What Do You Need To Borrow Crypto With Compound

Some people might call back that cryptocurrencies are but used for online payments. That is a serious misconception, every bit ane of the driving forces for crypto in 2020 and 2021 was Decentralized Finance. DeFi offers finance instruments similar to the ones available in a bank, but it does so in a technologically sophisticated fashion. This makes financial transactions more robust, transparent and secure. Just like a banking concern offers mutual funds, filing taxes, checking the credit card balance, etc., the DeFi does the same.

In 2021, DeFi emerged as one of the greatest contributions of blockchain technology to the earth of finance. With the steady transfer of financial services from legacy institutions to decentralized systems, the total value locked (TVL) in DeFi has grown to $190.5 billion. According to the DeFi protocols’ TVL rankings, Compound occupies the 5th position with a TVL of $10.57 billion.

Compound is creating ripples in the crypto marketplace for the right reasons. In this commodity, we will tell you what the hype around Compound is about. So let’south become started.

Outline

  1. What Is Compound protocol
  2. How Does Compound protocol Piece of work?
  3. How Does Compound Interest Work?
  4. What Is The Compound Interest Formula?
  5. The COMP Token
  6. Is Compound Protocol Safe To Use?
  7. What Are The Benefits Of Using Chemical compound?
  8. What Are The Alternatives To Compound?

What Is Chemical compound protocol?

First things first. Compound is a DeFi borrowing and lending protocol built on Ethereum that functions as the blockchain version of a money market.

What Is Compound protocol - Ulam Labs

An analogy with legacy financial institutions might help y’all understand things meliorate. Yous must have a savings business relationship in your banking company where you deposit coin to earn interest. Similarly, DeFi protocols like Compound allow you to invest your crypto savings, since your coin grows from the interest earned. Just like you can take loans from a bank, Compound likewise lets you take a loan against collateral.

Nosotros volition explain in detail how you can first ‘Compounding’ your crypto savings. But earlier that, you must know which of the cryptocurrencies Compound supports. The list is every bit follows:

  • Ether (ETH)
  • USD Coin (USDC)
  • Tether (USDT)
  • Wrapped BTC (WBTC)
  • Bones Attention Token (BAT)
  • Augur (REP)
  • Dai (DAI)
  • Ox (ZRX)
  • Sai (SAI)
  • Uniswap (UNI)
  • ChainLink Token (LINK)
  • TrueUSD (TUSD)
  • Aave Token (AAVE)
  • Maker (MKR)
  • Sushi Token (SUSHI)
  • Yearn Finance (YFI)

How Does Compound protocol Work?

You can diversify your investment portfolio when you lot kickoff putting your savings into Compound. In render, the protocol volition go on paying interest to you for the entire time menses that you proceed your money. All the same, if you wish to make some investments elsewhere, you can too take loans from the protocol. Quite naturally, it is you lot who will pay interest to Compound for borrowing money from the protocol’s liquidity pool.

As information technology is already evident past now, Chemical compound constitutes two main actors: lenders and borrowers. Let us explicate their part and how they work in the Chemical compound ecosystem.

Lenders

Lenders deposit or lock their crypto into Chemical compound to earn money at a dynamic annual interest rate. Each particular token is stored in a liquidity pool of the same token using Compound’s sophisticated smart contracts. Lenders receive the Compound involvement in the same token that they deposit in the pool. Thus, if you lend ETH to Chemical compound, your interest Compounds in ETH. Similarly, if you deposit USDT, you will go your Compound involvement in USDT.

Borrowers

Borrowers can have a loan against their crypto balance in the Chemical compound protocol. When you borrow money from a bank, they usually do a personal finance background bank check to determine credit ratings. However, Chemical compound, is keeping up with DeFi’southward hope of anonymity and never inquires about personal finance. Thus, in order to avoid debt and defalcation, Compound only offers over-collateralized loans. The protocol sets a borrowing limit/collateral gene to determine how much a user can infringe.

Since you are taking money from the protocol, you need to pay Compound interest on it. Examples help us visualize a system, then let united states of america use 1 to explain how it functions. Suppose Bob deposits ETH worth $10K into Compound. If the borrowing limit is set at 60%, and then he can borrow $6K worth of any cryptocurrency from Chemical compound. However, he needs to pay Compound interest on the borrowed amount.

How does COmpound work? - Ulam Labs

How Does Compound Involvement Work?

Unlike banks where interest rates are stock-still, Compound interest works in a dynamic manner. The Compound involvement keeps changing depending on the balance of a particular liquidity puddle.

When the total amount of crypto in a liquidity puddle is abundantly bachelor, the annual interest is low for lendings. However, for a smaller puddle with a bottom balance, the Compound Annual Growth Rate is high. This means the annual render is greater for lending crypto to smaller liquidity pools. This kind of floating interest works well to maintain some equivalence in the crypto marketplace. Users are thus incentivized to supply liquidity to smaller pools because the Compounding interest is college.

Similarly, the interest rate for borrowing from a larger pool is less since there is sufficient money to infringe. On the contrary, the involvement rate is college when someone borrows from a pocket-sized liquidity pool.

What Is The Chemical compound Interest Formula?

The question that withal needs answering is how to calculate Compound involvement. In banks, you earn uncomplicated interest on the initial principal that yous deposit. But Chemical compound interest works differently. The principal amount is compounded daily and then that your coin witnesses exponential growth at an incredibly faster rate. In banks, your savings are locked in for long periods that tin be as long as ix years. With the DeFi protocol’s daily compounding interest, you don’t demand to wait and so long.

