cTokens are a back-end unit of account for the Compound protocol. When a user supplies cryptocurrency to the protocol, cTokens are used to keep track of the funds that they have lent, as well as any interest earned.
Each time a user supplies funds to the lending pool, they are issued a corresponding balance in cTokens. This balance of cTokens is directly proportional to the stake they have in the lending pool, which accrues interest every block.
How Do They Work?
Interest is accrued annually and accounted for every block. Users capture this interest via token appreciation – that is, the value of each cToken will increase as interest accrues. Here’s a good example:
Let’s say you supply 1,000 DAI to the Compound protocol, when the exchange rate is 0.020070; you would receive 49,825.61 cDAI (1,000/0.020070).
A few months later, you decide it’s time to withdraw your DAI from the protocol; the exchange rate is now 0.021591:
- Your 49,825.61 cDAI is now equal to 1,075.78 DAI (49,825.61 * 0.021591)
- You could withdraw 1,075.78 DAI, which would redeem all 49,825.61 cDAI
- Or, you could withdraw a portion, such as your original 1,000 DAI, which would redeem 46,315.59 cDAI (keeping 3,510.01 cDAI in your wallet)
The longer a user holds cTokens, the more the value of those tokens appreciates.
Each asset has its own interest rate, which will also reflect how much the corresponding cToken will appreciate over time.
When funds are withdrawn from the protocol, cTokens are redeemed behind the scenes for the corresponding quantity of the underlying asset.
After a period of lending, each cToken will be worth more than when it was minted due to the interest earned. cToken holders do not need to worry about the exchange rate, however, as the protocol will calculate and process the conversion automatically.
Can cTokens be exchanged outside of the Compound protocol?
They sure can! cTokens can be exchanged in the same way as any other ERC20 token.
It is important to note however, that when a user exchanges their cTokens, they are also exchanging their corresponding stake in the lending pool.
To learn more about cTokens, visit the official Compound Finance cToken page here.