A Guide to Compound Finance – All You Need to Know About the Lending Protocol

A Guide to Compound Finance – All You Need to Know About the Lending Protocol

Lending and borrowing are among the top services offered by traditional financial institutions. Lenders deposit their funds in banks for borrowers to access them in exchange for interest. While banks act as the intermediaries between borrowers and lenders, they are not needed in the decentralized finance (DeFi) space. As a result, anyone can now access loans without restrictions that most traditional banks impose, thanks to blockchain technology.

There are several borrowing and lending protocols in the DeFi sector. One of them is Compound Finance. This platform allows interested lenders to deposit their crypto assets in pools for borrowers to access them without the involvement of middlemen. Do you want to learn more about Compound Finance? Keep reading this article.

Exploring Compound Finance

Compound Finance is an Ethereum-based DeFi protocol that lets users borrow and lend their cryptocurrencies. Lenders earn interest every time the borrowers repay their loans. Founded in 2018, Compound Finance is managed by a blockchain company called Compound Labs. The team behind the project says its main focus is to put into work crypto assets lying idle in holders’ wallets. That said, if you have tokens in your non-custodial wallet like MetaMask, you can consider depositing them in the Compound Finance pools to earn passive income in the form of interest.

As mentioned, there are no intermediaries in DeFi. So, what do lending protocols in this nascent sector use to connect lenders and borrowers? They use smart contracts, which automate the lending and borrowing processes. The lender and the borrower don’t even know each other.

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As a decentralized protocol, Compound Finance gives holders of its native token, COMP, an opportunity to participate in the governance process.

What Makes Compound Finance Special?

No Deadline for Repaying Loans

Compound Finance does not impose deadlines for repayment on borrowers. The protocol lets you return the money at your convenience. But it is worth mentioning that the longer you take to repay the loan, the higher the interest.

Yield Farming

Besides earning yield from interests, COMP holders can increase their passive income through Compound Finance’s InstaDapp, a feature that gives access to several DeFi protocols.

No Need for Verification

With Compound Finance, you can lend or borrow funds without completing the Know Your Customer procedure, which is a must requirement in centralized crypto platforms and traditional banks. In other words, DeFi protocols like Compound Finance allow you to transact anonymously.

How Lending on Compound Finance Works

We can compare a Compound Finance pool to your bank’s savings account. So when you deposit your crypto assets in the pool, you are letting the protocol use the money to lend to borrowers in exchange for interest. To commit funds to a Compound Finance pool, you need a crypto wallet like MetaMask. If you have it, connect it to the lending protocol and deposit ETH or USDC. As mentioned earlier, you will receive COMP tokens as interest, which you can swap for ETH, LINK, or USDC at any time.

How Borrowing on Compound Finance Works

Like any other DeFi platform, Compound Finance requires borrowers to deposit collateral. Crypto assets accepted as collateral include ETH, ARB, GMX, WBTC, and MATIC.

The COMP Token

COMP is an ERC-20 token. According to data from CoinGecko, the crypto asset trades at $50.73 with a market cap of $348.4 million. COMP has a total supply of 10 million tokens. As of November 2023, over 6.8 million COMP tokens are already in circulation.

As stated, COMP is used to reward lenders and gives holders the power to influence Compound Finance’s direction through voting.

COMP Tokenomics

Here is how Compound Labs allocated COMP:

  • Compound Finance users are set to receive 4 million tokens within four years.
  • Compound Labs’ shareholders were given 2.3 million tokens.
  • Founders and developers got 2.2 million COMP tokens.
  • About 775,000 tokens were set aside for community growth.
  • Future Compund Labs team members will receive 72,000 tokens.

So where can you buy COMP? The crypto asset is listed on reputable exchanges like Binance, Kraken, Coinbase, and Binance.

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Archie Lovell
About Author

Archie Lovell

Archie Lovell, a premier voice in crypto journalism, skillfully demystifies the intricate world of digital currencies. With a keen analytical eye and compelling narratives, Archie's writings delve deep, offering clarity amidst the complexities of blockchain. His expertise and style make him a trusted guide in the crypto space.

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