What is Compound (COMP)?
Compound Finance is a decentralised finance (DeFi) protocol that allows users to deposit, borrow and earn interest on cryptocurrencies.
The mechanism for doing this is by creating liquid money markets for cryptocurrencies by setting interest rates via algorithms. The main reason for their popularity is because they are Coinbase’s first ever investment into a cryptocurrency project. Given the high profile of the exchange, prices for the COMP token skyrocketed to $370 in the first month of launch as interest in the project gained traction. Currently, the token is consolidating around $150 as it gears up for another move.
COMP in brief:
- COMP is a DeFi money market protocol
- Holders of COMP have voting rights on the future of the protocol
- Interest is distributed to borrowers and lenders across the token’s liquid markets
- The token is traded on various high-profile exchanges
How does Compound work?
Briefly, the Compound protocol operates similarly to a bank. You can deposit various funds and earn an annual interest on your deposits. Such a feature is particularly attractive in light of the fact that global central banks are turning towards negative interest rates.
Another major difference to traditional banks is that Compound does not have custody of your cryptocurrency deposits. You are actually sending your crypto to interact with a smart contract, instead of a company or user at the other end of the transaction.
This feature is key as it means that no person or authority or middle-man can control your funds.
The reason this is so interesting is that Compound is a DeFi platform that does not have to follow the Federal Funds Rate. It can do something completely different and is censorship resistant since there is no centralised authority.
What is the $COMP token?
Since May 2020, Compound transitioned to what it calls ‘community-driven governance’. In essence, this means that holders of the Compound token can make proposals and vote on decisions relating to how the protocol is being developed and run. To demystify the abstraction, this means having a stake in deciding what sort of collateral Compound should support or what the interest rates should be.
Technically, there’s a total supply of 10 million COMP tokens, 42.3% of which is reserved for distribution to users to earn when they use Compound. For each Ethereum block, 0.5 COMP is distributed across the protocol’s 9 markets in proportion to the interest accumulated in the market.
Each of these markets get a portion of distributed tokens with a 50:50 ratio between suppliers and borrowers of a particular cryptocurrency. As such, the crypto that is earning the most COMP per day changes frequently.
The token is traded on various exchanges such as Coinbase, FTX and SwissBorg.
The bottom line
Compound is one of several decentralised finance protocols that’s openly accessible to anyone with a crypto wallet. The idea is to allow people to have more access and control of their money while transitioning to a fully decentralised system over time. This takes a degree of trust for initial users but ultimately, the plan is to transfer full authority over a Decentralised Autonomous Organisation (DAO) in the spirit of the decentralised financial community.