What is Compound Finance?
Compound (COMP) is a Defi protocol built on accessible smart contracts on the Ethereum blockchain. The protocol allows lenders to provide loans and borrowers to take them out by locking their respective cryptocurrencies within the protocol. The network's native token ($COMP) allows users to earn interest, transfer and trade money on the Compound platform. Deposited funds are added to liquidity pools which act as reserves for individuals looking to withdraw loans. Lenders earn interest for funding liquidity pools.
$COMP token is created each time a user deposits their crypto assets in Compound’s protocol. These users receive a $COMP equivalent of their deposited currencies as collateral when making a deposit. Anyone can create COMP using an Ethereum wallet (such as Metamask) and any of the digital assets that Compound accepts. These tokens automatically earn the user interest and can be redeemed for the corresponding cryptocurrency at any time. The interest rates are determined by supply and demand, changing with each block that gets mined.
Other than earning interest on your crypto assets, Compound allows you to borrow crypto. Your collateral needs to stay above a specified amount when borrowing these assets, alternatively Compound will liquidate your account to repay the loan. Once the loan is paid back in full, the locked assets can be accessed freely once more. We strongly advise conducting extensive research before using any crypto loan service and we do not recommend it for beginners.
When a user's crypto assets get converted into an ERC-20 form, they are freely tradable and moveable. They also become available for use in other dApps (decentralized applications). This allows for the combination of different protocols and building blocks opening up a broad range of potentialities for users. The most significant Defi protocol feature offered is the focus Compound puts on giving users more control and better access to their crypto assets while they earn and save. They aim to be completely decentralized over time and plan to transfer authority of the protocol to the decentralized autonomous organisation where it will be governed by the community.
Real World Example:
$COMP token allows users to earn interest, trade and send money on the Compound platform. It is also used as a governance token where holders can vote on changes being made to the protocol.
Compound is an open source protocol and encourages developers to integrate the Compound protocol into apps and services, with the intention of creating more versatile financial infrastructures for users around the world.
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