Investing In Compound (COMP) – Everything You Need to Know
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Table Of Contents
What is Compound (COMP)?
COMP is the governance token for the Compound Decentralized Finance (DeFi) protocol. DeFi networks seek to convert traditional financial systems over to decentralized versions. In this way, regular users gain a share in the profits that were once only available to large financial institutions.
Compound is an algorithmic money market protocol that lives on the Ethereum blockchain. Notably, this network is credited with starting the current DeFi craze. Compound was the first platform to introduce yield farming to the market in mid-summer 2020. Yield farming is similar to staking crypto in many ways.
Users lock their cryptocurrency into large farming pools. You receive rewards based on the amount of crypto you lock and for how long you participate in the pool. Unlike staking pools, yield farming pools feature much shorter lockup periods. Many offer no required lockup periods.
Compound's yield farming protocol functions as a decentralized lending system. Users provide liquidity to large lending pools. In return, they receive rewards in the form of tokens. These tokens can then be converted over to any supported asset in the network. Other users can then take out short term loans from the lending pool. These loans are issued with interest that is then split between the lender and the lending pool.
Benefits of Compound (COMP)
Compound brings a lot of benefits to the market. For one, it introduces a truly open lending environment to the blockchain sector. Anyone can borrow funds from Compound farming pools. There are no credit checks and the funds issue immediately. You just need to provide collateral.
Compound allows regular users to secure a passive income. Anyone can earn lending out their idle crypto. In the past, users simply held these coins in the hopes their value would rise. Now they can leverage their holdings without completely relinquishing ownership of their coin.
Another unique aspect of Compound is the ability to utilize Bitcoin in DeFi environments. This task is accomplished through the introductions of Wrapped Bitcoin (WBTC). Wrapped Bitcoin is an ERC-20 representation of locked Bitcoin. This new-age token provides Bitcoin HODLers with seamless access to the DeFi sector. A recent vote enabled these coins to function as collateral on the Ethereum-based Compound protocol. This addition was hard-fought. It took over two months of deliberation before the community finally approved the upgrade.
Compound leverages audited smart contracts to accomplish these tasks in an autonomous manner. The network's contracts take care of all vital functions on the network. Tasks such as storage, management, and the facilitation of all pooled capital are handled by these protocols.
Compound maintains network security through various means. The network has undergone numerous security audits by reputable agencies like Open Zeppelin and Trail of Bits. These organizations have certified the network's coding as sound and capable of handling the demands of the network securely.
Compound falls in line with the general consensus of DeFi in terms of interoperability. The network is open to the integration of third-party assets and platforms. Compound also supports the use of API protocols to simplify the UX. This interoperability has led other platform s to build upon Compound's vision in unique ways. Today, Compound users can leverage third-party market management tools in a seamless manner.
How Does Compound (COMP) Work?
Compound leverages a variety of proprietary systems to provide users with an open DeFi experience. Using Compound doesn’t take any technical understanding. You simply need to understand what yield farming is and how to lock your funds up in the farming pools to start earning today.
Yield farming protocols reside at the core of Compound's functionality. Currently, Compound supports the borrowing and lending of a selection of cryptocurrencies. Specifically, you can lend and borrow Dai (DAI), Ether (ETH), USD Coin (USDC), Ox (ZRX), Tether (USDT), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), and Sai (SAI).
Notably, anyone can borrow from the lending pools with interest and a deposit. To borrow from a lending pool, you will need to put up collateral above a threshold defined by the project. Aside from being your collateral, your deposit also determines the total amount of funding you can borrow. Notably, if the value of your collateral begins to drop, the protocol will sell this deposit to cover your loss.
Compound Lending Pools
Compound leverages large lending pools to operate. All funds are added into a giant pool of that same token in a smart contract in the Compound protocol. Importantly, each asset has its own market in the network. As such, the amount of supply or demand in that market determines the interest rate. Also, some assets may enable more borrowing power than others.
In the Compound ecosystem, interest rates are generated with every block mined. This provides the network with flexibility in terms of interest adjustment policies. This dynamic approach is necessary to maintain the liquidity pool's value
Compound relies on a decentralized governance model. Anyone can make a proposal in this network. You simply need to hold some of the network's governance token, COMP, to participate. Only those who hold more than 1% of the supply can make new proposals. Notably, token holders can delegate their tokens to an address of their choice.
