Digital Asset Review: Compound
Compound = The Internet's Credit Card.
Compound = The Internet's Credit Card
Here's how you can learn more about it.
Compound was founded in 2017. Its founders built the application before DeFi had matured into its current state. These founders saw early on that smart contracts could create an autonomous market for lending and borrowing. This was one of the first attempts to solve this problem and created a playbook for other DeFi platforms to follow.
Recently, FirstWatch Crypto attended a webinar that included a Q&A with Compound founder Rob Leshner, Co-Founder of Compound. Here are some things we learned.
Compound is a Defi platform built to bring decentralized lending and borrowing to the masses. It has raised over $30 million because investors are betting on it being a more efficient way (faster, cheaper, more open) to provide financial services to the masses. You can think of it as an anonymous, web-based credit card. Someone on the web is lending you the money, and the money you are borrowing is a digital currency.
What can I do with Compound then?
Borrow Money for Your Wedding with Compound
Currently, there are $20 billion worth of assets deposited into the Compound smart contract and earning interest. Similar to borrowing against your ownership in your house, you are borrowing against using crypto as collateral.
To use Compound, one would need to want to borrow cryptocurrencies or lend them to make some extra money. Compound has a series of markets for each currency available to lend and borrow. Each market has an interest rate to borrow as an asset. In the current market, the assets with the highest borrowing demand are stablecoins and Ethereum.
Compound allows you to borrow any asset. Interests rates are set programmatically by supply and demand, not by any centralized party, a result of the DAO structure.
Borrowing is based on the collateral you provide. Collateral factors for each token limit the amount users can borrow. The protocol does not assess creditworthiness or use screening practices that a traditional bank would. This is a pure collateralized peer-to-peer lending platform, accessible to anyone.
The steps you would need to take to lend or borrow on Compound are:
Get a cryptocurrency wallet
Fund it with cryptocurrencies
Go to compound.finance
Review the interest rates and collateral factor for your cryptocurrency
Click lend/borrow and the Compound contract will interact with the crypto in your wallet
So theoretically, to fund your wedding, you could deposit ETH onto Compound and receive stablecoins in return. In the future when you have the money to pay your loan back, convert it to ETH, and pay back the remainder of what you owe on Compound.
What happens if you don’t pay back your loan? Compound has ratios built into its protocol and requires users to over-collateralize their loans at demand-based rates to make sure the protocol and lenders don’t lose money when loans aren’t paid back.
More Details on the $COMP Token...
No one person owns compound or controls it. It's classified as a DAO (a decentralized autonomous organization). It's controlled by owners of the native token, COMP, who vote on the future of the protocol. COMP is a governance token, which offers the opportunity for the community to have sway in how the protocol develops.
Compound is classified as a DAO, a decentralized autonomous organization, in which the community controls how the token is run.
For protocols like Compound with no centralized authority, there needs to be a system in place for the leaderless protocol to be modified and upgraded to add security features. Examples of potential changes include changing interest rates, adding assets, or modifying the Compound protocol for the future. The structure gives users a voice in the direction of the platform.
Compound differs from bitcoin and Ethereum. Bitcoin is a store of value and can be used as a currency. Ether is the digital oil for smart contracts. Compound is a third style of cryptocurrency that includes ownership and modification rights, which mirrors corporate governance structure.
What's Next For Compound?
DeFi apps like Compound have huge potential. Any code developer can potentially add a lending feature to their website or app.
The biggest thing to look forward to is that Compound will be more integrated with a larger and broader financial ecosystem. Think clicking a button to loan someone money or buying things on credit on your favorite internet marketplace like Amazon. :) There are tons of guides and documentation available for developers on how to interact or plug into the Compound ecosystem and open-source technologies historically grow faster than closed-source ones.
Right now, Compound is native to the Ethereum blockchain but has the capability to launch on other blockchains as well. There are current development efforts ongoing to bridge external blockchains to Ethereum to access interest rate markets across all blockchain assets.
Most of Compound's use will come from exchanges, custodians, and banks integrating into the platform. Banks are looking to educate themselves on what's possible and how DeFi changes things for them. There's a lot of curiosity out there.
Over time, you may even be using technology like Compound without even knowing you are.
Some key stats:
$18B in assets being lent and borrowed on Compound.
Top holders of COMP token are Andreeson Horowitz, Polychain Capital, and Bain Digital Ventures
Grayscale has Compound in their Grayscale DeFi Fund.
There are currently $85B in outstanding loans in DeFi.
Resources:
Youtube Tutorial: How to use Compound
Compound market analysis: compound.finance/markets
History of every change that's ever been made to the protocol: compound.finance/governance
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG)and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.