Hey guys :) I’m back with another comprehensive Q&A piece, this time for the popular DeFi lending project – Compound Finance (COMP).
Compound Finance is a decentralized money market lending protocol on Ethereum that lets users earn interest or borrow assets against collateral. As of July 2020, Compound Finance is the number 1 ranked DeFi project with nearly $650 million in locked USD value.
Hope you enjoy!
The list of Q&A is kind of long so first comes the list of questions that I have prepared the answers to:
- What is Compound Finance?
- Who and When Created Compound Finance?
- What is $COMP Token used For?
- Who Backs Compound Finance?
- How Does Compound Finance Make Money?
- What are cTokens?
- What Assets can You Lend on Compound Finance?
- Where to Store $COMP Tokens?
- Where to Buy & Sell $COMP Tokens?
1. What is Compound Finance?
Compound Finance app interface
Compound Finance is an algorithmic, autonomous money market protocol on the Ethereum blockchain that lets users earn interest on or borrow assets against collateral.
In other words, Compound Finance is a decentralized lending platform that enables anyone to start earning interest on their idle crypto assets by providing liquidity to the Compound protocol.
The rate in which interest is paid to liquidity providers is automatically adjusted based on supply and demand, and different assets hold different rates. Compound Finance currently supports 9 markets including ETH, DAI, SAI, USDC, USDT, ZRX, REP, BAT, and WBTC.
Both individuals and institutions are able to earn interest on their assets when supplying liquidity to the protocol. On the other end, borrowers of digital assets can do so directly from the Compound protocol itself, without negotiating with the digital asset counterparty or peer.
By facilitating the decentralized lending and borrowing of digital assets and paying out interest to liquidity providers, Compound Finance is innovating upon existing financial money markets.
Compound Finance provides digital asset holders with a way to earn passive income on their idle crypto assets by lending them out to earn interest. In other words, it turns non-yielding digital assets into yielding digital assets that benefit from compound interest.
2. Who and When Created Compound Finance?
Compound Finance creator, Robert Leshner 3rd
The Compound Finance protocol and platform launched in August 2017 and was created by Robert Leshner who now serves as CEO.
Leshner describes himself as a well-rounded entrepreneur, product geek, and investor who also happens to be a Chartered Financial Analyst, former economist, and founder of two software startups.
Prior to founding Compound, Leshner was the Product Lead at Postmates, the popular delivery app; he served as Co-Chair for the San Francisco Revenue Bond Oversight Committee; he founded Safe Shepherd, a personal-information opt-out service for consumers, and worked in various investment management roles at different companies.
All in all, Robert Leshner is a brilliant mind and exceptional CEO of Compound Finance.
Moreover, in addition to Leshner, Compound Finance is made up of a team of 14 highly experienced and talented individuals. Out of all the Ethereum DeFi projects out there, Compound Finance is often touted as having the best team of people behind it.
3. What is $COMP Token used For?
Compound (COMP) token logo
Compound’s COMP token is an ERC-20 digital asset used for community governance of the Compound protocol. COMP was introduced on June 15, 2020, where it began getting distributed to users who provide liquidity to the Compound protocol.
COMP Token Use Cases:
- Vote on proposals or delegate voting rights
- Make new proposals
- Track historical voting weight
Vote on Proposals or Delegate Voting Rights
As a COMP token holder, you can participate in the governance of the Compound protocol by influencing changes to the protocol by voting on proposals or delegating your votes.
COMP token holders can choose to vote on their own behalf or delegate their voting rights to someone or some entity who knows what they are doing. You can go to the Governance Leaderboard to see the top delegates and who they are.
Make New Proposals
Any COMP token holder with 1% of COMP delegated to their address can submit a governance proposal; which can be a simple or complex change, feature, or upgrade to the protocol.
Track historical voting weight
The historical voting weight use case for COMP will be useful for future improvements but is not being used significantly at launch.
By tracking the historical voting weight you could build things like "weight vesting". For example; “must have held a voting weight for 30 days" or any complex pattern you can think of.
COMP Token Launch and Distribution
The COMP token launched on June 15, 2020, where it began getting distributed to users who borrow assets via Compound or to users contributing liquidity to the Compound protocol. That said, Compound did not launch the COMP token via an initial coin offering (ICO), like many other cryptocurrencies.
So, how does the distribution work?
Each day, approximately 2,880 COMP tokens are distributed to users of the protocol; 50% to suppliers and 50% to borrowers. Moreover, the 2,880 daily COMP tokens are allocated to each of the 9 markets (ie. ETH, DAI, USDC, etc.) where they are distributed to users.
The total supply of Compound is 10,000,000 COMP and there are currently 2,561,279 COMP tokens in circulation.
