A 5-minute complete guide of Compound Protocol?

Compound finance is an algorithm, decentralized, and interest rate protocol for lending and borrowing cryptocurrencies.

It is a platform where users can frictionlessly supply (lend) cryptocurrencies as collateral, to borrow crypto assets based on interest rates set by real-time supply and demand.

The compound has already been audited and formally verified.

Since May 2020, Compound has adopted community governance.

Holders of the COMP token and their delegates debate, propose, and vote on all changes to Compound. 

How does the Compound protocol function?

The compound is the first ‘ liquidity pool’, instead of lending assets directly to another user, the person needs to supply it to a market and users borrow from that market. 

The concept is pretty simple, deposit collateral, earn interest through smart contracts.

There is no involvement of any intermediate like banks.

This ensures that control of the assets is not in the hands of intermediaries. 

Moreover, 

In each market, interest rates are determined algorithmically based on supply and demand, and interest accrues every Ethereum block.

There are no predefined durations or terms (such as “90 days”),

A compound protocol can be used for as short as one block, or as long as the person likes and is free to withdraw and repay it any time. 

Interest rates! How are they being set?

Interest rates are a function of the liquidy available in each market and it fluctuates depending upon the supply and demand.

When liquidity is more, interest rates are low.

As liquidity becomes scarce, interest rates increase, incentivizing new supply and the repayment of borrowing.

And why is that?

Why are supply rates lower than the borrow rate?

Because in each market there is excess liquidity i.e assets supplied are greater than assets borrowed, which helps in borrowing and withdrawing the funds from protocol easily.

The interest paid by borrowers is earned by the suppliers of the asset.

Because there are more suppliers, the interest rate they earn is proportionately lower; this is measured by an asset’s Utilization Rate.

Second, a portion of the interest paid by borrowers is set aside as Reserves, which acts as insurance and is controlled by COMP token-holders.

“COMP” where it started?

COMP initiated by ethereum based credit market – compound is the native governance token.

This came in the market on June 15.

Demand for the token is reaching its height and moved Compound into the leading position in DeFi.

COMP token holders can make proposals and vote to decide on the direction the protocol takes in the future.

The features of COMP are as follows:

• The total supply of COMP is 10 million. 42.3% is reserved for users to earn when they use the compound.
• Within each of these markets, the amount of COMP is divided 50:50 between the suppliers and borrowers within that market.
• Users can check the amount of interest paid per day by checking the User Distribution page.
• COMP holders can earn more COMP token by voting on various governance proposals.
• Available on various exchanges like Coinbase and FTX.

There are new terms around the corner “yield farming” and “Liquidity mining”.

Yield farming is a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency. 

cTokens VS Comp – Compound blockchain dual token system.

First, we will run through what is the meaning of ctokens and how it functions.

cTokens represent your balance every time you choose to interact with the liquidity pool.

The underlying assets under this allow earn interest and serve as collateral.

It works similarly to ERC-20 tokens as it can be traded, or programmed by developers to create new technologies.

These tokens have proved to be the big use case for Ethereum, the second-biggest blockchain in the world.

They can be used in a few ways and mainly as a form of money within a set of applications.

Some features of the cTokens are as follows : 

• You can borrow up to 50-75% of their cTokens’ value, depending on the quality of the underlying asset. 
• You can add or remove tokens anytime.
• If your debt becomes undercollateralized, anyone can liquidate.
• Liquidators receive 5% on liquidated assets as an incentive.
• Coinbase Wallet and MetaMask integrate cToken balances.
• cTokens are visible on Etherscan.  

Secondly, COMP is initiated by an Ethereum based credit market – the compound is the native governance token.

This came into the market on June 15.

Demand for the token is reaching its height and moved Compound into the leading position in Defi.

COMP token holders can make proposals and vote to decide on the direction the protocol takes in the future.

The features of COMP are as follows:

• The total supply of COMP is 10 million. 42.3% is reserved for users to earn when they use the compound.
• Within each of these markets, the amount of COMP is divided 50:50 between the suppliers and borrowers within that market.
• Users can check the amount of interest paid per day by checking the User Distribution page.
• COMP holders can earn more COMP token by voting on various governance proposals.
• Available on various exchanges like Coinbase and FTX.

Security – Is the compound protocol safe? And how does its price feed work? 

The security of the protocol should be of utmost priority.

It should be created in such a manner that people should believe that it is safe and dependable.

All contract code and balances must be publicly verifiable, and security researchers are eligible for a bug bounty for reporting undiscovered vulnerabilities. 

Working: The price of ETH, DAI, BAT, REP, ZRX, and WBTC is a median of prices from Coinbase Pro, Bittrex, Poloniex, and Binance, denominated in Ether, and posted on-chain after a 1% deviation in an asset’s median price; USDC and USDT are pegged to $1.

For security, price changes are limited (at the protocol level) to 10% per hour, unless a manual approval is provided by a second, offline address.

The compound is developing the Open Price Feed, to create a transparent, decentralized, resilient, and tamper-proof price feed.

Governance Protocol

The compound is managed by a decentralized community of COMP token holders who propose and 

Votes on upgrades to the protocol.

The compound should utilize the following protocol i.e 

• The company’s shareholders will receive a portion of the COMP tokens during the initial sandbox period. The shareholders can either delegate the voting weight to themselves or someone else.
• Most of the COMP tokens will be escrowed, and hence, will not participate in governance.
• Compound developers are encouraged to participate in governance actively.

How does it work?

Any address with more than 100,000 COMP delegated to it may propose governance actions, which are executable code.

When a proposal is created, the community can submit their votes during a 3 day voting period.

If a majority and at least 400,000 votes are cast for the proposal, it is queued in a Timelock contract and can be implemented after a 2 day waiting period. 

Conclusion

Cryptic Ocean is a blockchain technology company that provides end-to-end blockchain development and blockchain consulting services to multiple business domains.

Our goal is to assist corporations adopt new technologies and change difficult problems that arise throughout technology evolution.

Contact us for the most effective solutions regarding the utilization of blockchain technology to resolve the toughest challenges faced by the globe nowadays.

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