compoundis software that runs on Ethereum and aims to incentivize a distributed computer network to operate a traditional money market.
Compound, one of a number of emerging decentralized finance (DeFi) protocols, uses multiple crypto assets to provide this service and provides essential lending and borrowing without the need for a financial intermediary such as a bank.
Simply put, Compound allows users to deposit cryptocurrencies into lending pools for borrowers’ access. Lenders then earn interest on the assets they deposit.
When a deposit is made, Compound issues the lender a new cryptocurrency called cToken (representing the deposit). Examples of cTokens include cETH, cBAT, and cDAI.
Each cToken can be transferred or exchanged without restrictions, but can only be used for the cryptocurrency that is initially locked in the protocol. This entire process is automated and managed by the Compound code, meaning lenders can withdraw their deposits whenever they want.
To encourage this activity, Compound uses another service-specific cryptocurrency called COMP. Each time a user interacts with a Compound market (borrowing, withdrawing or paying back the asset), they are rewarded with additional COMP tokens.
While complex, the model has so far proven adept at attracting users and encouraging other DeFi cryptocurrencies to adopt its model. According to the DeFi Pulse data site, over $500 million in assets are locked in the Compound protocol as of 2020.
How Does Compound Work?
Compound connects lenders and borrowers using a combination of smart contracts running on Ethereum and incentives paid in cryptocurrency.
The two main users of the platform are:
Lenders – Anyone wishing to lend a cryptocurrency on Compound can send their token to an Ethereum address controlled by Compound to earn interest.
Borrowers – Anyone who sends collateral to Compound in the form of cryptocurrencies. They are allowed to borrow cryptocurrencies supported by Compound at a percentage of the value sent.
Compound rewards lenders with COMP tokens based on the amount of cToken they hold in their wallets and is based on an interest rate that changes based on the current supply of that asset. The more liquidity in a market, the lower the interest rate.
Users lending assets to the protocol can take out loans in any other cryptocurrency Compound offers, up to the amount of collateral submitted.
More importantly, debtors can be liquidated if the value of the asset they borrowed increases and becomes more valuable than the collateral posted.
Why is COMP Valuable?
Koinfinans.com As we reported, Compound is programmed to reward users with COMP tokens for distributing their activities.
Anyone who owns COMP tokens can participate in decisions that affect the software and vote on proposals for rules governing the use of the platform.
A COMP owner may also transfer voting rights to another person to vote on his behalf. This means that someone who is not a COMP owner – such as a legal professional – may be asked to vote on behalf of COMP owners when a particular issue arises.
A point to note for investors is that new COMP tokens are issued by the network every day. As of 2020, approximately 2,880 COMP tokens are issued daily to lenders and borrowers; that is, anyone using Compound can earn COMP tokens in proportion to the amount lent to the protocol.
You Can Buy Compound Token From The List Below:
You can buy it from places like Binance, Coinbase Exchange, Kucoin, Bitfinex.
Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility. Finally, Koinfinans and the author of this content cannot be held responsible for personal investment decisions.