Welcome to our in-depth analysis of Compound Finance, the leading interest rate protocol in the decentralized finance (DeFi) space. Compound provides an innovative lending and borrowing platform that allows users to access liquidity and earn interest on their assets in a transparent, trustless and secure manner. In this analysis, we will dive into the inner workings of Compound, its unique features, and its potential impact on the future of DeFi.
Compound Finance (COMP) is a decentralized protocol that allows users to borrow and lend assets from a pool of collateral. Interest rates are determined algorithmically based on the utilization ratio of assets lent out. It is permissionless, meaning anyone can access the tools provided at any time without needing verification or identification. Compound is primarily used as a cryptocurrency borrowing and lending protocol, where users can deposit supported tokens into a shared pool to earn interest, or borrow a smaller amount of tokens and pay interest
To borrow on Compound, users first have to deposit collateral to acquire “borrowing power.” With this power, they can borrow tokens equivalent to the amount of borrowing power they have.
Compound operates on the principle of over-collateralization, which means borrowers must have collateral that is more valuable than the amount they want to borrow. This ensures the lender and the system are exposed to zero risk.
Borrowers should also note that the value of their collateral must remain above a certain value to avoid liquidation. If it falls below that value, the collateral will be liquidated to pay back the loan.
When a user’s collateral enters the liquidation event, other users will have the opportunity to purchase the collateral at an 8% discount to the market value.
It’s important to note that during liquidation, borrowers will still have their borrowed funds, and the loss is only on the collateral. For example, if a borrower collateralizes 100 and borrows 80, if the collateral is liquidated, they will still have 80, for a loss of 20, not 100.
This review of Compound Finance (COMP) was created for informational purposes. This article is not intended for promotion.
Compound is a decentralized lending and borrowing platform that was founded in September 2018. The CEO and Founder of Compound is Robert Leshner. The platform is focused on building the infrastructure for institutions to easily and safely on-ramp capital into DeFi, and its Treasury has seen immense growth since its launch in July 2021, working to accelerate institutional DeFi adoption. The team behind Compound believes that building and innovating is the way out of bear markets and that conditions for the next bull market require people to be excited around new ideas, and greater institutional adoption of crypto and DeFi.
Security of the Compound protocol is a top priority for the development team. Third-party auditors and consultants have been brought in to ensure the safety and dependability of the platform. The contract code and balances are publicly verifiable and security researchers are eligible for a bug bounty for reporting undiscovered vulnerabilities.
The Compound protocol has undergone several audits by reputable firms such as Trail of Bits and OpenZeppelin. These audits were done in April and August 2019, February 2020 and cover various aspects of the protocol such as the timelock and pause guardian, cDAI, COMP, Tether and COMP Distribution.
Additionally, the protocol was developed with a set of security principles and formally verified by Certora using Certora ASA (Accurate Static Analysis), which is integrated into Compound’s continuous integration system.
COMP is an ERC-20 token that allows the owner to delegate voting rights to any address, including their own address. Changes to the owner’s token balance automatically adjust the voting rights of the delegate. Addresses delegated at least 25,000 COMP can create governance proposals; any address can lock 100 COMP to create an Autonomous Proposal, which becomes a governance proposal after being delegated 25,000 COMP.
Proposals can modify system parameters, support new markets, or add entirely new functionality to the protocol. COMP holders can delegate their voting rights to themselves, or an address of their choice.
cTokens, or “compound tokens”, are ERC-20 compliant representations of balances supplied to the Compound Protocol. They allow users to earn interest through the cToken’s exchange rate, which increases in value relative to the underlying asset. Additionally, cTokens can be used as collateral. Users can mint cTokens by transferring an underlying asset, such as Ether or an ERC-20 token, into the Compound protocol. They can then earn interest on their cTokens by holding them in the protocol. Users can also transfer cTokens to other users, but it is important to exercise caution as this will transfer the underlying asset balance within the Compound protocol.
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Compound is an interesting option as it makes investing in assets easier by allowing borrowers to use their existing assets as collateral to borrow other assets. This can be beneficial for traders who believe the price of an asset will increase in the long-term, as they can turn a profit. The platform operates on the principle of over-collateralization, which means that borrowers must have collateral that is more valuable than the amount they want to borrow. This ensures the lender and the system are exposed to zero risk.
DeFi lending protocols like Compound have shown resilience during times of volatility, as compared to centralized lenders. Despite current market conditions causing a decline in protocol activity, Compound is taking steps to improve sustainability and incentivize new and existing users. These efforts position Compound to become a more efficient cross-chain protocol in the future.
Disclaimer: Trading and investing in cryptocurrencies (also called digital or virtual currencies, altcoins) involves a substantial risk of loss and is not suitable for every investor. You are solely responsible for the risk and financial resources you use to trade crypto. The content on this website is primarily for informational purposes and does not constitute financial advice.
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