Money markets have been around for ages in the traditional financial world – now the crypto world has one of its own. Compound funding.
Compound is an Ethereum-powered decentralized money market network that allows users to earn interest on deposits and borrow against collateral for interest rates based on supply and demand. However, it requires technical skills to reap the full benefits.
For new users, there are a few handy graphic portfolios that can make the process easier.
Join us as we walk through the basics of compound finance and how to start earning and borrowing.
Compound finance: the basics
You can think of Compound Finance as a large pool of money that operates under a transparent set of rules. Anyone can participate by depositing Ethereum assets like ETH or any compatible ERC-20 token. Because it is completely decentralized and automated, there are no KYC checks or application rejections. Anyone with an Ethereum wallet can interact with Compound directly or through a compatible app that offers integration with the platform.
This is how it works …
- When you deposit crypto into the pool, you immediately start earning interest after each Ethereum block (approximately every 15 seconds).
- The interest you earn comes from people who borrow from the pool and pay a higher rate of interest than what you earn by depositing.
- Unlike a bank account, deposits made in Compound are turned into a new type of Ethereum token called a C token.
- For example, if you deposit USDC, you will receive cUSDC – a different ERC-20 asset in return. cUSDC is designed to proportionally increase in value as interest is accrued in the pool.
- Since your deposit is completely in your control at all times, you are free to cash your deposit at any time to claim your interest. Or, you can directly sell your cUSD (or other C token) on compatible exchanges.
Borrowing assets on Compound Finance is more complicated than just making a deposit, but it uses the same basic principles. First of all, you will need to deposit your collateral as you would to earn interest. All loans on Compound are over-collateralized. This means that if you want to borrow WBTC for example, you will need to deposit a larger amount of another crypto asset such as ETH or DAI. Since you have more on deposit than you borrow, depositors have some protection in the event that a loan cannot or does not pay off their loan.
Interact with compound finance
There are many ways to get started with Compound Finance. A popular choice is to use the platform’s native web app. It is available on app.compound.finance. Once on the site, you will need to connect a compatible Ethereum wallet.
Default choices include Metamask, Coinbase, Ledger, and Wallet Connect. You can log in either through a browser add-on or by scanning a QR code with a mobile app.
Once connected, you can start interacting with the network and making deposits. Just like with other websites that interact with an Ethereum wallet, you will need to approve each transaction separately.
If you are looking for a simpler and more graphical experience, several portfolios offer Compound Finance integration. An example is Exodus, a very popular desktop and mobile graphics portfolio. Using any recent version of Exodus, just click on the Compound Finance button.
From there, follow the onscreen instructions to start earning interest with DAI. While using Exodus is much easier than other options, the wallet currently only supports interest-bearing deposits with DAI. Other items are currently not supported. Loans are also not currently supported.
Another choice for those looking for a simpler experience is Money wallet. Argent now supports Compound Finance and allows for a wider range of assets than Exodus. It seems that Argent does not currently support loans either.
How much can you earn with the compound?
Interest rates for earning and borrowing on Compound depend entirely on demand. If many people want to borrow an asset, depositors will benefit from higher interest rates. Conversely, if there is not much demand from borrowers, interest rates on deposits will be lower. The same is true for borrowers, but in reverse.
Current interest rates for supported assets are available on app.compound.finance, as well as on any wallets or apps with built-in Compound integration like Argent or Exodus. During our research, we found that the best rates for earning interest were for the TUSD at just over 17%.
DAI, another stable piece, lagged just over 5%. However, other big-name crypto assets like ETH and Bitcoin (in the form of WBTC, an ERC-20 token) were lagging behind and well below 0.20%. Looking at the 30-day averages for these assets, these interest rates appear to be well within the normal range.
When comparing these income interest rates to other DeFi apps and platforms, the offers on Compound are not competitive at all. On the other hand, the amount of interest available for TUSD deposits is top notch. Interest rates for other ERC-20 tokens were typically between 1% and 5%. This means that Compound Finance may not be the ultimate destination for all of your DeFi deposits. Instead, you’ll need to look at actual income rates and figure out what’s best for your plan.
Interest rates change all the time. Once you have made your deposit you will continue to earn interest as long as you keep your C tokens regardless of the interest rate.
What are the risks of using compound finance?
Compared to other high tech DeFi platforms, Compound Finance appears to be a good choice in terms of reliability from what we can determine. The platform claims on its homepage that it has been fully audited. The California company behind Compound also has an ongoing bug bounty program. So far in its history, Compound has not yet been the victim of any hacks, thefts or other breaches that we have been able to find reports on.
A point to consider about Compound is not so much a technical risk as it is a legal risk. Given that the company behind this one is based in the United States – a place that has been far from welcoming when it comes to crypto projects – it’s hard to say what the future holds for the platform in terms of interactions with major regulators like the SEC. So far there has been no friction on this front from what we can tell.
In terms of protecting against market volatility, the platform has undergone what appears to be a rigorous review by Gauntlet. In a 44-page report, Gauntlet notes that: “… the protocol, as currently set up, should be robust enough to reach at least 3 times the current loan size as long as ETH price volatility does not exceed all-time highs. . In other words, it would take a huge, virtually unprecedented black swan event to put Compound in jeopardy.
As with any DeFi project, it’s important to only invest what you’re willing to lose. Based on our research, Compound seems to be a safe bet. Be sure to do your own research and educate yourself on the project before you get involved.
Is Compound Finance your DeFi platform of choice, or are you using something else? Share your experiences with us in the comments below.