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The DeFi (Decentralized Finance) market has seen significant growth. Decentralized finance or open finance is a financial application built on the blockchain network for accessing various financial services from the current financial ecosystem.
The Compound protocol is in huge demand, owing to the unique benefits that make it one of the most preferred DeFi protocols. If you plan to develop a DeFi protocol like Compound, here’s all you need to know about Compound, its working, and creating your own decentralized protocol like Compound.
Compound: Autonomous Interest Rate DeFi Protocol
Compound is a decentralized protocol for lending and borrowing cryptocurrency in the DeFi space. It is a decentralized marketplace offering various functionalities using smart contracts to automate and manage the capital added to the platform.
The Compound is a top-ranked marketplace for depositing cryptocurrencies, earning interest and borrowing cryptocurrencies. The permissionless access offered helps in connecting and earning interest with the web 3.0 wallet using the trading path.
Moreover, Compound allows buyers and suppliers to directly interact to discuss the collateral and interest rates. All the funds or assets are held in smart contracts, also known as liquidity pools without any third-party intervention. Using the algorithmic mechanisms, interest rates keep on changing as per the demand and supply.
How Does Compound Finance Work?
If you are planning to develop a DeFi protocol like Compound, understanding its working will help you in the development process.
The supplied assets in Compound can be tracked in tokens, also known as cTokens. Compound’s native tokens or cTokens are ERC-20 tokens representing a portion of an asset pool in Compound. For example – If users add ETH into Compound, it changes to cETH, DAI to cDAI and so on.
If users deposit multiple coins in their wallets, they will earn interests on the basis of their individual interests, or we can say cDAI earns the cDAI interest rate, cETH earns the cETH interest rate.
Users can easily redeem the cTokens for the portion they represent from the connected wallet. And, whenever the market earns any interest, the cTokens will earn that interest and be convertible to more underlying assets. So holding an ERC-20 token means earning interest on the Compound.
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Schedule Free DemoWhy do Compound Borrowing and Lending Rates Fluctuate?
Whether users lend or borrow, they have to lock their cryptocurrency assets with Compound. Users get the cTokens as the balance of their crypto. CTokens are the ERC-20 tokens and one of the greatest innovations of a blockchain-based crypto money market to transfer, trade or program into other decentralized applications in the DeFi ecosystem.
They can be easily controlled like any other digital asset using public or private keys. Interest rates are just a function of the crypto in the market and vary as per the supply and demand of the currency market conditions.
Benefits Of A DeFi Protocol Like Compound
The following are the benefits of Compound-like DeFi lending and borrowing platform development:
- Provides users high yield on their crypto assets without any intermediary
- On the user distribution page, users can easily track the amount of interest earned per day.
- COMP holders can earn more COMP tokens using various governance proposals
- Token holders earn interest within the protocol
How Does Compound’s Governance Work?
Compound is mostly funded by capitalists. But, Compound Finance is being decentralized with the COMP tokens. With the token, it entitles holders to pay fees and governance rights over the DeFi protocol.
Token holders allow users to make changes to the protocol with the improvement proposals or on-chain voting. Each token has one vote and accordingly, holders can vote on their proposals using the token holdings. Possibly, the protocol will be completely governed by the COMP token holders in the future.
All the governance proposals are available in Compound with an executable code and have a three-day voting time frame. For community approval, the protocol can take up to two days to be into effect.
Final Words
The Compound protocol is a DeFi solution helping users in lending and borrowing crypto. It uses the functionality of smart contracts for various lending and borrowing transactions. Users just have to lock some crypto in Compound to lend or borrow crypto assets.
It has become an integral piece of the DeFi ecosystem, however when the governance will be fully decentralized, Compound will strengthen its position in the DeFi market.
If you are planning to develop a DeFi protocol like Compound, Antier Solutions can help. We offer end-to-end development solutions to develop and deliver Compound-like protocols. In addition, we specialize in the development of customized DeFi protocols as per diverse business mdoels.
Connect with our subject matter experts to share your requirements.
