Compound Crypto Protocol: What Is It?

By CoinUnited.io Research Team

18 Dec 2022

3 min read

Lending and borrowing rates on the Ethereum-based Compound Finance (COMP) protocol are determined algorithmically in response to the level of liquidity in the system. Over $2 billion is trapped in Compound's smart contracts as of this writing (September 15, 2022). Users of Compound do not need to go via a third party lender or borrower to lend or borrow some of the most well-known cryptocurrencies today. It's one of the most popular ways to borrow and lend crypto, and it's been around for a while. DeFi developers rely heavily on Compound, integrating it programmatically into their DApps and taking use of the protocol's support for dynamic borrowing and lending. The protocol is not just popular among programmers, but also among the entire crypto community. Compound allows non-technical users to borrow coin by providing collateral in the form of another crypto.

Several prominent VC companies, including Andreessen Horowitz, Bain Capital Ventures, and Polychain, have invested in Compound. San Francisco-based Compound Labs released the protocol in September 2018, while the crypto industry's loan and borrowing environment was still in its nascent phases. The second major update, version 2, was released in May of this year. The second version of the protocol included numerous significant enhancements, one of which was the introduction of cTokens, synthetic assets at the center of Compound's current supply and borrow functionalities. Compound released V3, which is compatible with V2, in August of that year. The third update prioritizes ease of use and provides access to fewer coins than the previous two versions. Though V3 is expected to become more widely used in the future, at moment, V2 is where most protocol action occurs.

Depending on the current market price and demand for a certain cryptocurrency, Compound adjusts the interest rates it pays on its coin pools on the fly. The Open Price Feed system, which is built on Chainlink (LINK) oracles and which aggregates crypto price data from numerous exchanges, is used to feed coin values into the protocol. Given that the market value of a liquidity is very sensitive to supply and demand, the interest rate on any given cryptocurrency will change as necessary to maintain equilibrium. On each market page in Compound, you can see the current interest rate for the crypto you desire to lend or borrow. Compound provides functions that may be used by DeFi developers to include the protocol into their DApp's infrastructure. Compound's visual user interface and one of the Compound-supported wallet brands make it simple for anybody to lend or borrow crypto. Compound supports the following payment systems with direct integration: In order to begin utilizing the Compound protocol, you must first connect your wallet to the app.

Borrowing crypto to invest in the Compound protocol is the first step in using the platform. Compound is a protocol for borrowing money, and like other popular lending and borrowing platforms, it needs collateral. You can't get your hands on your collateral while you have a collateral out, but it will generate interest within the protocol. The term "supplying" describes what users of the platform do when they lend money to the protocol. Currently, there are roughly 20 different cryptocurrencies you may provide if you utilize Compound's V2, the most popular version. Supply and borrowing pools based on Ether (ETH) and famous stablecoins like Dai, USDC, and USDT are among the most common. On Compound V2 as of September 15th, 2022, the top 5 cryptocurrencies in terms of supply quantities are as follows: Fewer cryptos are supported for distribution if you use V3. In the moment below, we can see the five currencies now available on Compound's V3. Coins available on Compound V3 as of September 15th, 2022 When you make a crypto contribution to Compound, you will receive an equal number of cTokens, a unique ERC-20 token. Each cToken represents a specific cryptocurrency that has been loaned to the protocol. To illustrate, if you make a loan in Dai, you may receive cDai tokens as collateral. Loans made in ETH will be rewarded with cETH cTokens, and so forth. CTokens are not only used to verify your deposit, but are key to the overall operation of the Compound platform. By lending a coin to Compound, you not only get interest on your investment, but you also prove your eligibility to borrow from the protocol using a different cryptocurrency.

After making a loan to the Compound protocol, you will have a rough idea of how much you will be able to borrow. This is the basis behind Compound's crypto loan limits. If you have lent the protocol 100 Dai, your projected borrowing capacity will be calculated using the rate of the Dai coin as set by the Open Price Feed system. For the account of calculating your maximum borrowing limit, all of your cryptocurrency loans to the protocol will be added together. Based on the collateral ratio of each coin, the protocol will lend you the appropriate amount of crypto. If Wrapped Bitcoin (WBTC) has a collateral ratio of 80%, for instance, borrowers are permitted to secure loans of up to 80% of their total loan amount in WBTC. Compound, then, is a standard example of an over-collateralized credit arrangement. Cash advances from Compound are issued in cTokens, the same tokens used for lending. To continue with our WBTC example from above, when you opt to borrow in this coin, you will receive cWBTC tokens.

At any point after you have paid off your protocol debts, you can request a refund of the money you gave to Compound. Compound's loan and borrowing features are attractive since they do not necessitate interaction with a third party trader, and they also do not impose any minimum investment durations or withdrawal penalties. You are always dealing with a dynamically managed pool of available liquidity. At the time of redemption, the protocol will convert your cTokens and any accrued interest back to the cryptocurrency you originally loaned it.

If your account's health ratio drops too low, your account might be liquidated and you could lose some of your collateral. Users of the platform take on the role of liquidators, and they conduct the full process of monitoring for problematic accounts and any liquidation in a decentralized manner. The proceeds from the account's liquidation are distributed to them.

These tokens serve as your "deposit certificate" and are provided to you in exchange for your monies. All interest earned on loans is added to your cTokens coin rather than the crypto you originally invested in. Tokens are digital assets that have been designed to increase in value. Lending you money means sending you the equivalent number of cTokens. Given the nature of these currencies, they are only used within the Compound platform and have little to no value in the larger crypto market.

An ERC-20 token, COMP's primary use is in tokenized governance.

In June of 2020, the COMP token was introduced with an initial price tag just around $100. Comp reached an all-time high price of $910.54 in May 2021, little than a year after its debut. Midway through 2021, when the crypto market as a whole began to chill, the COMP token began a lengthy drop. By mid-June of 2022, COMP had dropped to a low of $26.41. The token has been slowly but steadily rising in value ever since. Trading at about $57 as of right now (as of Sept. 15, 2022). The price of COMP has followed the general trend of the crypto market in most instances, as is typical for the vast majority of the most popular and well-known altcoins. Due to the crypto market's current gradual uptrend, COMP should follow suit in the near and intermediate term. In the long run, COMP should go well, maybe even better than the majority of other altcoins. Over the course of four years, Compound's platform has established its worth and the company's underlying business model is sound. By 2025, CoinCodex forecasts that the price of Compound will have increased by over 1,000% to a maximum of $636.78. CoinCodex predicts a maximum of roughly $250 by 2025, while DigitalCoinPrice predicts a climb, albeit less dramatic than CoinCodex's, to about the same amount.

There is a plethora of marketplaces to purchase COMP on as it is one of the most popular alternative altcoins. You may buy COMP on CoinUnited.io's spot market for USDT, and you can also buy a perpetual contract for COMP/USDT.

It's safe to say that Compound will keep its place as one of the most popular DeFi platforms for some time to come. Over-collateralization, strong market performance, widespread brand recognition among DeFi traders, and a tried and true business model are all reasons for the protocol's continued success.

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