COMP is an ERC-20 token that was launched on the Ethereum blockchain in 2018. This is a coin of Compound Protocol, a money market protocol where interest rates are generated algorithmically based on supply and demand.
COMP tokens give governance over the protocol to users. They can take part in the future of the protocol voting for initiatives and trying to improve the system. Members can propose and vote on upgrades of the protocol.
Compound is a decentralized lending platform created in September of 2018. The company behind the platform is Compound Labs Inc., based in San Francisco. However, the decentralized platform has become rather independent and doesn’t depend on the company any longer.
The main goals of the platform are stated differently on the project’s website but the main point remains the same. The project urges cryptocurrency holders not to leave their funds idle and put them to use. Therefore, the users of the platform can borrow and lend digital assets based on Ethereum including such coins as BAT, wBTC, and 0x (ZRX).
The protocol token was released in June and this has become a huge milestone for the community. The decision was taken to distribute 50% of COMP among the members of the community, while another 50% get allocated among the investors of the project and the team. The protocol is not operated by Compound Labs any longer.
The Compound system works differently in contrast to other borrowing services with either fixed rates installed or the rates agreed between the parties. The rates on the Compound platform are established by supply and demand, which is regulated by the sophisticated algorithm that is frequently updated. With the growth of demand, the interest rates grow as well for better regulation of the market. It was made not to let users over-borrow, while the lenders are motivated to lend in this way. At this, the funds are not frozen and the borrowers have the opportunity to withdraw their assets when they wish.
When borrowers owe more than allowed because of the collateral’s price drop, users face the risk of losing the collateral as it can be liquidated. It’s possible to select this option and then acquire the collateral with a discount. Users can pay back the part of the debt to improve the borrowing capacity and avoid the liquidation process.
In June 2020, Compound launched the liquidity mining program to urge lenders and borrowers to use the Compound protocol. The lack of activity would bring to decline, therefore the platform rewards the members of its community to ensure high liquidity.
At the time of writing, the platform is implementing its oracle Open Price Feed in numerous networks. It will rely on data from posters and price reporters. Various exchanges will report the price signed by the public key. In the beginning, the Coinbase will be the only price reporter. The oracle will also rely on Uniswap V2 price feed until it acquires numerous price reporters. The developers say that they plan to get away from Uniswap support in the future.
It’s possible to build your own API to invoke Compound protocol smart contracts via HTTP requests. The platform uses Infura as the bridge between the application and the Ethereum network. The team tried to create an open and resilient infrastructure so that every member of the community could create their own interface and functionality for participation in Compound governance.
Though COMP is a standard ERC-20 token, it is more than that. Being the token of the Compound protocol, it allows its holders to delegate voting rights to any address they wish. At this, anybody can receive the delegation and participate in the Governance of the protocol without even holding COMP. The voting system is rather sophisticated.
COMP tokens are provided to the members of the community for participation in the operations. Each time users borrow or lend assets, they are rewarded with COMP. As the price for the COMP token is rather high, it led to the situation when some users were able to raise their APY (annual percentage yield). This is partly the reason for COMP's popularity.
The principle of Compound work is rather simple. All members of the community combine their assets. As a result, the system has the asset pools with funds available for borrowing. There are Compound lending pools for different assets. Those who need funds can borrow crypto assets below the value of the supplied collateral. Different factors affect the amount they can borrow, for instance, the market cap of the collateral and its liquidity.
The members of Compound community have to pass through KYC/AML procedure to be able to use the platform.
ICO and other financial details
There was no ICO to distribute the COMP token. As it has been mentioned already, half of the token supply was allocated to the founders, investors, current and future team. 2.4 million tokens were allocated to the community and about 800 thousand tokens for community development.
COMP is distributed among users of the protocol on a daily basis via all markets supported by the platform. There is an equal distribution between the suppliers and borrowers, i.e. 50/50. Now the protocol belongs to the Community.
It’s possible to buy COMP on Coinbase Pro, Binance, and Poloniex. If a personal wallet is needed, the tokens can be stored on any wallet that supports Ethereum such as Exodus Wallet, Atomic Wallet, Trezor, Trust Wallet. MetaMask can be a reliable option for a browser wallet.
Compound Labs Inc. CEO Robert Leshner said in the interview that Compound was designed as an experiment. The company doesn’t profit from the project. The goal was to enable smooth and transparent borrowing and lending of Ethereum assets. He admits that the project didn’t have a roadmap at that time as the members of the team didn’t know what to expect from the project. In June 2020, the company admitted that their core work over protocol was done. The distribution of tokens was the last step to take it over to the community. The company agrees to step back to allow the community to take charge.