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Compound COMP: One of the First DeFi Lending Protocols on Ethereum

By 2sats | 2sats | 5 Jun 2022

*obligatory not financial advice*


What is Compound?

Compound is a lending protocol that is native to the Ethereum blockchain and the distribution of its governance token was one of the main catalysts for the massive DeFi boom in 2020.

Compound allows its users to lend or borrow cryptocurrencies in a decentralized way. People can supply their coins and tokens to earn an APY or to use them as collateral to borrow different digital assets. Borrowers can only borrow funds that have less value than their collateral and they can only get their collateral back by paying their loan back with its interest. Borrowers don't need any KYC and don't need to get approved because their loan is always ensured by the collateral and should the value of the collateral fall to a certain point, then it will be automatically sold to repay the loan.

Borrowing crypto when you already own crypto with more value sounds useless at first, but it enables people to get much needed money without needing to sell an cryptocurrency that they are bullish on, and it makes leverage trading possible by letting people use their crypto to get more money and buy even more crypto, and it can be used to short the borrowed token.

People can also supply funds without borrowing anything themselves to earn a share of the interest, which is automatically compounding. The APY for both lending and borrowing depends on how much is supplied and how much is being borrowed. If more people borrow ETH, then the APY for borrowing and lending ETH will increase. If more people supply ETH, then the APY for borrowing and lending ETH will decrease.

Compound is competing with Aave, which is also a lending protocol that works in the same way and holds more liquidity. However, Compound has been around for longer and is one of the main causes of the DeFi summer in 2020. That it because it was the first DeFi application that started to distribute its own token to its users. Both lenders and borrowers were receiving COMP tokens as additional rewards. This type of distribution has since been adopted by most other DeFi applications, which created liquidity mining and yield farming. Compound has also created a governance model that has been reused by other dApps like Yearn.Finance.



The COMP Token

COMP is the governance token of the Compound protocol. The holders of the token are able to propose and vote on changes like which assets should be supported and changes on various parameters.

There is a total supply of 10 million COMP tokens. About 4.2 million tokens are being distributed to the borrowers and lenders. 2.4 million are going to Compound labs and its shareholders and another 2.2 million tokens are distributed to the founders with a 4 year vesting schedule. 775,000 COMP tokens are used for governance rewards and 332,000 tokens were set aside for future development team members. Less than half of all tokens are going to the users, which is relatively low. About 7 million tokens are currently in circulation.

The value of the token depends on how much liquidity is held in the Compound smart contracts. There are currently more than 5,000,000,000 dollars’ worth of cryptocurrencies held in the Compound pools, so it’s by no means a small DeFi application. Right now the crypto market is very bearish and there will not be a lot of demand for using coins or token as collateral, which means that less people will take loans on Compound and the APY won’t be very high. But once the market recovers many more people will move their funds to platforms like Compound again. That the founders control this much of the supply can be a risk and Aave is the more popular lending protocol but Compound is well established too.




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