Compound Finance Review

Compound Finance is an Ethereum-based lending protocol enabling users to lend and borrow popular cryptocurrencies like Ether in exchange for interest or debt.

Compound leverages audited smart contracts responsible for the storage, management and facilitation of all pooled. Users do not have a login, but rather connect through web3 wallets like MetaMask.

History

Compound Finance is a San Francisco based company which raised an $8.2M seed round in May of 2018 and a $25M Series A round in November of 2019. Financing rounds were lead by industry giants including but not limited to Andressen Horowitz, Polychain Capital, Coinbase Ventures and Bain Capital Ventures, 

Compound’s team is highlighted by CEO Robert Leshner’s previous financial experience as a co-chair for San Francisco’s Revenue Bond Oversight Committee. Resher has previous experience working on successful companies with CTO Geoffrey Hayes from their time building Postmates and Safe Shepard.

Compound Finance Lending Rates

Current lending and borrowing rates are displayed below for your convenience. Please note that rates change frequently and that as of right now, supported assets are currently limited to Ethereum-based tokens.

BAT
BAT
0.32%0.3%
DAI
DAI
6.07%5.12%
ETH
ETH
0.02%0.02%
REP
REP
0.01%0.01%
SAI
SAI
3.54%3.06%
USDC
USDC
3.43%4.09%
WBTC
WBTC
0.68%0.78%
ZRX
ZRX
0.22%0.19%

The Compound Protocol

While DeFi and blockchain technology may seem overwhelming complex to the average individual, Compound prides itself on building a product that is digestible for users of all ages and backgrounds. More specifically:

“Compound is a protocol on the Ethereum blockchain that establishes money markets, which are pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset. Suppliers (and borrowers) of an asset interact directly with the protocol, earning (and paying) a floating interest rate, without having to negotiate terms such as maturity, interest rate, or collateral with a peer or counterparty.”

How Does Compound.Finance Work?

Compound leverages web 3.0 wallets such as Metamask, Brave Browser or Coinbase Wallet for access into their ecosystem. Once connected, users are brought to the Account Overview section. From here, users can select any asset(s) and unlock the market they wish to interact with. After an asset has been enabled, users are then able to supply or borrow said asset, but never both.

The process for lending assets is pretty straightforward. Simply enable a supported asset and sign a transaction approving the amount of capital you wish to supply capital to Compound. Assets are instantly added to the global supply pool with interest being tracked in real-time.

Every asset has a unique Supply and Borrow APR, both of which change frequently relative to supply and demand at any given time. When supplying assets to the protocol, users receive cTokens – Compound’s native tokens – which represent claims to a portion of any given asset pool. cTokens gradually accrue interest over the life of a loan as follows: 

If a user supplies 1,000 DAI to the Compound protocol, and the exchange rate is 0.020070 DAI per cDAI, they would receive 49,825.61 cDAI (1,000/0.020070).

A few months later, the user decides it’s time to withdraw DAI from the protocol, during which the exchange rate has increased to 0.021591 DAI per cDAI. This means:

  • The 49,825.61 cDAI is now equal to 1,075.78 DAI (49,825.61 * 0.021591)
  • 1,075.78 DAI can be redeemed for 49,825.61 cDAI
  • The user could withdraw the amount of cDAI now equivalent to the 1,000 DAI (or 46,315.59 cDAI), and keeping the remaining 3,510.01 cDAI in their wallet to continue collecting interest.

cTokens are transferable, however once they are removed from a wallet, that users Compound supply (and their subsequent borrowing power) are adjusted as well.

cTokens can be redeemed at any time, with borrowed funds instantly becoming available in the connected wallet to be freely sent to wherever the user chooses. In order to borrow assets, users must first supply collateral to earn “Borrowing Power”. Every asset has a unique Collateral Factor, meaning some assets may enable more Borrowing Power than others.

To start borrowing with Compound, head over to the borrowing dashboard.

Supported Assets on Compound Finance

With Compound v2, supported assets include Ether ($ETH), Wrapped Bitcoin ($WBTC), Dai ($DAI), Coinbase’s US Dollar Coin ($USDC), Augur ($REP), 0x Token ($ZRX) and Basic Attention Token ($BAT).

Understanding cTokens

Assets supplied to a market are represented by an ERC-20 token balance (“cToken”), which entitles the owner to an increasing quantity of the underlying asset. As the money market accrues interest, which is a function of borrowing demand, cTokens become convertible into an increasing amount of the underlying asset. In this way, earning interest is as simple as holding a ERC20 cToken.

cTokens represent your balance in a specific Compound market. Each market has its own cToken (cETH, cUSDC…), which you’ll receive when you supply that asset to the protocol. As such, you’ll earn interest on all cTokens held in your wallet based on the respective lending rate.

Governance

Compound governance is currently centralized with hopes to transition to a community and stakeholder controlled protocol in the future. Current governance cases include:

  • Listing new cToken markets
  • Updating market interest rates
  • Updating oracle addresses
  • Withdrawing cToken reserves
  • Choosing new admins

According to HackerNoon, Compound currently falls in the middle of the centralized/decentralized spectrum thanks in large part to it’s open sourced smart contracts and permissionless magrin monitoring.

As mentioned above, the future implementation of a DAO should allow for markets and interest rates to be governed by community members rather than the current structure where all proposals are made by Compound who then seeks community approval via public forums.

Use-Cases

As we’ve seen with the creation of Vaults in the MakerDAO system, most users are utilizing Compound to gain leverage. Whether this be in the form of accruing interesting by lending or by increasing exposure through a borrow position, experienced traders can leverage traders to gain additional exposure to favorable assets.

cTokens are also being integrated into a variety of popular DeFi products such as Set Protocol, Dharma and DeFi Zap. In essence, other projects incorporate cTokens to allow for passive income to be earned on trades that require settlement into a stable assets like Dai or USDC. By using cDai or cUSD instead, financial products can earn additional income without the user having to worry about the opportunity cost of having missed out on the savings that could have been earned from lending via Compound.

Other use-cases such as shorting are listed in the official whitepaper while a full list of projects integrating Compound or cTokens in some capacity can be found here

Competitors – Is Compound Finance Safe?

Compound has undergone a number of security audits by reputable agencies like Open Zeppelin and Trail of Bits, all of which have been publicly disclosed.

There has yet to be any security breaches of Compound smart contracts to date, with products like Nexus Mutual allowing users to take out insurance covers on Compound smart contracts. 

Seeing as many products are relying on Compound’s smart contracts as an integral piece of their product, we find Compound Finance to be a reliable, trusted lending and borrowing solution.