Compound.Finance is an open-source decentralized cryptocurrency lending platform that was founded in 2017 by a group of blockchain enthusiasts residing in San Francisco, California. Compound Labs, the company standing behind the platform, is headed by Robert Leshner. His main goal at the time of launch was to enable users to use assets locked in their wallets and get passive income in this way. Eventually, the platform has become one of the most popular decentralized platforms with smooth, DeFi protocols with a high level of security. It has played a huge role in the advent of a new DeFi era having replaced the outdated traditional financial system.
It is worth saying that the facility wasn’t initially decentralized, though. The founders of the system have decided to issue a native governance token COMP to transfer this function to the members of the community. Thus, it gradually transformed into the DAO (decentralized autonomous organization) run by the community. Full reduction of administrative privileges took place in October 2019.
The Compound.Finance lending platform employs a unique working methodology. The procedure presupposes the lack of direct lending when a user gets borrowed funds from a certain lender. Instead, the assets are provided by a liquidity pool which is created with the assistance of liquidity providers. The process is fully automated as it works on the basis of smart contracts.
With the help of Compound, users get a unique possibility to monetize their idle money while those who need funds for their activities can borrow them in a trustless manner. Utilizing these funds, borrowers benefit from the offer as they don’t have to pay to any middlemen as they borrow funds directly from liquidity pools. The process is hassle-free as there is no need to go to the bank while the platform enables easy operations in an automated manner. Thus, it removes all unpleasant nuisances that usually arise in traditional financial institutions.
The lending platform Compound is based on the Ethereum ecosystem. As users can get interest in 18 markets, they can deposit cryptocurrencies supported by the platform and harvest rewards. Thanks to the yield farming functionality, the borrowing power of the community keeps improving over time.
Another benefit of Compound is associated with the fact that it enables borrowing and lending without intermediaries which makes the procedure more affordable for both parties, lenders and borrowers. The pre-programmable character of smart contracts forces the conditions of the deal and generates interest in an automated way.
Also, it’s worth noting that the fluctuation of rates incentivizes lenders to contribute their assets. At this, borrowers try not to over-borrow to avoid the liquidation of collateral that can follow as a result of a price drop. On Compound, customers can reimburse the collateral at any time, though.
Compound.Finance financial details
It is possible to lend or borrow any cryptocurrency asset supported by the platform. At the time of writing, there are 12 basic Ethereum-based assets. The list of cryptocurrencies added to the system includes ETH, ZRX, USDT, BAT, USDC, LINK, WBTC, DAI, USDC, TUSD, USD (fiat), and UNI. When assets are supplied to Compound.Finance, they are represented as cTokens. The platform started the distribution of its native tokens in June 2020.
Users who want to borrow an asset from the platform should have collateral that requires evaluation. This procedure is necessary to determine the amount users can borrow. If it happens that the amount borrowed by users exceeds the available limit, it entails insolvency of the account, which is known as liquidation mentioned above. Users should avoid such situations so as not to lose their funds.
The withdrawal fee depends on the asset as well as APY that lenders may earn. One of the most appreciated features of the platform is a receipt of COMP rewards that strengthens the platform and improves the stability of the customer base that constantly grows.
The platform relies on the Compound protocol that was built on the Ethereum blockchain. While establishing money markets presented by pools of assets that feature algorithmically calculated interest rates, the exchange works on the supply and demand principle. There is direct interaction of borrowers and suppliers with the protocol without counterparties and the necessity to negotiate the terms. The team of developers has embedded the automated algorithms in the contract, which help to calculate the average price on the basis of data received from numerous exchanges by comparison of figures from these feeds.
Also, the platform uses Comptroller implemented as an upgradeable proxy which is the risk management layer of the Compound protocol. It is used to calculate the amount of collateral maintained by users. Comptroller maps function with the assistance of the Price Oracle.
Though the platform protocol was controlled from a single point at the time of launch, the project selected the DeFi path. Thus, with the release of its native token (COMP), the transition to community control had begun. At the time of writing, the members of the community are entitled to decide on a number of questions that determine the future of the platform. For instance, the list of the Compound proposals includes the OpenZeppelin security partnership, which had been successfully executed already, and retroactive distribution of COMP tokens to early users that failed.
The voting weight depends on the amount of assets held by every single member of the community. The official website of the platform publishes the list of top-100 addresses by voting weight beginning with Polychain Capital with over 300 million votes and the voting weight over 11% to Robert Leshner, who is the founder of the platform, with more than 105 million votes and the voting weight over 4%, and other participants.
Robert Leshner, a graduate of the University of Pennsylvania in economics, is the founder and CEO of Compound Labs and the Compound.Finance platform. Previously, he was the chair of the San Francisco Revenue Bond Oversight Committee. Additionally, he founded Citywide Special and Safe Shepherd, where he takes the position of CEO as well.