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Compound Finance in DeFi Explained
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Compound Finance can be described as a savings account where you can earn interest without trusting a third party with your funds. It allows lenders to provide loans to borrowers against their crypto assets locked in the Compound protocol.
This article covers what Compound Finance is, how it works, and everything else you need to know about this promising technology.
What is Compound Finance?
Like most DeFi protocols, Compound is based on the Ethereum blockchain. Lenders can provide loans to borrowers by locking their crypto assets in the DeFi protocol. Compound Finance also enables you to transfer, trade, and use the money in other DeFi applications. The native token of the Compound network is called COMP.
How it works
Positions (supplied assets) in Compound are tracked in tokens called cTokens, Compound's native tokens. cTokens are ERC-20 tokens that represent claims to a portion of an asset pool in Compound. By locking up ERC20 assets in the Compound protocol, depositors receive an equivalent amount of respective cTokens as collateral.
Remember that your collateral has to stay above a minimum amount when borrowing crypto from Compound, or else it will liquidate your collateral to repay the loan. Once repayment is made, you can withdraw your crypto assets locked in the Compound protocol.
Interest rates are calculated by the supply and demand of each crypto asset. In addition to earning interest on your crypto assets, Compound allows you to borrow additional crypto assets through cTokens generated each time a user deposits their crypto assets into Compound protocol. These ERC20 token tokens can be traded or used in other decentralized applications (DApps).
You can mint or generate cTokens using an Ethereum wallet. Compound users can borrow or lend BAT, DAI, ETH, REP, USDC, WBTC, and ZRX. Whenever you deposit your crypto assets into the Compound protocol, new cTokens are generated. If you want to borrow crypto using ETH as collateral, you will receive cETH equivalent of your deposited ETH.
Compound Finance is one of the most popular lending and borrowing solutions in the Decentralized Finance ecosystem.
The goal of Compound Finance is to be fully decentralized over time and transfer authority of the underlying protocol to the Decentralized Autonomous Organization (DAO) governed by the Compound community.
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