Compound (COMP) is a decentralized finance (DeFi) protocol built on the Ethereum blockchain. It allows users to lend and borrow Ethereum-based tokens in a secure, automated, and trustless manner. Compound is designed to facilitate the growth of an open financial system by providing access to liquidity, low fees, and transparent pricing. CryptoNewsHerald is proud to provide an in-depth look into Compound and its innovative features.
What is Compound?
Compound Finance is a decentralized lending protocol in which interest rates are formed algorithmically based on the ratio of supply and demand. It can be seen as an open money market where users deposit crypto assets as well as borrow funds.
Who created Compound Finance?
The creator of the Compound Finance protocol and CEO of Compound Labs is a web developer and financial market analyst Robert Leshner.
The co-founder and CTO of Compound Labs is programmer Jeff Hayes.
How did Compound Finance originate and develop?
University of Pennsylvania alumni Leshner and Hayes collaborated for several years on various projects (Britches, Postmates, and others). In 2013, Leshner, who has worked as a certified auditor, portfolio manager and banker, got interested cryptocurrencies.
August 28, 2017 Leshner & Hayes registered company Compound Labs Inc. headquartered in San Francisco.
January 31, 2018 Leshner published article on the development of the Compound protocol.
May 7, 2018 company attracted $8.2 million seed investment. Bain Capital Ventures, Andreessen Horowitz, Polychain Capital, Transmedia Capital, Compound Ventures, Abstract Ventures, Danhua Capital and Coinbase Ventures participated in the round.
In September 2018 Compound Labs introduced the first version of the protocol that allows you to borrow five crypto assets – ETH, TUSD, ZRX, BAT and REP.
In February 2019 it was published white paper project. May 23, 2019 Compound Labs released the second version of the protocol with the release of tokens cTokenrepresenting rights to underlying money market assets in Compound Finance.
In November 2019, Compound Labs raised $25M in a Series A funding round led by Andreessen Horowitz. Bain Capital Ventures, Polychain Capital and Paradigm also participated in the round.
Even in the early stages, Robert Leshner announced his intention to gradually decentralize the protocol, depriving the Compound Labs developers of administrative privileges in favor of the community.
In February 2020 Compound Labs released governance tokens COMPdesigned to encourage community participation in the project.
On April 16, 2020, governance issues on Compound moved from administrators to COMP token holders, who were able to change the list of supported coins, influence risk parameters, interest rate curves, etc.
How does Compound work?
Compound works similarly to a bank: the user deposits various cryptocurrencies and receives interest income. However, unlike a bank, Compound does not store deposits: the funds are placed in smart contracts with which the user interacts directly.
Lenders and borrowers do not need to negotiate terms. The parties interact directly within the framework of a protocol that controls the size of the interest rate and collateral. There are no counterparties holding funds.
Access to platform anyone with a Web3 wallet like MetaMask can get it.
After confirming the request to interact with the Web3 wallet, the user gets access to a dashboard displaying the supported assets. To deposit or borrow an asset, you need to click on the page of this asset and unlock it.
After unlocking an asset, which involves allowing the smart contract to interact with the funds, the user can lend it at a predetermined annual percentage rate (APR). Each asset has an individual annual percentage return (APY).
To borrow an asset, the user must first place funds on the platform and obtain the so-called borrowing power. This metric represents the amount that can be borrowed. It increases with the growth of the collateral provided.
This is how the depositing user’s balance looks like after the transaction is processed:
After placing assets on the platform, so-called c-tokens appear in the user’s wallet – in this case, Compound Dai (cDai).
To withdraw placed assets with accumulated interest income, you need to click on the Withdraw button.
The function of obtaining a loan on the platform
The process of obtaining a loan is as simple as the deposit process. Provided that the user has already obtained the right to borrow, he can borrow assets using the appropriate panel.
Compound needs to get permission from the Web3 wallet to interact with smart contracts. Permission is granted only once. This will require an on-chain transaction involving the payment of a fee on the Ethereum network.
By selecting a supported asset on the right side of the panel, the user can designate the amount they wish to borrow. The Safe Max value represents the maximum amount of borrowed funds with a low risk of liquidation when the price of the underlying asset falls.
After the transaction is initiated, the loaned asset (in this example, ETH) is deposited into the Web3 wallet.
Loan interest accrues according to a predetermined interest rate. The debt can be paid at any time by clicking the Repay button.
How does the system of two types of Compound tokens work?
The tokens represent the balances of users interacting with Compound’s liquidity pool. Represented by cToken the underlying asset allows you to receive interest income and serves as collateral.
These tokens are ERC-20 assets and can be viewed on the Etherscan blockchain explorer, stored in a wallet, and sent to other users. Compound currently supports 14 crypto assets.
