What is Compound? | Complete Guide

Que es compound
6 min read

You may have heard of Defi lately or also known as “decentralized finance“, and this concept is becoming more and more important in the world of finance and cryptocurrencies. This, in part, is thanks to protocols such as Maker and Compound, among others.

And it is that Compound, it is a project with great potential, since this protocol allows you to make a profit for lending your cryptocurrencies. Yes, that’s right, you loan your cryptocurrencies and you receive an interest.

That is the main reason why today there are many people who think that Compound can be the future of decentralised finance. Will it be, won’t it be? Only time will tell.

However, today is your lucky day because if you want to know everything about COMPOUND you could not be in a better place. Join us to discover why, for many, is the future of decentralised finance.

Origin of Compound

Like everything, Compound also has an origin and in this case it took place in 2017 in San Francisco. The Compound Labs Inc company founded by Robert Leshner and Geoff Hayes was born with the objective of making it possible to create exchange financial markets with interest rates based on their assets.

Something that was of great help during the beginnings of Compound Labs Inc was the round of financing carried out in May 2018 with which they managed to raise 8 million dollars, when it was not even a year since it had been founded.

Thanks to these 8 million dollars they obtained, it was possible to develop a large part of what is today Compound Finance, one of the most ambitious DeFi protocols, and for many the future of the same.

However, despite extensive development in 2018, it had little use. Compound did not begin to be used until a few months ago, specifically in June, where it managed to reach 910 million dollars deposited by millions of users, to receive an interest.

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How does Compound work?

The operation of Compound is based on the blockchain of Ethereum, like the vast majority of decentralized applications and protocols.

  • On the one hand, much of the operation depends on Ethereum smart contracts, as these are used to automate the storage and capital management that is added to the platform. 
  • On the other hand Compound uses ERC-20 tokens called cToken (Compound Token), which serve to monitor and control loans and interest generated.

For example if a user adds “x” amount of any ERC-20 token such as Ether, the protocol will automatically generate the equivalent value of the Ethers deposited in cEther, in this case.

Best of all, we can store these tokens in wallets like Argent and exchange them without problems. Thanks to this, it is not only possible that you earn interest, but you can also spend your funds while generating income.

How to start earning with Compound?

To start earning interest with Compound, you need to know which ERC-20 token you are going to use, these can be Uniswap (UNI), DAI, Basic Attention Token (BAT), Ether (ETH), Augur (REP), USDC, WBTC and ZRX among others.

There are some tokens that offer a higher interest rate if you lend them, this depends on the supply and demand. The more users you have requesting a token, the more interest that will be generated will increase. Therefore, before buying the token you should see which one you can get the most benefit from.

Once you have chosen the token you want to use you must buy it. On the Bitnovo website you can find  DAI, Basic Attention Token (BAT), Ether (ETH) and ZRX

When you already have your tokens you must use a wallet to store them, the wallet I recommend is Argent, because with this wallet you can store and send, borrow, earn interest and invest, in a comfortable and simple way.

“Argent is building the simplest, safest and most practical gateway to cryptographic and open financial products.”

Robert Leshner – Compound creator

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Advantages and Disadvantages of Compound

Compound is a very important project that can offer many benefits and can be key for decentralized finance to consolidate as a new model of the economic ecosystem.

However, it is a fairly new project and something unknown to many people, however nothing is perfect and as everything has its pros and cons we will see below.

Advantages

  • Compound allows us to generate revenue passively without practically making a large investment.
  • It is a great option for those who have their money stopped and is not generating any benefit, because thanks to Compound you can earn interest.
  • You can liquidate your cryptocurrencies, that is, you can get liquidity from them without having to sell them.
  • Is decentralized.

Disadvantages

  • One of the main disadvantages of Compound is, as in most cases, the volatility of cryptocurrencies. This would not only affect borrowers but would also affect those who have cTokens and receive profits from them.
  • In an ecosystem like DeFi, various variables can contribute to its malfunction. For example, the vulnerability of some protocol can turn the most valuable token into nothing, all in a matter of minutes.

In short, DeFi projects are a mine of opportunity, however, most of these are in an experiential phase. Therefore, it is best to be cautious and be prepared for everything.