Compound is a decentralized finance protocol based on the Ethereum network. The platform allows users to borrow crypto by locking up some of their assets first, as well as lend crypto to earn interest. Compound has its own token called COMP, which is a governance token that allows holders to vote on future changes to the protocol. COMP tokens were initially distributed to Compound protocol users on June 16, 2020. Around 2,880 COMP tokens are distributed daily, with 50% of the daily distribution going to suppliers (lenders) and 50% going to borrowers.
What is Compound?
The cryptocurrency lending market often called the world's second-largest, is projected to grow to over $12 billion by 2024. It is expected to significantly disrupt the traditional finance industry. While peer-to-peer lending has existed for a long time, it is now catching on in a big way with new platforms such as Emurgo, Propy, and Lenddo. However, some observers, such as Mona El Isa, founder of BitBond, have said that peer-to-peer lending is the most popular way for people to leverage their crypto assets, but it's not always the best for the borrower. What is Compound? The platform launched in 2015 and now has almost 16,000 active users across 159 countries.
What does Compound do?
Compound allows borrowers to borrow crypto, while lenders are incentivized with interest earnings. Under the standard model of peer-to-peer lending, the borrower gains the interest payment. If lenders have assets with a lower liquidation price and find that they’re being offered less than the interest rate they require, they sell some of those assets and buy some of the ones that are cheaper. They then lend that asset, and if the borrower doesn’t pay the interest then the lender loses money and is compensated only if the asset is later sold for more than the interest rate. Compound takes a completely different approach. Compound’s borrowers can first buy or borrow fiat from their current lender. This way, it doesn’t matter if lenders have assets with high liquidation prices.
The COMP Token
CMC is the market capitalization, or total value, of the COMP token. It was established as a financing token, and the production of the Token Party, an annual fundraising campaign that is intended to raise enough funds to develop the Compen. “We decided to come up with this token project in order to attract investors who were looking for real value, instead of speculation,” says David Di Stefano, a Compen coordinator. Compens will be minted through the Compen protocol, which is itself based on the Ethereum blockchain. It uses an ERC-20 standard token contract which can be tokenized into a mix of ETH, BLT, and COP. Users can withdraw the accumulated value of all these tokens directly from the Compen website. Compens is the sole source for the issuance of COMP tokens.
How does Compound work?
Compound is a complete financial service stack. The platform leverages the web3 API on Ethereum (as well as other blockchain technology) and can be used for many financial activities. The platform also works with the peer-to-peer lending feature of the Luminate Network, which allows users to rent the profits of others' lending activities. The Luminate Network was first announced at the Consensus 2018 blockchain technology conference on June 6, 2018. How does peer-to-peer lending work? Lenders and borrowers use COMP tokens to borrow and lend to each other on the Compound network. The lending process is relatively simple. The borrower agrees to make a loan to the lender, and the lender will send their existing assets to the borrower as collateral.
The future of cryptocurrency finance
It seems like blockchain technologies are on the brink of revolutionizing the way people use money and transacting. In fact, some are saying it will bring about the democratization of finance and unlock new possibilities in financial markets. However, for the purpose of the study, the research team only focused on the way cryptocurrency exchanges function and how cryptocurrency lending works. Compound says that in the future, cryptocurrency exchanges are also likely to adapt to the new business model of cryptocurrency lending and become financial hubs for the industry. These will be key players in providing services that are necessary for cryptocurrency exchanges to function smoothly and for digital currency to be accepted as a mainstream financial asset.
Conclusion
Compound is one of the most innovative financial platforms that will influence the global economy in the years ahead. This platform has a big head start and it seems highly likely to succeed. My understanding is that COMP is simply a market maker — it does not engage in full-fledged lending. The platform itself is only about 1 year old, so in this short amount of time, it has already gone through some iterations and changes. The fact that it is based on a well-tested and popular smart contract protocol, combined with the organization’s venture capital backing, makes me confident that the project has a bright future. However, we will have to wait and see, as there are a number of unknowns. One of the biggest unknowns is whether it is profitable.