DeFi initiatives have reached a high level of popularity in recent years due to the financial advantages they bring to their users, which is why it is very common to hear / read about them in the crypto ecosystem. DeFi apps built on the Ethereum blockchain alone currently control over $500 million worth of digital assets. Besides, it is known that users have managed to earn 5-20% interest on DeFi lending platforms.
There is a lot of information and many community members do not even know where to start, which is why we will review Compound Finance, a DeFi initiative that will interest your pockets.
What is Compound Finance?
Compound is a protocol built on the Ethereum blockchain that allows users to make loans from their own digital assets. This platform will allow its users to earn interest on the tokens they deposit to provide liquidity.
It has a minimalist and easy to understand interface. Interest begins to earn immediately after making the lending deposit. The deposit can be withdrawn at any time (as long as the contract is liquid). Right now the interest in lending DAI is at 16%, so creating a CDP with Maker DAO and generating DAI with a 2% interest and then lending it on the platform at 16% seems attractive.
How does it work?
Users who have cryptocurrencies will lend these tokens to a pool on the platform, which is offered as a loan to different users who request loans in order to receive short-term money in exchange for paying interest.
The interest paid is divided among all those people who deposited in that pool. Basically, you must lend your cryptocurrencies to start generating passive income whose percentages vary depending on the supply and demand of the specified tokens.
The interesting thing about Compound Finance is that you can also withdraw the money at any time, giving you the option to both lend and withdraw the money whenever you want.
In order for each operation within the platform to work, Compound makes use of Ethereum’s smart contracts. However, the administration of the platform rests entirely with Compound Labs, Inc. who have power over all funds deposited on it.
Therefore, despite being written on the Ethereum blockchain, Compound is a centralized application. However, the Compound developer group has plans to fully decentralize the application, so that it is governed by the user community.
COMP is the official Compound Interest token and was announced in February and launched on Ethereum in April this year (2020).
While there was growth in DeFi applications in the early months of this year, when the MakerDAO platform was dominant, it was with the launch of the COMP token on Compound that a major turning point in DeFi occurred. Thanks to a strong incentive strategy for lenders and borrowers, implemented by Compound, the phenomenon known as yield farming, or interest harvesting, took place.
Compound is a very particular platform in the field of financial technologies that has been gaining popularity on the Ethereum blockchain. Despite being centralized, it offers interesting opportunities for those who own cryptocurrencies and do not know what to do with them, and also want to generate dividends.
Another important aspect, and this with respect to the use of Compound as such, is that it will be necessary for you to understand and be clear about each of its concepts, such as the collateralization relationship, or the conditions of settlement of a loan. This way, you can use Compound with complete peace of mind.