4. Who Backs Compound Finance?
Compound Finance Investors
Compound Finance is backed by some very prominent investors including a16z, BainCapital Ventures, Coinbase, Paradigm, Polychain Capital,and Dragonfly Capital.
To provide some context on just how big these investors are:
Polychain Capital is one of the biggest crypto investment funds; Bain Capital is the investment arm of Bain & Company, one of the “Big Three” management consulting firms; and Coinbase is one of the largest and most trusted cryptocurrency exchanges on the market.
That said, the backers of Compound are world-class investors who see the potential of its innovative DeFi protocol and platform.
Audited and Verified
In addition to Compound Finance’s financial backing, the protocol is also backed by Security Audits by Open Zeppelin and Trail of Bits, Formal Verification by Certora, a Market Risk Assessment by Gauntlet, and a $150,000 Bug Bounty program.
With these measures, Compound Finance is one of the most secure DeFi platforms.
5. How Does Compound Finance Make Money?
Compound Finance makes money by accruing a portion of the interest made on cTokens in the Compound protocol. The Compound protocol sets aside 10% of interest paid as reserves and the rest (90%) goes to the suppliers (liquidity providers).
Additionally, Compound Finance has raised money on two separate occasions. The first was in May 2018 when the company raised $8.2M in a seed funding round and the second was in November 2019 where the company raised $25M in a Series A round.
Another way Compound Finance makes money is by supplying the protocol with its own digital assets and accruing interest just like any other Compound Finance user.
6. What are cTokens?
cTokens are the primary means of interacting with the Compound protocol as supplied asset balances to the protocol are represented by cTokens.
When a user contributes liquidity to Compound by supplying the protocol with digital assets, an equivalent number of cTokens representing the underlying asset are minted.
These cTokens have three properties; they represent a user’s balance in the protocol; they earn interest through the cToken’s exchange rate; and they serve as collateral, allowing the user to borrow from the Compound protocol.
There are currently two types of cTokens: cERC-20 and cEther. Both of these types of cTokens are EIP-20 compliant representations of the underlying assets they represent.
As a market earns interest (ie. cDAI, cETH, cUSDC, etc.), the cTokens become convertible into an increasing quantity of the underlying asset. Also, each market has its own Supply interest rate (APR), making some markets more lucrative than others.
7. What Assets can You Lend on Compound Finance?
Top 3 Compound Finance markets (source)
Compound Finance currently offers 9 different markets in which users can lend or borrow assets:
- Ether (ETH)
- Dai (DAI)
- USD Coin (USDC)
- Tether (USDT)
- 0x (ZRX)
- Auger (REP)
- Basic Attention Token (BAT)
- Wrapped BTC (WBTC)
- Sai (SAI)
As of July 7, 2020, the top 3 markets on Compound Finance for lending and borrowing are DAI, USDC, and ETH.
More markets will likely be added in the future and the ones to be added will be decided via Compound’s community governance model using the COMP token and voting on proposals.
8. Where to Store $COMP Tokens?
Compound (COMP) is a relatively new ERC-20 token residing on top of the public Ethereum blockchain. That said, you can store COMP in any ERC-20 token supported wallet.
Most Popular Compound (COMP) Wallets:
- MyEtherWallet (MEW) (web)
- Ledger Nano S (hardware)
- Coinbase Wallet (web, mobile)
- Trust Wallet (mobile)
- Exodus Wallet (desktop, mobile)
In addition to the above-listed wallets, Compound (COMP) can be stored on a wide variety of other reputable wallets supporting ERC-20 tokens. However, before you choose a wallet to store COMP, be mindful of the following features:
- In-Wallet token swaps - exchange COMP for other cryptos without leaving you wallet
- User control of private keys - not your keys, not your coins
- Active developer community - up-to-date maintenance
- Back up & security features - pin codes, seed phrase
- Good reviews - highly recommended
9. Where to Buy & Sell $COMP Tokens?
Compound (COMP) can be bought and sold on a peer-to-peer (P2P) basis but the most popular way to buy, sell, or trade Compound is through cryptocurrency exchanges.
You can buy COMP with cryptocurrency or fiat at the following top exchanges. In most cases, you will have to fund your account with fiat, buy Bitcoin or Ethereum, and then use BTC or ETH to buy Compound (symbol COMP).
- Binance - BTC, BNB, USDT
- Coinbase Pro - BTC, USD
- OKEx - BTC, USDT
- KuCoin- USDT
In addition to the exchanges listed above, Compound (COMP) is also traded on a wide array of other exchanges and platforms that enable people to buy, sell, or trade cryptocurrencies.
Hope you enjoyed that read :) Let me know if I have missed something in the comments.