Compound Finance is quickly emerging as the industry standard for lending and borrowing digital assets. With over $80M worth of Total Locked Value (TVL) as of writing, this consumer-friendly platform has quickly ascended the ranks into second place on DeFi Pulse. By introducing a variety of new digital assets with an enhanced UI/UX via Compound V2, the platform’s TVL is up nearly 300% from last month.
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 follow the steps to send your assets to Compound and boom! You’re instantly added to the global supply pool and able to track accrued interest in real-time.
Assets can be withdrawn at any time through the click of a button! When borrowing assets from Compound, completed transactions are instantly sent to user’s Ethereum wallet where they are then free to send to wherever they’d like.
*It’s important to note that similar to the process on MakerDAO, borrowers are currently required to stake 150% worth of collateral in order to take out a loan. Additionally, Compound currently charges an origination fee of 0.025%, or 2.5 basis points, for opening a borrowing position to prevent spam on the protocol. In practice, a borrow request of 1 ETH will actually cost 1.00025 ETH.
Unlike traditional lending contracts, Compound pools all of the supplied assets under one roof, offering competitive borrow rates without having to rely on one obscure party to deliver the promised assets. Furthermore, all lending and borrowing positions can easily be tracked on the Account Overview section with new apps such as InstaDapp, Zerion and Coinbase Wallet integrating this feature directly into their interface.
Listed Assets on Compound Finance
Thanks to the recent release of Compound v2, there now 7 different markets listed on Compound. 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).
Current lending and borrowing rates are displayed below for your convenience. Please note that rates change on a daily basis and that as of right now, available assets are currently limited to Ethereum-based tokens.
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.
Simply put, 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.
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 a recent article from 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 cToken DAO should allow for markets and interest rates to be governed by community voting rather than the current structure where all rules are set by Compound themselves.
As we’ve seen with the creation of new CDPs in the MakerDAO system, most users are utilizing Compound to gain additional leverage to digital asset markets. Whether this be in the form of accruing interesting by lending or by increasing exposure through a borrow position, use-cases at this point in time and heavily focused on experienced traders well versed in the blockchain ecosystem at large.
While it could be argued that the first two use-cases in the whitepaper are rather obscure, the third example surrounding shorting is quite interesting to consider.
Traders looking to short a token can borrow it, send it to an exchange and sell the token, profiting from declines in overvalued tokens.
As it stands right now, there are few instruments available for retail users to short digital assets in small amounts. Seeing as trading platforms such as Bitmex require KYC along with user’s wallet(s) to remain above a certain threshold, it can be difficult for small traders to capture properly timed downswings. With Compound, this process becomes trustless for any of the digital assets currently listed on the platform.
For digital asset companies, Compound may provide a new form of fractional reserve banking within crypto markets. It’s been noted that companies such as Coinbase are considering ways to lend their collective asset pools for additional revenue. While the proposition of trusting one centralized entity is certainly frightening to most blockchain users, the company’s track record is unscathed to date.
Competitors – Is Compound Finance Safe?
While Compound is by no means the only lending platform available within the digital asset market, it’s quickly taken lead as the member-preferred platform when it comes to lending digital assets.
Thought experiment: You have extra USD in a savings account and want to earn a return on your money, which service would you feel most comfortable lending out your stable coins (DAI, USDC, etc) on? 🤑
— Blake Henderson (@HendoVentures) July 23, 2019
Other lending protocols include MakerDAO, Nuo Network and Dharma, each with their own respective systems and unique interest rates. With this in mind, it’s important to note that outside of MakerDAO, Compound current contains the largest pool of digital assets for lending.
Furthermore, it’s somewhat interesting that despite being the second largest DeFi lending platform, Compound actually offers lower average APR than the competitors listed above. As such, it’s safe to assume that the Compound brand and supported assets have established a sentiment of trust going so far that users would actually prefer to earn LESS interest simply to lend via Compound rather than Nuo Network or Dharma.
Compound Labs is a San Francisco based company which raised an $8.2M seed round in May of 2018. Lead by industry giants including but not limited to Andressen Horowitz, Polychain Capital, Coinbase Ventures and Bain Capital Ventures, Compound has quickly delivered on their promises by rolling out a product with over $120M of lending supply and over $30M of asset demand.
Compound’s team currently consists of 12 members, highlighted by CEO Robert Leshner’s previous financial experience as a co-chair for San Francisco’s Revenue Bond Oversight Committee. Combine with the synergy Robert shares with CTO Geoffrey Hayes from their time building Postmates and Safe Shepard, it’s easy to see that this isn’t their first rodeo.
When it comes to the introduction of a permissionless banking system, companies such as Compound Labs are paving the way for the next-generation of user-friendly applications. As time goes on, it’s safe to assume that the company will offer markets for assets based on other protocols outside of Ethereum.
Similarly, Compound is unique in the sense that there is no native token required to utilize the platform. As such, it’s interesting to consider the future implementation of something like Binance Coin ($BNB) or Nexo Coin ($NEXO) which could allow for key actors to gain additional exposure to the protocol’s success.
For now, it’s crucial to recognize how far Ethereum-based interface’s have come. With tools such as Compound making it easier and easier for users to access the endless possibilities smart contracts have to offer, the road to mass adoption is closer than we may think!
Cooper is a long-time blockchain enthusiast currently working as the managing director for Fitzner Blockchain Consulting. Starting his career in the industry as a project and community manager, Cooper has since expanded his skillset as a CFA Level 1 candidate and recent graduate of Draper’s Hero Training in San Mateo, California. His favorite DeFi projects include Set Protocol and Ren Project with a strong interest in The Block Crypto and Messari.