Why leave your crypto assets idle in your wallet when you can literarily put them to work and grow your portfolio with Compound Finance. Find out how in this complete and unbiased review of the largest DeFi lending protocol.
What is Compound Finance?
Compound Finance is a non-custodial crypto lending protocol built on the Ethereum blockchain and allows you to lend your crypto assets and earn interest on them.
The platform supports the deposit and lending of popular cryptocurrencies such as Bitcoin (BTC), Ether (ETH), DAI, USDC, BAT, and USDT.
The Compound Finance business model is similar to what is called a Money Market in the traditional financial system.
In that, it provides a system for trading short-term loans designed especially for institutional cryptocurrency investors.
The company was founded in August of 2017 and is headquartered in San Francisco, California, United States.
And is backed by notable investors such as Bain Capital Ventures, Coinbase Ventures, Andreessen Horowitz, and Polychain Capital.
“We believe that Compound is building one of the core crypto-financial primitives for the financial system of Web3. This project fits well with our thesis that decentralized finance will be one of the first key use-cases of Web3 ~ Polychain CEO Olaf Carlson-Wee.”
So far, the company has successfully raised a total of $33.2 million in 2 rounds of private investments.
It first raised an $8.2 million seed funding round in May 2018 and a $25 million Series A round in November 2019.
The Compound Finance Team
The Compound Finance Team is 14-man strong and lead by the co-founders Robert Leshner (CEO) and Geoffrey Hayes (CTO).
Robert is described as a chartered financial analyst and former economist who has founded two different software startups.
Robert was formerly a Core Services leader at Postmates, Ethereum developer, and have two different technology startups in his portfolio.
Compound Finance Review: Pros and Cons
Pros:
- Open-source and non-custodial.
- Beginner-friendly user interface.
- No KYC required.
- You receive the COMP token in addition to your standard interest payments.
- Flexible lending and borrowing terms. Withdraw at any time.
- Globally accessible with zero restrictions.
Cons:
- Supports a limited amount of cryptocurrencies.
- Lower interest rates compared to competitors.
- Semi-centralized
Compound Finance Review: How Does it Work?
The Compound Finance business model is pretty straightforward with very practical applications.
- Compound pool funds from regular cryptocurrency investors like us and most especially institutional investors sitting on large piles of crypto holdings.
- These funds are made available as loans to borrowers on the platform.
- All investors who contributed to the pool of funds gets a share of the interests paid by borrowers in proportion to their investment.
That sounds really simple, right? Yes! it is.
And that’s basically how Compound Finance works.
Also worth noting is that:
- The interest rates for lending and borrowing are algorithmically determined by the Compound Finance smart contracts based on demand for each of the supported cryptocurrencies.
- And the prevailing interest rates are publicly made available on the Compound Finance website so that both the lenders and borrowers know exactly what the interest will be.
The interest rates are updated every time a block is mined on the Ethereum blockchain. That means the rates are adjusted every 10 to 20 minutes and interests are charged and paid accordingly.
To lend or borrow on Compound, all you have to do is head over to their web application portal and connect your wallet where you have your crypto assets.
After which you simply enable an asset in your wallet to start lending or borrowing.
Watch the video below for a visual overview of Compound Finance, how to connect your wallet, and how to borrow or lend your crypto assets on the platform.
Anyone with the supported cryptocurrencies can supply capital on Compound Finance.
However, according to the CEO, the majority of the platform users are institutional investors with large crypto holdings or who require mostly short-term high liquidity loans for different use cases.
What are the Use Cases of Compound Finance?
What do people do with the crypto they borrow on Compound Finance?
- To leverage a long position on supported cryptocurrencies.
- To short a particular supported cryptocurrency.
- To use supported cryptocurrencies for their real-life applications
For example:
In the first case, if you’re bullish on a particular cryptocurrency (e.g. BAT), you can borrow ETH to buy more of BAT to take advantage of the potential price appreciation.
And because the interest rate is very low, you will certainly pull a good profit if your prediction goes right.
Secondly, if you think a particular cryptocurrency will fall, you can borrow it and convert it to USDT or any other stablecoin or better still sell it for fiat and keep in your bank.
If your prediction is right, you buy more of that cryptocurrency back with the same dollar amount, repay your loan, and the small interest on it and keep what’s left as your profit.
A third use case will be to borrow a particular cryptocurrency, for example, BAT, and use them for their actual application.
For example, you borrow BAT on Compound Finance and use it to purchase ad space on the Brave Browser.
The benefit of this is that should the value of BAT fall, you can buy more of it with the same dollar value, repay your loan, and the small interest on it, and save on your advertising budget.
There’re many possible applications for the loans but these are just a few to spark your imagination.
Supported Cryptocurrencies
The following cryptocurrencies are currently supported for borrowing and lending on Compound Finance.
- Ether ($ETH)
- Wrapped Bitcoin ($WBTC),
- Dai ($DAI),
- USD Coin ($USDC),
- Augur Reputation ($REP),
- 0x Token ($ZRX),
- Tether ($USDT)
- Basic Attention Token ($BAT)
- Sai (SAI)
- Uniswap (UNI)
- Compound Governance Token (COMP)
And most likely, there would be support for more tokens in the future.