Decentralized governance protocols are now common in the DeFi sector. Compound was a pioneer of this strategy. In the compound network, users can vote on listing new cToken markets, updating market interest rates, updating oracle addresses, withdrawing cToken reserves, and choosing new admins.
COMP – Compound Tokens
COMP is the primary governance token of the network. This unique financial instrument allows token holders and delegates to vote on important protocol decisions like new collateral types, borrowing power, and interest rate models. Recently, COMP was listed on the popular centralized exchange Coinbase.
Compound relies on cTokens to function. New cTokens are created whenever a user deposits crypto-assets into the Compound protocol. Notably, cTokens are simply ERC-20 tokens representing a user’s funds deposited in Compound. Users can transfer, trade, and stake these tokens.
cTokens allow users to earn interest in pools. For example, you could stake your USDC and receive cUSDC tokens in return. These tokens could then move freely within the Compound network. Once you have made your interest, you can redeem your cUSDC for normal USDC plus interest paid in USDC. Best of all, cTokens can be redeemed at any time. When you convert these funds they instantly become available in the connected wallet.
History of Compound (COMP)
Compound entered the market in May 2018. The network is based in San Francisco at this time. The founder and CEO of Compound, Robert Leshner, served as the co-chair for San Francisco’s Revenue Bond Oversight Committee. As a former economist, he is uniquely aware of the nuances of CeFi to DeFi conversion.
Compound entered the market in spectacular fashion with the platform securing $8.2M in funding during a seed round held in May of 2018. Then platform went on to raise an additional $25 million in its Series A funding round in November of 2019. Interestingly, this round found heavy support from the venture capital firm Andreesen Horowitz. The protocol also received $1 million in USDC from Coinbase’s “USDC Bootstrap Fund” the same year.
A Strong Team
The support network behind Compound is worthy of mention. The entire team behind this project is well-known in the market. For example, the platform's CTO, Geoffrey Hayes, also worked as a Maintainer of Exthereum, a new-age Ethereum client. He is also the technology founder of two startups, led Core Services at Postmates.
How to Use Compound (COMP)
Using Compound is easy. You don’t need to fill out a bunch of personal information to participate in this DeFi network. You will need to download a compatible web 3.0 wallet that supports ERC-20 coins. Metamask is generally considered the best option for these tasks.
Once your wallet is connected to the network, you can mint or create cTokens. Go to the Account Overview section located on the website's menu. Next, select any asset and unlock the market. Once the asset has been enabled, users are then able to supply or borrow as they desire. Notably, you want to review the details of each farming pool because every asset has a unique Supply and Borrow APR. Additionally, these rates change frequently.
How to Buy Compound (COMP)
Compound (COMP) is available at the following exchanges:
Uphold – This is one of the top exchanges for United States residents that offers a wide range of cryptocurrencies including COMP. UK & European residents are prohibited.
Binance – Best for Australia, Singapore, UK, & USA residents. Canadian residents are prohibited.
Discount Code: EE59L0QP for 10% cashback off all trading fees for non-USA residents. USA residents: Trade $100 & Earn $10 in 30 days after account registration.
Kraken – Founded in 2011, Kraken is one of the most trusted names in the industry with over 9,000,000 users, and over $207 billion in quarterly trading volume.
KuCoin – This exchange currently offers cryptocurrency trading of over 300 other popular tokens. It is often the first to offer buying opportunities for new tokens. This exchange currently accepts International & United States residents.
WazirX – This is the best exchange for residents of India.
Uphold Disclaimer: Assets available on Uphold are subject to region. All investments and trading are risky and may result in the loss of capital. Cryptoassets are largely unregulated and are therefore not subject to protection.
How to Store Compound (COMP)
If you seek to make a major investment in COMP or if you are planning on HODLing this crypto for long periods of time, a hardware wallet is the best option. Hardware wallets keep your crypto stored offline in “cold storage.” This strategy makes it impossible for online threats to access your holdings. The Ledger Nano S or the more advanced Ledger Nano X both support Compound (COMP).
Compound – A Pioneer in the Market
As the first platform to introduce Yield Farming into the market, Compound holds a valuable position as a pioneering force within the DeFi sector. DeFi appears to be just starting. Consequently, Compound continues to see new users joining daily. The combination of easy returns and the ability to earn without trading is part of the lure this platform possesses. Additionally, it’s one of the safest and most reputable options available to users today. Consequently, Compound is set to remain a premier platform for years to come.
David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com
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