Eth, DAI, USD coin, etc a list of which is displayed on its platform. It has also introduced its own governance token COMP. COMP is an Ethereum token on compound protocol allowing leveraging anyone to buy and sell thorough DeFi. COMP tokens are given to lenders and buyers to incentivize them to participate in different markets across the compound protocol. It was recently made available on Coinbase Earn. There is no limit on either lending or borrowing. Each market has a collateral factor, ranging from 0 to 1, which represents the portion of the underlying asset value that can be borrowed.
Borrowers use their crypto assets as collateral to obtain a stablecoin. In return, Lenders provide the assets required for the loan at a consensual interest rate discussed between both parties. Both lenders and buyers get more value from their crypto. Traders can finance new ICO investments by borrowing Ether, using their existing portfolio as collateral. Lenders can earn interest or borrowers deposit crypto to gain access to credit without rules of banking. In DeFi space, this process does not require permission. This leads to optimized interest rates across platforms.
How to get started?
Using Compound Finance is simple. It is an all-in-one app and you do not have to send your funds externally. The user goes to the app, connects the wallet and takes his currency to lock it in there. Make sure the connected wallet has enough ETH to cover the gas fees.
Compound acts as a bridge between the buyers and sellers who want to earn interest. Lending out DAI stablecoin on the platform gets double the interest rate of the next highest yielding Ethereum based asset. One can easily deposit and eventually withdraw their assets when the interest is high.
The current crypto landscape is one in which we need to trust developers and strangers without funds. You can check exchange rates for different Ethereum based assets on the platform.
It gives the option to connect your Ethereum wallet with Coinbase, Ledger or Metamask. Once the asset is lent onto the compound finance protocol, the depositor earns interest every time an Ethereum block is mined.
It gives the option to connect your Ethereum wallet with Coinbase, Ledger or Metamask. Once the asset is lent onto the compound finance protocol, the depositor earns interest every time an Ethereum block is mined.
Unlike banks, Compound Finance does not need a KYC or ID verification to complete the process. One of the major advantages of using Compound finance is that the depositor can take out money at any time, unlike banks where one needs to lock the money for a specific time period in order to enjoy interest. There is no penalty for withdrawing assets from Compound other than paying the gas fees.
Buying and Selling cToken
Assets supplied to a market are represented by cToken. By supplying a token, you will receive a ctoken. For instance, cDai acts as a redemption token to redeem actual Dai just like gold and silver can be redeemed for US Dollars. Dai is a decentralized stable currency that does not oscillate. cTokens are designed to increase slightly after every Ethereum block is generated. This is how interest is generated on the platform. A Dai is converted into cdai at the current exchange rate. Cdai tokens in the Ethereum wallet are redemption tokens represent your claim of real Dai stable coins on compound finance. The number of cDai tokens you have will always remain the same however a ctoken is designed to increase in value and you should be able to take them out at a higher interest rate in the future.
Features
Free from Bank’s rules and regulations
Compound Finance allows earning high interests without getting the money locked as in the case of Banking institutions. One can deposit the money on Compound Finance for as long as he wishes and take it out at any time. Compound Finance offers double and triple the interest rates offered by any other bank. It is because it does not need to work under federal authorities and hence it is a free marketspace to formulate its own rules. There are no terms to negotiate, maturity dates, or funding periods. Borrowing is instant and predictable. Also, Compound Finance gives the advantage to a borrower to repay an outstanding loan at any time.
Remove the middleman
DeFi focuses on cutting the middleman and directly benefiting the depositors. The borrowers and lenders make direct interaction on the platform and compose a deal on a mutually decided interest rate. There is no limit on either lending or borrowing. There is no penalty for withdrawing assets from Compound other than paying the gas fees.
Non- custodial nature
Compound Finance is Non-custodial. Funds are directly sent to contract and you directly interact with another smart contract and not person. Breaking or hacking of the contract and withdrawing money is not that easy.
Provide Interest on stablecoin
One of the key reasons for the existence of Compound Finance is that it supports stablecoin as an asset and let crypto grow. Till date $1.25 billion USD are locked on Compound. Each money market has different but fluctuating interest rates that are determined by the supply and demand of the underlying asset. A Stablecoin like USD Tether, USD Coin, Dai, is a crypto version of similar and equivalent fiat currency. While Bitcoin and Ethereum tends to change their value according to market demand and supply, Stablecoins does not fluctuate and can be used in everyday applications.
DeFi has pumped projects like Compound Finance to new heights. Compound Finance has made the whole lending process easier and convenient also allowing customers to earn high interest online that too on stablecoins. Decentralized systems like Compound Finance can potentially transform the banking industry and grow public participation on Ethereum- based protocols.
________________________________________________________Disclaimer: The information contained on this web page does NOT constitute financial advice or a solicitation to buy or sell any cryptocurrency contract or securities of any type. Trading is a high-risk activity. Readers are suggested to conduct their own research, review, analyze and verify the content before relying on them.
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