What is Compound Project ?

What is Compound?

Compound is an algorithmic money market protocol on Ethereum that lets users earn interest or borrow assets against collateral. Anyone can supply assets to Compound's liquidity pool and immediately begin earning continuously-compounding interest. ... The protocol now supports BAT, DAI, SAI, ETH, REP, USDC, WBTC, and ZRX.

In Brief

  • Compound is a company that allows people to earn money on the crypto they save.

  • The project is part of Ethereum and more broadly, DeFi

  • Users can also borrow crypto from Compound by putting up collateral above a threshold defined by the project.

Compound Finance Team

  • CEO Robert Leshner is a Chartered Financial Analyst, former economist, and 2x startup founder. He was also Product Lead at Postmates, the popular delivery app.

  • CTO Geoffrey Hayes and Application Lead Torrey Atcitty also held leading roles at Postmates.

  • Jake Chervinsky, Compound Finance’s General Counsel, is an adjunct professor at Georgetown University Law Center. He’s also known for his commentary on various aspects of crypto law like the SEC vs. Kik case, stablecoins, and BitMEX’s email leak.

Compound Finance Investors

  1. Horowitz

  2. Polychain Capital

  3. Bain Capital

  4. Coinbase.

For reference, Marc Andreessen created the first popular web browser - you know, that thing you’re using to read this. Polychain Capital is one of the biggest crypto investment funds. Bain Capital is the investment arm of Bain & Company, one of the “Big Three” management consulting firms. And Coinbase is one of the largest centralized crypto exchanges.

The Money Market Protocol

Compound is a protocol built on ethereum ecosystem that gave birth to different ethereum-asset-based money markets on its decentralized nodes. These markets are actually a pool of assets that algorithmically derive interest-rates based on the supply and demand for that particular asset category. Lenders and Borrowers of these assets interact with the protocol directly in order to earn and pay (respectively) a floating interest rate, without having to negotiate any kind of terms such as maturity, interest rate, or collateral.

Supplying Assets

Since the conventional and decentralized peer-to-peer money markets need to match user’s asset-requirements with the available lenders in order to initiate a trade. Here in Compound, the protocol combines similar assets supplied by the lenders into a single fungible resource. This actually increases the liquidity of such pooled assets when compared to that of their status in direct-lending protocols. Also, it enables every lender to withdraw their assets anytime without waiting for the maturity of any loans issued against the pool.

When a lender supplies his assets to this protocol, he will be issued with an ERC-20 Token called ‘cToken’.

How are cTokens produced?

New cTokens are created whenever a user deposits crypto-assets into the Compound protocol. If users want to take out a loan using ETH as collateral, they automatically receive cETH in return for their deposited ETH. If users want to use USDC to earn interest, they receive cUSDC when they deposit USDC into the system.

How do you get hold of cTokens?

Anyone can mint or create cTokens using an Ethereum wallet such as MetaMask, Coinbase wallet, or Huobi wallet plus one of the crypto assets the Compound system currently accepts. As of December 2019, users of Compound could borrow or lend BAT, DAI, ETH, REP, USDC, WBTC, and ZRX.

What can you do with Compound?

Besides earning interest on your crypto assets, which is a fairly straightforward process of depositing crypto assets on the platform and receiving cTokens, you can also borrow crypto on Compound. Borrowing crypto assets has the added step of making sure the value of your collateral stays above a minimum amount relative to your loan. If the value of your collateral drops too far, you risk getting liquidated – having your collateral automatically sold to repay your loan.

Borrowing Assets

In other peer-to-peer protocols, users need to negotiate with the lender for the loan’s maturity, interest rate, and other terms. But when we take Compound, the user only needs to select asset they want and nothing else. Borrowing cost of the same will be assigned by the protocol, calculated based on pure market forces.

Each market in the compound has a collateral factor that ranges from 0 to 1, which represents the portion of underlying assets value that can be borrowed from it. Like in any other markets, illiquid and small-cap assets will have the lowest collateral factor when compared to those liquid and high-cap assets.

Borrowing Capacity = ÎŁ(Value of underlying Token Balance) x Collateral Factor

A user can only borrow up to their borrowing capacity and cannot transfer or redeem the collateral (after borrowing against it) in order to protect the protocol from default risks.

Interest Rate Model

The compound protocol follows an equilibrium interest rate model in each of its money markets, based on the demand and supply of that particular asset in the same market. Following the Price Theory, price here (interest rate) will act as a function of demand and supply, resulting in a decrease in interest rate when the demand is low and vice versa when the demand is high.

Utilization Ratio (U) is the single-unified variable of supply and demand in each markets(a). This can be expressed as:

Uₐ (utilization ratio of Market ‘a’)= Borrowingsₐ / (Cashₐ + Borrowingsₐ)

Now that we have utilization ratio, demand curve can be codified and expressed as a function of utilization. This helps in plotting the borrowing-interest-rates of each markets. For example, it can be calculated as a function:

Borrowing Interest Rateₐ = 2% + (Uₐ x 20%)

Same way, the interest rate earned by lenders can be calculated as the ratio of Borrowing Interest Rate’s to the utilization of funds in same money market. This can be illustrated as follows:

Lending Interest Rateₐ = Borrowing Interest Rateₐ x Uₐ

Compound Protocol doesn’t guarantee the liquidity of their tokens, rather it uses the interest rate model to incentivize its liquidity position. When demand for an asset is high, the liquidity of protocol / tokens will fall for sure. When that happens, interest rate will hike, thus incentivizing the supply and disincentivizing the borrowing.

Social Connection

Website: compound.finance

Twitter: @compoundfinance

Reddit: r/Compound

Medium:medium.com/compound-finance

Github: github.com/compound-finance/compound-protocol

Crunchbase: crunchbase.com/organization/compound-labs

Conclusion

We are finally seeing the promise of smart contracts and how they can take blockchain beyond just payments. The revolution is happening before our eyes, and Compound is one of the main players helping us leave outdated finance.

Its frictionless borrowing and lending, high safety standards, accessibility, DeFi market dominance, and rockstar team earn it two thumbs up! Trade on CoinEx ,Binance

References

  1. Compound Protocol White Paper [https://compound.finance/documents/Compound.Whitepaper.pdf]

  2. Compound on Medium[https://medium.com/compound-finance]

  3. Investopedia [https://www.investopedia.com/terms/m/moneymarket.asp]

  4. Robert Leshner [https://medium.com/@rleshner]

  5. Decrypt [https://decrypt.co/resources/compound-defi-ethereum-explained-guide-how-to]

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