Compound — A Passive Income DeFi Token
Compound is an ERC 20 token that allows users to earn crypto by supplying or borrowing crypto assets on the platform. Lenders get to accrue interest on their deposited assets, while the borrowers pay interest.
As a supplier of crypto on Compound, you can withdraw both your principal and your accrued interest at any time. Interest accrues after every Ethereum block time (approximately 13s).
Taking part as a supplier in the network means that you’re part of a liquidity pool that provides borrowers with money. And for that reason, you earn the right to share in the interest earned by the pool.
When you deposit a token on the Compound network, it becomes a cToken. That is, Ether becomes cEther; DAI becomes cDAI; USDC becomes cUSDC, and so on. A cToken can be exchanged for its underlying asset at any time.
The Compound network currently supports only Ether and ERC 20 tokens in its markets. You can head over to the Compound official page to see all the tokens and markets that are available.
To borrow on Compound, you need to provide collateral to get the token that you don’t own. This can be useful if you need to use that token on another application or market. During this time, your collateral can not be redeemed or transferred until the borrowed token is fully repaid.
Take an example where you have ETH but need USDC to complete a certain trade. You can simply provide ETH as collateral on the Compound platform & then instantly borrow USDC to perform the transaction.
An interesting thing with Compound is that both lenders and borrowers are rewarded with the blockchain’s native token, COMP. Every day, 2312 COMP tokens are distributed to different markets. The tokens got by each market are split 50/50 between borrowers and lenders.
Owning this token gives you the power to participate in the governance of the Compound protocol. You can suggest a new market to be added, suggest parameter changes, and even vote for proposed changes. Besides, this voting power can be delegated to other COMP-token addresses.
If your address has 65,000 COMP or more, you can make a governance proposal. The other option is to lock up 100 COMP to create an Autonomous Proposal and then if delegated 65,000 COMP later, it can become a governance proposal.
Until now, no mention has been to how you can transfer a supported cryptocurrency to the Compound network. The top 3 ways are discussed below:
A. Using the official Compound site
- Go to app.compound.finance
- Tap the “Connect Wallet” button ( You should be able to see this on the top right-hand side of the web page)
- You’ll then be shown different Wallet options( Coinbase, Metamask, Ledger, Wallet Connect) that you can connect to
- Most users should find the Coinbase option easiest. Follow their simple step-by-step instructions to transfer your coins to Compound
B. Using Argent
Argent is the first smart contract Ethereum wallet, available on both App Store and Google Play. You don’t need a seed phrase or a paper backup to recover your funds with it. The app allows you to add “Guardians” who can authorize a recovery when you have initiated a recovery request.
Guardians can be your trusted friends or family, a third-party organization, or a hardware wallet if you’re not the trusting kind.
For security, ownership is transferred after 36 hours and this gives you time to cancel the recovery request in case you find your lost phone.
It’s important to note that Argent doesn’t own any of your assets or keys. You’re still in control of everything, as it should be in the blockchain era. The whole recovery process is handled through smart contracts on the Ethereum network.
To recover your lost wallet simply follow these steps:
- Download the Argent app
- Enter your username
- Make a recovery request to your Guardians
- Once they confirm it, you’re all set.
It’s also worth knowing that Argent intends to work on an EIP (Ethereum Improvement Proposal) to make it usable with other blockchain protocols. So if you’re a developer, feel free to contribute on Github.
C. Using a Code-based approach
You may want to create a custom smart contract to manage how you supply or borrow assets from the protocol. In order to do this, you’ll need knowledge of a combination of all of the following tools:
Solidity: The smart contract language for Ethereum
Web3.js: A Javascript library that eases the work of reading and writing to the Ethereum blockchain
Metamask: An open-source DeFi Wallet
Infura.io — A company that provides an API for connecting to the Ethereum network using HTTP and Web sockets
With that said, the last option is ideally meant for developers.
As a user of any financial service, you need assurance that your funds are managed with the utmost safety. So how does Compound ensure this?
This DeFi application has put in place a number of security & risk management measures to safeguard the platform.
The development team follows the best security practices & also encourages ethical hackers to participate in the bug bounty program. Submitting a bug review makes you eligible for a $500 to $150,000 reward, depending on the severity.
Compound is majorly concerned with vulnerabilities that affect the platform on its Mainnet. Bugs that affect third-party applications built on top of Compound are not part of the bug bounty scope. Vulnerabilities that affect the Compound site (app.compound.finance) are also welcome by the team. You need to follow the terms and conditions to participate in the bug bounty program. These can be found on the Compound page.
For even greater security, the platform has patterned with third-party organizations ( Trail of Bits & OpenZeppelin) to audit its software. You can get these findings on the Compound site.
Compound also partnered with Certora to carry out a formal verification of its software. Formal verification is a software engineering practice that is meant to prove or disprove the correctness of an algorithm using a formal software specification. This process ensures that you can mathematically trust an algorithm and not just by heart.
Lastly, Compound has also ensured its economic security by partnering with Gauntlet. Gauntlet is a simulation platform for risk management. It has simulated the market stress of the Compound protocol to measure its economic security as it scales to support more markets. The long and possibly boring 44-page market risk assessment can be found on the Compound page. Bottom line: they did a great job.
Final Thoughts
Compound is a powerful DeFi platform on which you can build your own applications. The protocol also boasts of strong backing, including the biggest US crypto exchange — Coinbase.
Even better, the COMP token can be traded just like other tokens.
Now that you have enough knowledge about Compound, feel free to participate in the network activities. If you’re a developer, you can contribute to its development via GitHub. If you want to earn some COMP, you know where to begin from!
