In recent months there has been a growing interest in decentralised finance (DeFi) and perhaps one of the best-known projects in this area is the Compound protocol.
The beauty of the DeFi world, comprised of projects that use the blockchain to provide non-centralised services, is that it is possible to use it in different ways, though at the moment the most common use is that of loans.
The Compound protocol provides precisely this service, allowing users to lend or borrow Ethereum (ETH) and DAI, in exchange for a fee obviously.
How does Compound protocol work?
There are two ways to obtain the DAI crypto: either by buying it on an exchange or by collateralising ETH for DAI (CDP – Collateralised Debt Position). When opting for the second method, it will be necessary to lend some ETH.
To start staking the tokens, simply open the “Swap” function inside the Eidoo wallet;
In case of not having DAI, it is possible to buy the stablecoin with ETH or fiat currency. In the first case, it will not be necessary to carry out the Know Your Customer (KYC) procedure.
Once DAI has been obtained, simply “swap” them with cDAI and this will automatically make the DAI contribute to the liquidity pool.
In fact, thanks to the Compound protocol, instead of lending the assets directly to other users, it is possible to contribute to the market by staking tokens, which other users can then borrow.
What are the fees of the protocol?
Compound interest rates are based on supply/demand algorithms: when there is a lot of liquidity, rates are lower.
Each cryptocurrency has its own version of “cToken”, such as cDAI in the case of the DAI token, which represents the assets lent and on which interest is being earned.