Best DApp - Compound Has Captivated The Crypto DeFi Economy

By JLettermanMB | Crypto Cranny | 2 Dec 2019


Opportunities abound within the world of crypto going into 2020, and DApps lead the way. Decentralized applications are being developed at nearly the same rate ERC20 tokens were being released a year ago. DApps built on the Ethereum blockchain are some of the most widely used. The popularity of DeFi is no secret as the crypto economy matures, and when it comes to DApps in this niche, Compound leads the way. 



Compound holds true to its mission when it comes to leaving out the counterparty. Both lending and borrowing crypto are key essential components of the blockchain ecosystem in order for it to thrive. People seeking to earn interest on their coins can do so using this transparent DApp, and HODL investors also have the opportunity to borrow against their assets. Interest rates are tied to supply and demand, are subject to liquidity and are also variable. 

Compound is an open-source, autonomous protocol built for developers, to unlock a universe of new financial applications. Interest and borrowing, for the open financial system. - Compound Labs

How Does It Work? 

Since Compound is on the Ethereum blockchain, let’s keep things simple and first look at how you would stake ETH in order to earn interest. You have to enable ETH and any other asset you wish to supply or borrow. To enable assets on Compound, you pay a small ETH gas network fee. Once you have enabled an asset, you would then choose whether you want to be a supplier or a borrower. 

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Currently, ETH earns you a meager 0.02% interest rate. No doubt, you’re not looking to earn at a rate a brick and mortar bank would pay you for cash deposits. But this is just one example, and the rates are always subject to change based on what’s going on in the world of crypto. 

The current rate for Legacy DAI or SAI is 4.84 percent. The rate for multi-collateral DAI currently sits at 1.45 percent. These are better interest rates, as is the 3.99 percent you can currently earn for staking USD coin. 

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Furthermore, at this point in time, there are more investors opting to supply many crypto assets than there are consumers looking to borrow against their assets. This has everything to do with the DeFi market being fairly new. As the number of borrowers grows, liquidity effect then switches gears, enabling higher interest rates for suppliers.

When supplying ETH, it must be converted to wrapped Ether. If you aren’t familiar with WETH, you can easily convert wrapped Ether back to ETH. The same goes for wrapped BTC. 

How is interest accrued? Understand that supplying crypto to the Compound DApp provides you with freedom and flexibility. You can withdraw your crypto at any time, as you aren’t subject to a fixed term. Interest is accrued each ETH block, which means you compound every 15 seconds. 

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The fact that this DApp helps you compound your crypto every 15 seconds is one of the main reasons why it is the industry leader. But how does Compound stack up for borrowers?

Borrowing With Compound

The Compound Protocol sets interest rates algorithmically, and the rates are quite competitive. Granted, the rate for borrowing crypto is always going to be higher than the rate you earn as a supplier. And you can’t supply and borrow a single asset at the same time. You either stake the asset to earn interest, or you deposit and borrow against the asset. 

You can enable as many assets as you would like, making deposits and increasing your borrowing power. You choose which asset you want to receive when borrowing with Compound. Collateral factors for assets vary and have everything to do with volume and liquidity. 

If you choose to deposit several assets with the Compound Protocol, then you can pick which ones you want to use as collateral, and which ones you might want to supply in order to earn interest. That would be the way you tick both boxes with this innovative app. 

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There is a small origination fee for borrowing with Compound. When borrowing while using crypto as collateral, you have to keep in mind that the value of your assets could decrease, pushing your outstanding balance above the value of your deposited collateral. 

If this happens, liquidation occurs. Compound offers other members the opportunity to take on half that burden, purchasing 50 percent of your collateral at a discount of 5%. To avoid liquidation, watch how much you borrow and monitor positions. You can always deposit more collateral. The crypto market can be volatile. At the same time, just because your assets decline doesn’t mean the outstanding balance is suddenly larger than the value of your collateral. 

Compound’s Connections

The investment Coinbase made in Compound is no secret. This business relationship certainly helped make the DApp the center of attention for investors looking to earn interest while they HODL. The Coinbase Wallet makes it easy to use the DApp, including the sending and receiving of cTokens. But there are other partnerships in place, too. 

WIth InstaDApp, Compound members can migrate MakerDAO CDPs. And DeFi Saver provides an interface that offers members support for their hardware. The list of Compound’s connections goes on and on and include Huobi Wallet, Multis, Pool Together and Lumina. In some ways, people say that Pool Together has gameified Compound, with its no loss lottery platform distributing interest earned through the DApp. 

The support Lumina provides for Compound members is very important. If you were to start staking sizable amounts of crypto to earn interest, you need your accounting and taxes to be on point. That is where Lumina, which offers institutional grade portfolio management, can help. The fact that Compound has built such a web of business relationships speaks volumes about the Dapp being an industry leader in DeFi. 

There are even rumors that Compound has future plans to tokenize fiat currencies and stocks. It would be quite interesting to see how that plays out. Not everyone would be a fan of such a move, mixing the decentralized world so heavily with the centralized economy. But then again, such an innovative compromise could be exactly what the crypto world needs moving forward. 

After all, Compound, while a decentralized application, acts in a centralized way by avoiding direct peer to peer lending. Compound Labs manages the assets on its protocol like a bank, governing if you will over the suppliers and borrowers. Yet this type of move works to the advantage of everyone, and Compound has future plans for the DApp to be fully decentralized.

Long & Short Positions

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Compound really gets interesting when you start looking at how you can take out long and short positions on crypto currency pairs. Let’s say you want to short a specific asset against one you wish to supply. Supply the crypto, and borrow the asset you wish to short. When you receive the crypto, send it to an exchange to turn it into the asset you originally supplied. You now have more of the crypto you supplied, and what you owe is an asset you believe will decline in value. 

You see, Compound isn’t just about supplying crypto to earn interest or borrowing against your assets. The company has fostered partnerships with and has gained support from many other entities. Its DeFi tentacles have quite the reach, providing investors with plenty of options when it comes to earning money with their crypto assets. 

With Compound, there is no order book to manage. This DApp makes DeFi simple enough for anyone to participate, even beginners, yet it offers advanced solutions as well for the most seasoned crypto investors. And Compound Labs places a high priority on security and transactions being publicly verifiable. The company is also working on a new price feed to enhance its DeFi capabilities. The project is called The Open Oracle System.

Are you a believer in autonomous finance that is open and transparent? What’s your involvement in the world of DeFi? Compound has played an enormous role in facilitating facets of the crypto market that are necessary in order for this decentralized economy to counter the centralized world. The protocol provides a good glimpse into how traditional banking and investing, on all levels, is progressively being turned on its head. 

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JLettermanMB
JLettermanMB

I am a ghostwriter, investor and foodie. I enjoy learning about the crypto world, and I am continuously seeking out new opportunities.


Crypto Cranny
Crypto Cranny

The purpose of Crypto Cranny is to provide consumers with valuable information about the market growth of digital currencies. Where will crypto be 5, 10, 20 years from now?

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