Mostly on Ethereum blockchain, Compound is a decentralized and computerized lending and borrowing service. Individuals can use it to generate a return on their bitcoins or take out collateralized crypto mortgages. It is, in essence, a bank that is not governed by a particular corporation but rather by its customers. It now accepts DAI, ETH, USDC, ZRX, USDT, WBTC, BAT, UNI, as well as COMP, among other cryptocurrencies.
Lending on Compound
Anyone can transmit their coins via a web wallet like MetaMask to a smart contract that is part of Compound to earn a return on their crypto as if anyone might have money in a bank account. People will get an identical number of c-tokens when they invest in their cryptocurrencies, and then they’ll start earning interest on them right away.
The protocol calculates the interest for lending and borrowing depending on the supply and demand for a cryptocurrency. If a lot of people take out loans for a given cryptocurrency, but only a few individuals lend it to Compound, the interest rate on the debt will climb to encourage individuals to borrow it.
Borrowing on Compound
Compound exclusively offers secured debt loans, which implies that customers must first submit cryptocurrency before applying for credit. Borrowers could only lend a sum of cryptocurrency which is less than or equivalent to the value they have deposited.
One might be questioning why somebody would take a mortgage if they presently had more cryptocurrency than they could loan. Somebody might do this because a credit like this offers liquidity without requiring the sale of an asset. If users have ETH and wouldn’t want to trade it because they think its price will improve, but they need cash, users can lend it to Compound and receive a credit in stablecoins.
If the valuation of the collateral falls below the amount people can borrow with it, the Compound procedure will resell some of it at a discount of 5%. This is intended to encourage borrowers to repay their loans as soon as possible.
Users will remain anonymous on Compound and do not need to have the loan authorized by anybody. All they have to do now is link their internet wallet to the program and input collateral. The Compound does not presently offer non-collateral loans since it is extremely difficult to assess somebody’s trustworthiness to repay a debt without collateral in a decentralized and computerized manner.
Compound’s Competition
There seems to be a variety of ways to generate interest in their cryptocurrency assets. Clients may generate a significant APY on their crypto investment at crypto banks like Nexo as well as Celsius. These centralized organizations, on the other hand, have control of their cryptocurrency. This can be beneficial if someone does not really trust themselves to keep their crypto safe. But it can be disadvantageous if one would not want to rely on a 3rd person.
Aave, another Ethereum-based loan and lending protocol that functions similarly to Compound and is likewise quite prominent in the DeFi area, is a strong contender to Compound in the decentralized finance arena.
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