COMP - Is Compound a Good Crypto Investment?

Introduction

In this article, we’ll explore the Compound platform, one of the DeFi pioneers that led the way along AAVE during the bull market of 2021 in the lending and borrowing sub-sector.

Lending and Borrowing is one of the most popular services in traditional markets, so it would be naïve to assume that developers wouldn’t see the opportunity of bringing it on-chain and implementing decentralized finance protocols that provide a smoother service than traditional companies.

What is Compound?

Similar to the majority of Decentralized Finance (DeFi) platforms, Compound functions as a network of transparent smart contracts operating mainly on the Ethereum blockchain. Its core focus lies in facilitating lending and borrowing activities. Borrowers can access loans while lenders can contribute by locking in their crypto assets within the protocol. The interest rates borrowers and lenders receive are dictated by the supply and demand dynamics of each specific cryptocurrency.

As of now, the Compound protocol is available on Ethereum, Polygon, Arbitrum, and Base.

How does Compound Work?

At its core, Compound operates by seamlessly merging the actions of lenders and borrowers through the synergy of smart contracts executed on the blockchain, complemented by cryptocurrency-based incentives.

The platform caters to two primary user groups:

• Lenders: Individuals seeking to lend their cryptocurrency holdings can initiate this process by transferring their tokens to a specific address under the governance of Compound. In return, they earn interest on their deposited assets.
• Borrowers: Those who wish to access funds by utilizing their cryptocurrency as collateral engage as borrowers. They deposit their chosen cryptocurrency as collateral and gain the ability to borrow other cryptocurrencies supported by the Compound protocol, with the borrowing amount contingent on a portion of the deposited collateral.

To facilitate this intricate dance, Compound introduces the notion of cTokens. Once an individual deposits cryptocurrency into the platform, they are issued a corresponding cToken, a novel cryptocurrency that encapsulates the value of the deposited asset. Various cTokens such as cETH, cUSDC, and cDAI embody this concept.

Although cTokens can be freely traded and transferred, they are exclusively redeemable for the original cryptocurrency locked within the protocol. This intricate procedure operates autonomously through the Compound code, allowing lenders to withdraw their deposits whenever they choose.

Tokenomics

Compound has introduced its native token called COMP, which basically functions as a governance token, allowing the community to vote on governance proposals and help to build the future of the platform.

The maximum supply of COMP tokens is capped at 10 million tokens, and the distribution is the following:

Final Thoughts

The COMP token is included in our approved list of tokens here on Kassandra. If you're intrigued by the idea of adding it to your investments to either diversify your portfolio or get involved in the lending and borrowing field, you have the option to invest in one of our existing pools or establish your own!