“We’re looking for well known, highly liquid, larger market cap tokens to be listed,” Leshner
The Compound Native Finance Tokens
There are two different tokens on the Compound Finance platform:
- cTokens: Capital balance tokens
- COMP token: The governance token
Let’s briefly explain what these tokens are and what they are used for on Compound Finance.
1. cTokens
cTokens are used to represent your balance on Compound Finance.
What that means is that your balance of each of the cryptocurrencies supported on Compound is represented by a cToken.
For example, ETH is represented by cETH, and USDT is represented by cUSDT, etc.
So that if you lockup any cryptocurrency on the platform, e.g. you lockup your BAT you will receive cBAT into your wallet which represents the same value as the BAT you locked up.
And this cBAT has the same value as and is redeemable for your locked up BAT and the accrued interests on it.
These tokens are of no use outside of the Compound Finance protocol and can’t be traded on exchanges.
2. COMP Token
COMP is the governance token of the Compound Finance platform.
Compound finance is a community-managed DeFi platform and the COMP tokens enable holders to submit and vote for proposals regarding protocol upgrades on the platform.
Usually, the COMP tokens are distributed to both lenders and borrowers on Compound Finance just for using the platform and to encourage them to stay as members.
About 2880 COMP tokens are distributed among all lenders and borrowers every day. Half of these tokens are distributed to the lenders and the other half is distributed among the borrowers.
To make a protocol upgrade proposal one must have at least 100,000 COMP tokens in their wallet.
And for a proposal to pass for implementation, it must get at least 400,000 votes and supported by a majority of the community.
Users can transfer or delegate their votes to another to support a proposal or vote on their behalf without having to transfer the COMP tokens.
Both cTokens and COMP Token are Ethereum-based ERC-20 tokens.
COMP Tokenomics
The COMP token was launched on June 16, 2018, with a total supply of 10 million.
- 2.4 million COMP tokens were allocated to shareholders of Compound Labs Inc. The Company that built the Compound Finance Protocol.
- 2.2 million COMP tokens were allocated to the Compound founders and team.
- 400,000 COMP tokens were allocated to future team members.
- 800,000 COMP tokens were allocated for community initiatives.
- 4.2 million COMP tokens will be distributed to users of the Compound Finance platform over a 4-year period, more or less depending on the Ethereum block production rate.
It’s interesting to note that the 2.2 million COMP tokens allocated to the founders and team mentioned above will be eventually returned to the community after a 4-year period.
Those tokens were issued to the founders and team to be able to guide the protocol development via voting.
And once the full transition to community governance is achieved, they will no longer require those tokens.
Compound Finance Review: How Does the Team Make Money?
According to the CEO, the company makes money by taking a cut from all interests generated on the platform.
“We keep a small residual of all interest that moves through the system,” … “The more assets inside the system the more we earn.”
Compound Finance Review: Is it Secure?
The risk of losing your capital on Compound Finance due to borrowers defaulting on their loan repayment is non-existent.
This is because all loans on Compound are collateralized.
However, there still exists the risk of a possible smart contract hack that could open doors for scammers to steal funds locked up in the protocol.
But you can feel safer to know that the Compound Finance code is open-source.
So that anybody interested can independently audit the smart contract’s code and report any vulnerability.
Open-source codes are considered more reliable as everyone can verify their safety and report if anything looks abnormal.
More so, there’s a running bug bounty to reward anyone who’s above to identify and report a problem in the code.
Furthermore, the Compound Finance smart contracts code has been audited by reputable audit firms such as Open Zeppelin and Trail of Bits, and their results are publicly available.
And so far, since the platform was launched in 2017, there’s never been any record of security breaches.
In fact, Compound is so reliable and trusted that platforms such as Nexus Mutual and Opyn allow users to take out insurance covers on Compound smart contracts.
That is how much confidence these DeFi platforms have in the security of the Compound Finance smart contracts.
As such Compound can be considered a very reliable and secure crypto lending and borrowing platform.
But that is not a green light for you to go all-in and invest all your funds on the platform. Invest only as much as you can survive without should the unexpected happen.
Remember you’re a responsible investor, right? yeah! good.
Summary of Compound Finance Review
Compound Finance is the first DeFi lending platform.
And even though the platform is mostly regarded as a decentralized crypto lending and borrowing platform, it is not all that decentralized.
It is best described as a non-custodial crypto lending platform because your crypto assets never leave your wallet —NOT decentralized.
This is because the Compound Finance team have centralized control of the protocol.
This allows them to regulate the algorithm that determines interest rates for each of the supported cryptocurrencies.
However, the team has plans to transition into a full community-controlled protocol through its governance system.
Such that the community members and other stakeholders determine the future direction and destiny of the protocol.
It will be interesting to see how this transition plays out in reality.
More so, their interest rates are not that enticing when compared to similar services like Aave and dYdX.
But considering you’re getting some free COMP tokens in addition to the interest payments, one can easily understand why so many people are heavily attracted to Compound Finance.
Finally, the fact remains that Compound is one of the first, longest-standing, and most promising DeFi platforms that are shaping the future of finance by leveraging blockchain technology.
What do you think about Compound Finance? What’s been your experience with lending or borrowing on the platform? Share with us in the comments section below.