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Jun 30, 2020

11 min

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11 min

What is Compound: Complete Guide

compound cover

Compound (COMP) is an ERC20 token, a new form of cryptocurrency that gives you the power to debate, propose, and vote for changes on the Compound protocol. By owning COMP and supporting its governance, you can also generate interest income. In this article, we’ll tell you how COMP came about, its technology, and whether you can impact on how COMP is controlled.


A Brief History of Compound (COMP)

Founded by former economist Robert Leshner, the Compound (COMP) cryptocurrency features a Decentralized Finance – or DeFi – protocol. Using openly accessible smart contracts that have been built on the Ethereum platform, COMP allows its users to “borrow” tokens like they were taking out a loan. Token lenders lock the borrower’s crypto assets into the loan protocol.

The borrower pays interest rates that are based on the current supply and demand of the crypto asset. The interest rates are generated every time a block is mined. These loans can be paid back, and the borrowers locked assets released at any time. What is unique about this system is that users of cTokens, Compound’s native token, can earn interest in their money and transfer, trade, and use the money in other applications as needed.

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Compound (COMP) Technology

While Compound looks like other DeFi lending protocols, allowing borrowers to use their crypto assets as collateral to borrow more, Compound’s cTokens are what stand out from the rest of available cryptocurrencies out there. cTokens are ERC20 tokens. They represent the user’s funds that have been deposited into Compound.

When users borrow against their cTokens, another type of token, such as USDC tokens are added to the borrowing protocol and locked into place. The borrower gets an equivalent amount of cTokens from the protocol in addition to generating tokens that earn interest for them. For example, when USDC tokens are used, they are converted to cUSDC. These tokens earn interest. When the borrower redeems their cUSDC tokens for normal USDC, they also get paid the interest earned in USDC.

As cTokens are converted in ERC20 form, users can move, trade, and use them in other decentralized applications. cTokens are a great example of how the DeFi movement is allowing different protocols to build different blocks, called “money legos.”

To have cTokens to use, borrow, or invest, users must deposit into the Compound protocol. New cTokens are then created. These tokens are based on the type of crypto asset the user deposits. For example, if borrowers use ETH as collateral against a loan, they get cETH in return. If they want to earn interest, they will use USDC. Using an Ethereum wallet, users can mint or create cTokens.

Compound cTokens can be used to earn interest on your crypto assets. Users deposit their crypto assets into their chosen platform and receive cTokens in return. Those users who need to borrow against their crypto assets are protecting themselves when they use Compound. The protocol used for the loan ensures your collateral stays above the value of your loan. This keeps your assets from being liquidated to repay the loan.


Perspectives and Takeaways

While Compound (COMP) is only trading on a few lesser cryptocurrency exchanges, it is still a hot commodity. Its value doubled days after its release, and many data sites like CoinGecko, The Block, Forbes Crypto, and others are having trouble coming up with COMP’s market value because it is still so new. The cryptocurrency got a boost from Coinbase when they announced that Coinbase Pro users could start trading the tokens at the end of June in every jurisdiction except New York State.

The current frenzy over COMP is due to the speculation over blockchain systems that let users borrow against cryptocurrency and other digital assets without the need for banks and exchanges. It makes it easy for anyone with cryptocurrency accounts to invest their money and get more out of it without a middleman being involved.

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There is a concern in the cryptocurrency world that Compound COMP tokens could get caught up in a speculative cycle. The concern is that the market value will grow more than the tokens actual value before going down, triggering a reduction of incentives to hold onto the tokens. If this happens, less interest will be generated in COMP, and the value could tank.

With COMP already being listed on Coinbase’s Pro and retail platform, the movement of tokens will start happening rapidly. The listing on Coinbase was one of the training platforms fastest following the launch of a new cryptocurrency. The 20% boost it received has helped, and it was trending just under $250 at the end of the week after the listing.

Soon after launch, this kind of movement could have something to do with users getting free tokens when they borrowed against themselves. Because COMP is a governance token, it is awarded to anyone who uses the platform to borrow or lend, as much as possible. COMP tokens are being used as a swap meet with some users borrowing against themselves up to 30 times to maximize the amount of COMP they can get. Additionally, some COMP were being purchased from spot markets to drive prices up further.

To protect investors in case COMP takes a downturn, Opyn, the service that protects your DeFi deposits and hedges ETH risks, offered a “put option” on COMP at the price of $150. This means users can sell their COMP for $150 before the expiration date to protect their investment. Users are not obligated to sell their COMP but can if they invest in the “put option.” Right now, the expiration date is July 3. Setting up the “put option,” speculators are watching COMP carefully just in case it does tank. Considering it sold for $80 when COMP hit the market and is now selling around $250, investors buying into the “put option” are capping any downside risks. Cryptocurrency is known to rally after launch before dropping and rebuilding its value.


Compound Website

Learn more about the Compound (COMP) cryptocurrency at their official website and on Medium.


Compound Blockchain Explorer

Track Compound (COMP) transactions here.


Compound Reddit

Discuss Compound (COMP) on Reddit with other users.


Compound Twitter

Follow Compound (COMP) on Twitter.


How to store and manage Compound (COMP)?

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When a user interacts with Compound (COMP) – whether they are supplying, withdrawing, borrowing, or repaying – COMP is automatically transferred into their digital wallet as long as the user has accrued at least .001 COMP. All undistributed COMP can be manually withdrawn at any time.

User can then view their accrued COMP by searching the Compound Governance Explorer profile page. This is done per wallet address. Distributions can only be made to the address that has accrued the COMP. This means that your digital wallet has to be able to send COMP from the same address that is interacting with Compound. If it cannot be done, users could face the problem of not being able to claim the asset, and it will become inaccessible and lost.

Compound is currently supported in the Atomic Wallet. The wallet will let you manage, exchange, and buy a large number of digital assets with your bank card. You have total control over your funds as your private keys are generated by a mnemonic seed, and all is encrypted and never leaves your device. Atomic is one of the best solutions to storing COMP. Install and try out the app now to manage your COMP in the wallet interface.


Conclusion

Compound (COMP), an Ethereum protocol, is designed to allow users to borrow, invest, use, and short-sell tokens. Because the protocol has been set up to establish a money market with set interest rates, COMP also provides users with the ability to earn interest when the protocol users use cTokens and ETH.

Interest rates for loans are based on the money market’s supply and demand for the asset being used for the loan. Users of Compound can supply tokens to a money market to earn interest without the assistance of a central party. They can also borrow tokens against their collateral balance.

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