Compound is primarily secured by Ethereum because it is a decentralised application (dApp) that runs on the Ethereum network.
Smart contracts, which enable the autonomous execution of each action offered in Compound’s protocol, are responsible for making the platform work.
Compound’s future growth and direction are also guaranteed by the governance mechanism made possible by its native COMP token.
What is cryptocurrency Compound (COMP) and how does it work?
A decentralised blockchain-based system called Compound (COMP) operates on the Ethereum network. The Compound protocol, which has its own ERC-20 token called COMP, functions as a decentralised application that allows for the direct implementation of decentralised finance (DeFi) functionalities on the Ethereum network. Through autonomous smart contracts, users of the Compound protocol can either request loans or earn interest by lending coins they already hold.
Compound uses its cryptocurrency token, COMP, to reward its users and encourage activity on both sides. Users receive bonus COMP tokens any time they engage with the Compound protocol, whether it be by borrowing, withdrawing, or repaying a loan. This provides a robust market and encourages the protocol’s active usage.
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What Is Compound (COMP)?
On the Ethereum network, Compound is a decentralised software protocol. Its native ERC-20 token, COMP, is intended to motivate a distributed computer network charged with running a fully decentralised replica of a conventional financial/banking market.
Compound (COMP), one of the growing number of decentralised finance (DeFi) protocols, can use numerous crypto assets as collateral to offer different financial services. In essence, this makes it possible for lending and borrowing to be entirely decentralised and independent.
In other words, individuals can deposit bitcoin they already possess into lending pools created so that other users can borrow from them thanks to the Compound protocol. Interest is paid to lenders on their deposits.
A user receives a new cryptocurrency, called a cToken, from Compound after depositing their cryptocurrency for lending. The cTokens cETH, cDAI, and cBAT are a few examples.
Users are free to move and trade their cTokens, but they can only be redeemed for the cryptocurrency that is locked in the system that the token stands for. Users can withdraw their deposits whenever they want to do so thanks to the Compound protocol’s usage of autonomous smart contracts to manage the entire transaction.
How Does Compound Work?
Compound (COMP) uses a number of potent smart contracts that are directly embedded in the Ethereum blockchain to link lenders and borrowers.
Compound users fall into one of two categories:
Borrowers are users who utilise Compound to post cryptocurrency as collateral and are then given access to borrow additional cryptocurrencies at a percentage of the posted value.
Users that contribute their cryptocurrencies to the lending pools from which borrowers might borrow are known as lenders. On the cryptocurrencies they deposit, lenders get interest.
Lenders that use the Compound protocol are rewarded with ERC-20 COMP tokens. These incentives are fully determined by two variables: the number of cTokens kept in the user’s wallet and a fluctuating interest rate that depends on the asset’s availability. The interest rate earned is lower the more liquid a given token is.
Users can borrow money in any other cryptocurrency that the Compound protocol supports if they lend assets to the system.
It’s crucial to keep in mind that this creates the prospect of liquidation for borrowers if the asset they borrow appreciates in value and becomes more valuable than the deposited collateral.
Who Are the Founders of Compound? (History of Compound)
Veteran businessmen Geoffrey Hayes and Robert Leshner established Compound.
In 2018, renowned venture capital firms Andreessen Horowitz and Bain Capital Ventures contributed $8.2 million to Compound.
The next year, Compound raised an additional $25 million from many of the same backers as well as some new ones, like Paradigm Capital, a venture capital firm affiliated with Coinbase.
The team and company’s investors each received a portion of the COMP cryptocurrency’s initial supply.
What Makes Compound Unique?
Compound is exceptional in how it uses incentives to promote decentralised finance (DeFi). Users are rewarded for their engagement with COMP tokens in addition to the standard DeFi advantages.
COMP serves as a governance token in addition to rewarding users for their loyalty. This encourages users to vote on future decisions that could affect things like interest rates and other variables that may have an impact on their future income in addition to simply participating in the protocol.
What Gives Compound (COMP) Value?
The ability of COMP holders to vote on decisions that may impact the software’s future is one advantageous feature that was already noted.
A COMP holder may also transfer their right to vote to another person. If more delicate issues come up, this enables a third party, someone who is not a COMP holder, to vote on their behalf. This third party could be a legal, financial, or other expert.
How Many Compound (COMP) Tokens Are in Circulation?
Only a predetermined number of COMP tokens will ever exist, just like Bitcoin. There is a limit of 10 million COMP on the entire supply. Less than one-third of the maximum supply is currently in use.
Over a four-year period, users of the Compound protocol will receive 4.2 million tokens.
The stockholders of Compound Labs, Inc. will get about 2.4 million COMP. The founders and current Compound team will receive another 2.2 million COMP tokens with a 4-year vesting period.
The remaining 332,000 tokens will be allocated to future team members, leaving 775,000 COMP set aside to reward community governance.
The precise pace of COMP generation will fluctuate over time since COMP holders and voters have the power to alter it by approving a proposal through local government.
Other Technical Data
To accomplish decentralised governance, the Compound protocol makes use of 5 essential elements:
A user’s voting power is determined by the ERC-20 token COMP. A user’s delegation or vote on a proposition carries more weight the more COMP they have in their wallet.
Delegation – COMP owners must first assign a voting address before they may cast a ballot or make proposals. The address can be anyone’s or, if the user wants to cast their own ballot, their wallet.
Proposals are executable pieces of code that alter the protocol in some way. A user must have at least 1% of the entire COMP supply delegated to their address in order to submit a proposal. A user must own one of the 10 million COMP that are currently in use.
Voting – Users who have voting rights assigned to their address can vote for or against certain proposals. Three days are allotted for voting. If a proposal receives support from the majority, it is added to the Timelock queue.
Timelock: Prior to being enacted, any governance or other administrative acts must spend a minimum of two days in the Timelock.