Example. The user deposits 1,000 BAT in the liquidity pool, with an exchange rate of 0.02. In this case, the user receives 50,000 (1000/0.02) cBATs. If a few weeks later, when the exchange rate is equal to 0.021, the user withdraws funds, 50,000 cBAT will equal 1050 BAT (50,000 * 0.021).
Features of cTokens:
- You can borrow up to 50-75% of the value of cTokens, depending on the market characteristics of the underlying asset. You can add or withdraw tokens at any time.
- If the collateral coverage of the user’s debt is insufficient, the debt position may be subject to liquidation.
- Liquidators receive 5% of liquidated assets.
- cTokens are available for viewing on Etherscan.
How to get cEther?
The method of obtaining cETH is different than in the case of cBAT or cDAI.
When a user deposits ETH, the app sends the tokens directly to the paid cEther contract creation function. After activating the option, cEther appears in the wallet.
As a result, thanks to the request (invocation), the cToken contract removes the specified amount in base tokens from the sender’s address.
Another asset in the Compound ecosystem is the COMP native governance token.
Features of the COMP token:
- Total offer volume COMP is 10 million 55.71% of them are subject to distribution among the project team members, founders, investors and partners. The remaining 42.29% will go to users within four years.
- The dynamics of coin accrual depends on the interest rates set by the market. For example, if USDT has the highest rates, then those who deposit and borrow in the stablecoin from Tether will receive more COMP tokens.
- In each asset market, the number of COMP tokens is divided equally between lenders and borrowers.
- Users can find out the interest rate on the page User Distribution.
- COMP holders can earn additional COMP native tokens by voting on the governance of the system.
- COMP tokens are available on many exchanges, including Coinbase and FTX.
How is the compound interest rate determined?
- The interest rate depends on liquidityavailable in a given market.
- The rate fluctuates based on supply and demand in real time.
- When liquidity is high, the interest rate is low.
- When liquidity is low, the interest rate rises.
How is the interest rate calculated?
Each asset in the Compound markets has its own annual interest rate (APR) for lending and depositing based on supply and demand. Interest income is generated when a new Ethereum block is mined, approximately every 15 seconds.
Excess liquidity can only exist if the number of assets placed on the platform exceeds the amount of borrowed funds. If the number of lenders in the market exceeds the number of borrowers, the interest income of lenders decreases. The utilization rate of an asset determines the level of income.
How is the secured loan rate calculated?
Borrowing right (borrowing power) of the user directly correlates with the amount of collateral. Each asset has its own collateral factor (collateral factor), determined by its volatility.
For example, the Basic Attention Token (BAT), which has a collateral factor of 50%, has less borrowing power than the Dai stablecoin. The latter has a higher collateral factor of 75% as it is a less risky asset. Thus, staking $100 of BAT tokens on the platform will give a borrowing right of $50, while staking $100 of DAI will give a borrowing right of $75.
When calculating the secured loan rate, the collateral factors of all assets placed on the platform are taken into account. A base rate is set for the maximum amount of funds that can be borrowed in relation to the amount of assets deposited.
The collateral factor for each asset determines the governance mechanism of Compound Finance.
How is the liquidation of assets carried out?
If the amount owed exceeds the user’s maximum borrowing right, Compound exchanges the reborrowed asset for collateral provided by the borrower at a slightly below market rate. Thus, the user is motivated to effectively manage debts.
Compound allows community members to act as liquidators using tools such as Compounder Liquidator. Members can redeem other users’ loans in exchange for ETH at the best market rate.
For example, a loan of 10 ETH, the collateral of which is no longer enough, can be repaid (re-mortgaged) by another user. This user receives the base collateral for this loan at a discount of 5% or more (paid in ETH).
To prevent liquidation, Compound also provides Account Service API to monitor addresses at risk.
How does the governance mechanism of Compound Finance work?
- The voting period for any proposal is three days.
- Any address with the right to vote can vote “for” or “against” a particular proposal.
- If a proposal receives at least 400,000 votes, it is queued and implemented after two days.
- If the required number of votes is not obtained, the proposal is rejected.
Examples of issues on which COMP token holders vote:
- Support for the new cToken Market.
- Changing the interest rate model.
- Oracle address update.
- Withdrawal of cToken reserve.
- Selection of new administrators.
To update the risk parameters of the Compound Finance system, such as the annual interest rate or the collateral factor, Compound uses the Timelock mechanism. It changes parameters with a time delay, guaranteeing protection: any attempts by intruders to interfere with the system can be tracked and prevented.
Compound.finance website elaborates:
“Any proposal to govern the system is published with a delay of at least two days. For proposals for important updates, such as changing risk settings, the delay can be up to 14 days. Timelock is currently managed by an address administrated by members of the Compound team.”
