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How Compound works for lending with cryptocurrencies

Compound is software running on the Ethereum blockchain network that aims to incentivize a network of computers within a decentralized finance ecosystem to enable lending with cryptocurrencies.

Compound, loans without intermediaries

Its purpose is to allow lending on cryptocurrencies without the need for intermediaries, earning an interest rate set independently by an algorithm based on the sole criterion of supply and demand.

The Compound protocol only supports a certain basket of cryptocurrencies, which are: 

  • Dai (DAI), 
  • Ether (ETH), 
  • USD Coin (USDC), 
  • Ox (ZRX), 
  • Tether (USDT), 
  • Wrapped BTC (WBTC), 
  • Basic Attention Token (BAT), 
  • Augur (REP), 
  • Sai (SAI).

In a nutshell, a lender deposits its share of cryptocurrencies to be available to those who wish to borrow them. Once the deposit is made, Compound will assign the lender a new cryptocurrency called a cToken (representing the deposit).

Each cToken can then be transferred or traded without restriction, but is only redeemable in exchange for the cryptocurrency locked in the protocol. In addition, Compound rewards lenders with its own native COMP token. 

Every time a user interacts with the platform by borrowing coins, depositing or redeeming them, they receive a share of COMP.

The interest earned on the loans is clearly recognized in the same cryptocurrency that was put on deposit.

How Compound works for lending with cryptocurrencies

Lending on Compound 

Compound creates a perfect balance between lenders and borrowers. The synergy is seamless once a deposit is made, 

The system determines how much it is possible to borrow. So, for example, if you have deposited 1000 USDC worth $1000 and Compound has set the lending limit per USD to 50%, you will be able to borrow $500 of any other cryptocurrency. 

Despite sounding a bit complex, the system seems to have caught the attention of many users. As of 2020, over $500 million in assets have been locked into the Compound protocol.

The token, which is listed on major cryptocurrency exchanges, hit its ATH at over $900 in May before falling back to its current $300. 

It was founded in 2018 by Robert Leshner, an enterprising economist and professor at the University of Pennsylvania who is already the founder of the data control start-up, Safe Shepherd. Earlier this year, it successfully closed a Series A funding round, raising around $25 million.

In October, a bug in the system accidentally distributed $90 million to users. Robert Leshner, founder of Compound Labs tweeted:

“If you received a large, incorrect amount of COMP from the Compound protocol error: Please return it”.

This was the consequence of an update released by the company and raised some questions about the real security and reliability of the system.

Vincenzo Cacioppoli
Vincenzo Cacioppoli
Vincenzo was born in Genova but lived most of his life in Milan. He has a degree in political science. He is a journalist, blogger, writer, and marketing and digital advertising expert. After a long experience in traditional marketing, he started working with the web and digital advertising in 2011, creating a company called Le enfants. Passionate about the web and innovation, in 2018 he started exploring the topics related to blockchain technology and cryptocurrencies. Independent cryptocurrency trader since March 2018, he now collaborates with companies in the sector as a content marketing specialist. In his blog. mediateccando.blogspot.com, he has long been primarily focused on blockchain, which he considers to be the greatest technological innovation after the Internet. His first book about blockchain and fintech is scheduled for release in November.