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WHAT IS COMPOUND AND HOW COMP WORKS

,   and  Ana Fernandez
January 6, 2023 . 6:44 AM
3 min read
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With Compound, users can now borrow and loan crypto with ease — all while having
the power to influence its future direction through the ownership of COMP
tokens.

DeFi has been a driving force behind the cryptocurrency revolution, and Compound
Protocol is an integral piece of this innovative financial system. Understanding
DeFi can give us invaluable insights into where crypto will go in years to come
- let's take a look at that context now.

The world of cryptocurrency taps into the power of decentralization to
revolutionize the handling of payments. Take Bitcoin, for example - without
involving all sorts of banks or financial services companies - one user can pay
another through an independent network built on a distributed system and
verified by individual nodes across different locations. The result is fast and
secure money transfers that defy traditional boundaries.

DeFi has drastically changed the financial world by allowing users to access a
wide array of services, such as banking, borrowing, and lending, in an entirely
new way through decentralized and secure distribution using blockchain protocols
and cryptocurrencies.

Ethereum is the foundation of DeFi, a blockchain ecosystem that offers smart
contracts and native tokens for decentralized financial products. Compound
protocol stands out from other services as it allows users to borrow & lend
their crypto easily.


UNDERSTANDING HOW LENDING WORKS ON COMPOUND

Users can access innovative borrowing and lending services for various leading
cryptocurrencies – like Dai, Ether, USD Coin, and Ox without having to depend on
a third party. Imagine borrowing money without visiting a financial institution
and dealing with bureaucratic processes.

With Compound, you can securely send any amount of the supported
cryptocurrencies to their blockchain-based protocol - similar to a savings
account and start reaping the rewards in interest payments in the token you
sent. In a stunning example of collaboration, crypto traders unite to pool
tokens in an intricate and ever-growing web through Compound protocol smart
contracts.


UNDERSTANDING HOW BORROWING WORKS ON COMPOUND

Borrowing crypto is a global opportunity that allows users to access funds
without needing a good credit score. Through Compound Protocol, you can use your
existing digital assets as collateral to access loan opportunities - the amount
available for borrowing based on the quality of that asset.

💡
For example, if $500 worth of BAT was secured with Compound at 50% Collateral
Factor (CF), up to $250 in other supported cryptos could be borrowed. Keep in
mind, though, like all loans, interest payments are required.

Lenders and borrowers have to pay attention to the interest rate. Fortunately,
the Compound protocol has found a way of automatically calculating and applying
these interests.


HOW LENDING AND BORROWING RATES WORK ON COMPOUND

By lending or borrowing on Compound, you have the potential to unlock a world of
digital asset possibilities. When your crypto is locked up in their
blockchain-based "money market," cTokens are created; these work like any other
Ethereum tokens and can be transferred, traded, or used with other decentralized
applications (Dapps) while still earning interest.

With complete control over your public and private keys and access to
potentially lucrative DeFi opportunities, this innovative platform could open
doors for increased portfolio flexibility.

Interest rates on the crypto markets fluctuate in line with supply and demand,
ensuring that investors always have up-to-date information to make decisions.


LET'S SEE HOW COMPOUND LIQUIDITY POOLS WORK.

The crypto lending and borrowing market can be highly lucrative, with the size
of a pool determining how much you will earn. When there is an abundance of
funds locked in Compound's pools, interest rates are naturally lower to reward
those who add more funding—the key being to lend new crypto into smaller
reserves for higher yields!

On the other hand, borrowers are incentivized to repay loans taken from pools
while taking out larger ones as they pay fewer interest fees overall.

Borrowing crypto through Compound requires locking in more collateral than the
value of what's borrowed. This ensures a secure loan, but it also comes with
certain risks - if your deposited assets lose too much of their value, they're
automatically liquidated (margin call) to protect against losses on both sides.


EVERYTHING ABOUT THE COMP TOKEN

Lenders and borrowers on the Compound protocol can benefit from COMP, its
governance token. Every 15 seconds, both parties earn a proportional amount of
COMP depending on how much interest has been accrued from their assets.

This valuable asset allows users to turn profits and lets each holder have one
vote in proposing and deciding changes for the entire protocol - even assigning
that power to someone else if desired.

The Compound financial ecosystem is unique because it's held together by
executable code and governed democratically. All proposed changes to the
protocol must pass a community vote, granting everyone two days to debate before
committing - giving users time to adjust any open positions before new rules
take effect thoughtfully.

Allowing for its self-governance, Compound creates an innovative space where all
updates are carefully considered on their merit alone.

Compound is revolutionizing the DeFi ecosystem, giving users access to a new
world of lending and borrowing opportunities. Its native COMP token enables
blockchain-enabled benefits unlocking massive potential in crypto markets.


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