Thus, now the risk parameters of the platform are controlled by the company, albeit with a delay in time. However, Compound, using smart contracts for control, may eventually open access to Timelock to a distributed committee of community members. This will give Compound Finance the opportunity to become a Decentralized Autonomous Organization (DAO) similar to MakerDAO.
Why use Compound Finance?
- Interest income on funds placed on the platform.
- Decentralized applications and exchanges can use Compound as a source of monetization in the Ethereum ecosystem
- Traders can borrow ETH from the liquidity pool and place these assets in their portfolios as collateral to participate in crowdsales.
- Traders interested in shorting a particular token can borrow it from the liquid pool and sell it.
How is Compound developing?
In August 2020, Compound joined the Global DeFi Alliance, an international consortium of centralized and decentralized financial service providers and platforms formed by cryptocurrency exchange Huobi.
In August 2020, the project launched its own price oracle for cryptocurrencies as part of the transition to the free-access price feed channel Open Price Feed.
The developers also created an aggregator of information about the declared prices. The data is available directly from each publisher through their API.
In September 2020, the MakerDAO community voted to add COMP tokens as a new option to enable the issuance of the DAI stablecoin.
Compound currently only works with Ethereum ecosystem coins. In the future, it is planned to support tokenized versions of real-world assets: the US dollar, the Japanese yen, and Google shares.
On December 17, 2020, Compound presented a white paper with a detailed description of Compound Chain, a new protocol designed to ensure the interaction of assets from different blockchains.
Subsequently, Compound Chain was renamed to Gateway. Protocol testnet earned March 1, 2021. The main network will be launched in the summer or towards the end of 2021.
Gateway functions similarly to the Compound protocol on Ethereum. However, there are also differences:
- Gateway allows you to borrow and lend assets on any blockchain.
- Interest is paid in dollars (stablecoins) via CASH, Gateway’s native unit of account.
- Gateway has a more efficient risk assessment mechanism. It is based on the volatility of secured and borrowed assets. This improves the capital efficiency of using less volatile coins.
Gateway is focused on cross-chain interaction, and its functionality resembles THORChain.
Gateway users can download supported assets from various independent blockchains using a system of connected peer-to-peer chains. Each chain has a Starport contract associated with it. It allows you to lock and unlock assets on the Gateway.
Once uploaded to the Gateway, users can deposit and borrow assets from various blockchains. For example, you can lend Ethereum tokens using Solana as collateral, or borrow Celo assets using Polkadot assets, etc.
Gateway is designed to enable blockchains to interact directly, without wrapping tokens.
For example, in order to wrap Bitcoins (WBTC), DeFi users are forced to turn to intermediaries in the person of BitGo or Ren. Because of this, they loose control over their private keys. Gateway offers a solution that allows bitcoin holders to interact with other blockchains without resorting to third parties.
Switching to Gateway will allow Compound users to avoid high Ethereum fees.
CASH is Gateway’s native unit of account. It is used to pay transaction fees. Similar to MakerDAO’s Dai stablecoin, this token is created through a loan. The amount of CASH in circulation is equal to the number of coins borrowed.
It is assumed that initially CASH will correspond to one US dollar. Subsequently, this parameter can be changed by the community by a collective decision. Potentially, CASH can become a competitor to DAI and USDC.
All users and validators holding CASH tokens receive income that increases based on the interest rate index. This happens whenever a user/validator generates, redeems, borrows, returns or liquidates CASH.
The Gateway uses the Proof-of-Authority (PoA) algorithm. The network is run by trusted validators. Consensus is achievable even if one third of the nodes break the rules. Block finalization occurs when at least two-thirds of the nodes agree to add a block to the chain. Borrowers pay validators a percentage for each block they validate. Validators also receive a commission for transferring assets.
The Proof-of-Authority model allows banks and centralized crypto exchanges to become Gateway validators.
COMP token holders will manage the Gateway within the Compound Governance system on Ethereum.
At first, Gateway will be predominantly an interest income market based on interconnected blockchains. Over time, other dapps may integrate with this system, such as decentralized exchanges.
June 28, 2021 started work Compound Treasury is a new company under the umbrella of Compound Labs. Compound Treasury empowers neobanks and other fintech companies convert US dollars to USDC stablecoin. USDC tokens will be involved in Compound at a guaranteed interest rate of 4%. This is much more than what companies can receive in traditional bank savings accounts (0.55% -0.7% per annum).
Official site: compound.finance
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Compound (COMP) is a decentralized financial platform built on Ethereum, allowing users to earn interest on crypto-assets and borrow crypto-assets with a variable interest rate. It is an innovative way to utilize the blockchain to create a transparent and secure financial platform, allowing users to use their crypto-assets to their advantage. With its cutting-edge technology and easy-to-use platform, Compound is becoming a leading force in the blockchain and cryptocurrency space. As the platform continues to evolve and its user base grows, Compound is sure to become an integral part of the global financial system.