If you are looking for an opportunity to earn on your crypto, contributing to a lending protocol, such as Compound Finance or Aave, is an option to consider. You can make a profit by providing liquidity to lending pools and earning interest on your deposit. You can also use your deposits as collateral to borrow other crypto assets.
To help you get started, we put together this guide introducing you to the Compound Finance lending protocol and how you can use it to lend and borrow crypto.
At A Glance
- Compound is a DeFi protocol that allows users to lend and borrow Ethereum-based assets.
- You can lend crypto on Compound as an investment strategy since it allows you to earn interest.
- The COMP token is used for governance and is distributed to all lenders and borrowers on the protocol
What Is Compound Finance?
Compound Finance is a DeFi lending protocol that was built on Ethereum by Compound Labs Inc in 2018. Compound is based on smart-contracts, is fully open source and is maintained by its community. Governance rights, for proposals and voting, are given to COMP token holders. This means anyone using Compound can participate in governance since COMP tokens are distributed to all users everyday.
Compound supports 17 different assets and has a liquidity pool or “market” for each. Users can deposit funds into any of these liquidity pools to earn interest. Deposits can also act as collateral for you to borrow crypto from another market, given that the borrowed assets’ value doesn’t surpass the collateral.
We’ll get into more detail about how the process for lending, borrowing and earning interest works below.
How Does Compound Work?
Compound has a liquidity pool for each of the assets supported by the protocol. Users can supply assets to any given pool using their crypto wallet and the Compound app. They also have the option of borrowing or withdrawing assets for any of the available liquidity pools, given that they first deposit funds as collateral.
After you supply funds to a pool, you’ll receive cTokens (matching the corresponding value of your deposit) in exchange. These ERC20 tokens represent your deposited assets and can be redeemed at any time you decide you want to withdraw your funds from the pool.
After adding funds to a lending pool, you’ll also automatically start earning interest on your assets. Interest rates vary for different lending pools, based on the availability and demand of the asset. Interest accumulates with each Ethereum block, so you can redeem your cToken and withdraw your deposit plus any awarded earnings whenever you see fit.
If you borrowed assets using Compound, you’ll instead pay interest on your loan with each Ethereum block. These interests paid by borrowers contribute to the lenders’ earnings.
Is Compound Safe?
Compound is a safe, well-established DeFi lending protocol and holds $11,952,347,016.00 worth of assets at the time of writing. While no platform is 100% risk-free, Compound is considered a safe lending protocol for crypto investors. It’s open-source code and bug bounties contribute to keeping the protocol free from any faults that could put assets at risk.
You can use Compound directly through your non-custodial crypto wallet, allowing you to be in control of your private keys and privacy.
How To Use Compound
You can interact with the Compound protocol from its web based app by connecting a supported crypto wallet, containing the funds you’ll supply to a liquidity pool.
This simple process is very beneficial for users looking for privacy and anonymity. A wallet is all you need to sign up, no Know Your Customer (KYC), Anti Money Laundering (AML) or sensitive personal data required.
Once you have connected your wallet, you can start lending crypto right away. First, you’ll need to select the market or pool you want to contribute to. Then just set the amount and make your deposit. After depositing, you’ll receive an equivalent amount of redeemable cTokens and start accumulating interest on your lent assets. Your earnings depend on the interest rate, considering the rate will be higher for assets that have a high demand for borrowing. You can withdraw your assets at any time, redeeming your cTokens for the crypto you deposited plus earnings.
To borrow on Compound, you’ll first need to make a deposit that will act as collateral for your loan. The value of your collateral must be greater than the value of the crypto you want to borrow. The amount you can borrow is also limited by the asset’s liquidity on the platform.
When borrowing, you should keep in mind that if the value of the crypto you put up as collateral drops, you run the risk of getting liquidated. This means that your collateral will be sold to pay back your loan. You can avoid this by depositing more assets to rematch the required collateral value.
Compound Finance: The Verdict
You can easily start lending and borrowing crypto using Compound. Compound Finance provides its users a safe, decentralized platform for lending that can be used anonymously using one of the supported non-custodial crypto wallets. By getting involved in the protocol, you’ll also receive COMP tokens, which allow you to take part in the protocol’s governance.