What Is The Compound Interest Formula? - Ulam Labs

Source: Kriptomat.io

In fact, the compounding menstruation is equally small-scale equally a few seconds. With a phenomenally high annual growth charge per unit, the accumulated interest on your original principal tin be sky-high. Although the interest charge per unit is displayed for annual terms, Compounding periods are equally low every bit 15 seconds. This is approximately the time it takes to mine an Ethereum block.

Compounding works with the cTokens that lenders get for their investments in the protocol. It is these ERC-xx tokens that appreciate in value from the accrued involvement. As per Compound’s fiscal calculator, cTokens’ value has a growth rate of one/2102400 of the annual interest rate. The value of cTokens increases in value by the aforementioned growth charge per unit every 15 seconds.

The obvious reward of such brusk Compounding periods is that you will be earning involvement on a daily compounding basis. This ways you don’t need to look for monthly interests. With a floating interest rate, the returns on your initial investment will besides exist significantly higher. Overall, compounding involvement on your starting amount will requite you larger returns on your coin.

The COMP Token

The COMP token is a powerful force that runs the Compound protocol. Information technology is a governance token with which the token-holders can propose changes and vote on them.

COMP is besides the rewards token for Compound’south liquidity mining. Whenever a lender adds cryptocurrencies to Compound’due south liquidity pools or borrows from these pools, they get COMP tokens. COMP is distributed every xv seconds (Ethereum mining period) in proportion to user’due south involvement. Everyday, 2,880 COMP tokens are rewarded to lenders and borrowers in a fifty:50 ratio for maintaining Chemical compound’s liquidity pools.

Is Chemical compound Protocol Safe To Use?

At present that you lot know you will have your interest compound from this DeFi protocol, the bigger question withal remains. Is it rubber to put your money into Chemical compound every bit an investment strategy?

That’s not a financial communication only from the technical standpoint, the Compound protocol is safe. DeFi projects are subject to frauds and hacks due to faulty and problems-ridden smart contracts. An elaborate smart contract audit rules out the possibility of such hacks. OpenZeppelin and Trail of $.25 take conducted multiple security audits of Compound, and received its formal verification from Certora. However, a DeFi bug mistakenly distributed COMP tokens worth $90 million to users. Information technology didn’t put users assets at risk, rather than was an effect of a smart contract bug that was issued with a regular update.

Additionally, there are iii more factors that make Compound a safer space to invest crypto:

Public Code

Compound’s lawmaking is available in the public domain. This means any programmer with a technical groundwork can easily spot errors in the code.

Bug Bounty Program

Compound offers a advantage of $500-$150,000 to white hat hackers for detecting and ethically rectifying security vulnerabilities. This rewards plan incentivizes keeping the protocol safe from whatsoever undiscovered bugs and faulty code.

Dynamic Interest Model

Chemical compound operates on a floating interest charge per unit that finer rules out any possibilities of a ‘bank run’. The supply-demand ratio in crypto markets determines the interest rate which makes your crypto investment remainder safe.

What Are The Benefits Of Using Chemical compound?

The benefits of using Compound are manifold:

  • Anyone with crypto tin open an account and get monthly returns for investing. Since the interest compounds annually, lenders have a source of passive income.
  • The Compound involvement protocol allows for bitcoin investing with WBTC listing.
  • COMP tokens power the Compound involvement platform. This makes information technology a community-oriented crypto project where the community holds decision-making powers.
  • All transaction data on the Compound protocol is immutably recorded on-chain. The robust security audits ensure condom every bit well.
  • Over-collateralized loans and dynamic interests ensure that the Compound involvement protocol will never run into debt.

What Are The Alternatives To Compound?

There are several other solutions where you tin can open an business relationship to diversify your crypto investment plans. As long as you don’t have debt, you will keep earning interest on your crypto investing schemes. Post-obit are 3 such alternatives:

Venus - alternative to Compound Protocol

Venus

Venus is a DeFi platform and a blockchain coin market congenital on the Binance Smart Concatenation (BSC). The lenders and borrowers use BEP-20 assets to brand fast, depression-cost transactions. The protocol provides a good opportunity for investing since your crypto asset’s involvement is based on marketplace demands.

BlockFi - alternative to Compound

BlockFi

BlockFi is a platform where you can transact cryptos and earn as much as 8.25% monthly interest on your investment. You tin can besides take a loan for just 4.5% interest. But enter your information to open an business relationship, and get access to over $10 billion-worth of assets. At that place’s a catch, though – if y’all’re looking for decentralization, BlockFi is a centralized solution, with all its advantages and disadvantages.

AAVE - alternative to Compound - Ulam Labs

Aave

Aave is the largest DeFi borrowing and lending protocol on Ethereum with $16 billion in TVL(Total Value Locked). It supports 17 cryptocurrencies for its lending pools, and provides aTokens for each supporting cryptos. These aTokens are interest-belongings tokens through which all lenders and borrowers receive or pay interest. The protocol is powered by AAVE token which functions as a governance token.

Want To Offer Crypto Lending & Borrowing Services?

Compound is an interesting solution for those that want to leverage their digital assets and earn involvement on their holdings. If you lot concur a crypto asset for the long term and don’t want the hazard of twenty-four hour period trading, it’s a great mechanism of maximizing your long-term investments – although it works for the brusk-term, too. Information technology also allows you to leverage crypto by borrowing on an interest rate calculated by the protocol

However, if the available solutions are not satisfying for your client base, you tin build your own. We have successfully deployed Lendingblock which allows for institutional crypto lending & borrowing – feel free to read more about it in our example study and contact us if y’all’d like to integrate such solution. Nosotros have also built such solution for retail.

Want to leverage crypto lending & borrowing? Let’s get in affect!

Source: https://www.ulam.io/blog/how-compound-protocol-works

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