A lot has been said / written about Compound in the past week and that you can get Compound on Coinbase for free. But what is more important to me is exactly what Compound is and how Compound works. I want to explain this to you in an easy and quick way, so that you are immediately familiar with the basics of what Compound is exactly. I am not going to tell a difficult technical story or a story about calculations. So let's see what's behind Compound's hype.
A stopover and we look at what exactly is the problem that Compound wants to solve. Normally you earn money from the money that you make available to the bank by putting it in your savings account. You earn a certain annual interest on this. Now it is the case in the Netherlands that you no longer receive any interest on the money you have in your savings account. Fortunately, there are other ways that you can receive interest on earned money.
But once your money is in the bank you can no longer spend it on something else logical right? But just imagine that you could still spend your money and keep saving at the same time.
This is to solve Compound and other decentralized financing
What is compound?
The website of Compound stated:
Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications.
Compound is a DeFi protocol, works through smart contracts and is built on Ethereum. Compound ensures that borrowers can borrow money and that people who want to invest their money make their money available for this by locking their crypto at an interest rate per year.
Now you may be wondering how the interest you earn works? Well, here's how it works: The interest that the borrowers pay and the interest that the borrowers receive for making their crypto available is determined by how much supply and demand there is for a particular coin or token.
When a block is mined, interest rates are created. It is also important to know that you can pick up your loaned crypto at any time. Compound's token is now called cToken and is how Compound protocol users can generate interest on their borrowed money. I will explain more about this later.
Where does compound make the difference?
Now do you think what is so special about Compound? What you see in this is the tokenization of the money locked in their system using cTokens.
These so-called cTokens are compound tokens that simply fall under the ERC20 tokens. These ERC20 tokens now represented the money that the borrower and lender have borrowed and financed. For example, if you add Ethereum or another type of ERC20 to the protocol, you will get the same amount back in cTokens. If you use Ethereum for this you will receive cETH tokens for this or if you use BAT for this you will receive cBAT tokens.
Another interesting difference is if you have turned the cryptocurrenys into a cToken. Then you can freely trade, move or use this cToken in other dApps.
Has there been criticism of Compound?
Like always, there has also been criticism of Compound. The Compound protocol would not be completely decentralized. This would leave vulnerabilities in the system for attacking and manipulating the protocol.
You can read the criticism here:
Because of this, Compound promised that this would be resolved as soon as possible. This was taken up by the team behind Compound and you can read it here:
How and when are these cTokens made?
The cToken is created when a user of the Compound protocol deposits a cryptocurrency into the protocol. In other words, if you deposit Ethereum, for example, you will receive cETH in return. You can also make cTokens yourself by doing this in a wallet in which this is possible, such as MetaMask.
Risks for lending money from the Compound Protocol
What happens to my crypto that has been deposited as collateral if this crypto falls in price too much? This is a good question that many should ask before borrowing money from Compound. If the value of your collateral falls too much, this collateral will be sold to repay the loan that you have taken out. This is very important to know because cryptocurrency tends to fall 50% or more in a short period of time.
To avoid this, users of the Compound protocol can use a stable coin to lend to users. Because these coins will never suddenly drop 50% or more in price.
What about the native token of Compound?
COMP tokens are available and used in various ways. First, for example, you can buy COMP tokens on Coinbase for real money and you can swap it against several other coins and tokens. You can also earn the COMP token by borrowing and lending money.
What exactly is the usability of the COMP token? The users of the Comp token and the delagates can debate, make proposals and vote for changes within the Compound protocol. So Compound can ensure that the protocol remains Decentralized.
The token ticker: COMP
What is the token type: ERC20
The ICO Price was: 1 COMP = 90.00 USD
The supply of tokens: 10,000,000
Token role: Utility
So now you know a little what the Compound protocol does and what you can do with the COMP token. It is also easier to judge for yourself whether you think the hype behind Compound protocol is right or not.
I find the DeFi market very interesting to follow but I keep my hands off it because I think there is still too much uncertain about the risks and disadvantages of Compound protocol.
But the project is certainly an interesting option to consider using as it is based on a decentralized system. And this is a very important requirement in the crypto world. There is certainly potential for the project to grow.
And what do you think about Compound and the DeFi space at the moment?
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