Money markets have been around for ages in the traditional finance world – now the crypto world has one of it’s own called Compound Finance.
Compound is an Ethereum-powered decentralized money market network that allows users to earn interest on deposits and borrow against collateral for interest rates that are based on supply and demand. It does require some technical skill to reap all of the benefits though.
For newer users there are a few handy graphical wallets that can make the process easier.
Join us as we go over the basics of Compound Finance and how to get started earning and borrowing.
Compound Finance: The Basics
You can think of Compound Finance as a big pool of money that operates on a set of transparent rules. Anyone can participate by depositing Ethereum assets like ETH or any compatible ERC-20 token. Because it’s completely decentralized and automated, there are no KYC checks or application rejections. Anyone with an Ethereum wallet can interact with Compound either directly or through a compatible app that offers integration with the platform.
Here’s how it works…
- When you deposit crypto into the pool, you immediately start earning interest after each Ethereum block (about every 15 seconds).
- The interest you earn comes from people that borrow from the pool and pay a higher interest rate that you earn by depositing.
- Unlike with a bank account, deposits made into Compound are turned into a new type of Ethereum token called a C token.
- For example, if you deposit USDC, you will receive cUSDC in return – a different ERC-20 asset. cUSDC is designed to proportionally increase in value as interest is accrued in the pool.
- Since your deposit is completely under your control at all times, you are free to either cash out your deposit at any time to claim your interest. Or, you can directly sell your cUSD (or other C token) on compatible exchanges.
Borrowing assets on Compound Finance is more complicated than just making a deposit but it uses the same core principals. First, you’ll need to deposit your collateral just like you would to earn interest. All loans on Compound are over collateralized. That means if you want to borrow WBTC for example, you’ll need to deposit a larger amount of another crypto asset such as ETH or DAI. Since you have more on deposit than you are borrowing, depositors have some protection in the event that a borrow can’t or doesn’t’ repay their loan.
Interacting With Compound Finance
There are many different ways to get started using Compound Finance. One popular choice is to use the platform’s native web app. It’s available at app.compound.finance. Once you’re on the site, you’ll need to connect a compatible Ethereum wallet.
The default choices include Metamask, Coinbase, Ledger and Wallet Connect. You can connect either through a browser add-on or by scanning a QR code with a mobile app.
Once you’re connected you can begin interacting with the network and make deposits. Much like with other websites that interact with an Ethereum wallet, you’ll need to approve each transaction separately.
If you’re looking for a more simple and graphical experience, several wallets offer built in Compound Finance integration. One example is Exodus, a highly popular graphical desktop and mobile wallet. Using any recent version of Exodus, simply click on the Compound Finance button.
From there, follow the on-screen instructions to begin earning interest with DAI. While using Exodus is much easier than other options, currently the wallet only supports interest earning deposits with DAI. Other assets are currently not supported. Loans are also currently not supported.
Another choice for those seeking a simpler experience is Argent wallet. Argent now supports Compound Finance and allows a wider array of assets than Exodus. It does appear that Argent also does not currently support loans.
How Much Can You Earn With Compound?
Interest rates for both earning and borrowing on Compound depend entirely on demand. If many people want to borrow an asset, depositors will get higher interest rates. Conversely, if there isn’t much demand from borrowers, interest rates on deposits will be lower. The same is true for borrowers but in reverse.
The current interest rates for supported assets can be found at app.compound.finance, as well as through any wallets or apps that have built-in Compound integration like Argent or Exodus. During our research we found that the best rates for earning interest were for TUSD at just over 17%.
DAI, another stable coin, was trailing behind at just over 5%. However, other big name crypto assets like ETH and Bitcoin (in the form of WBTC, an ERC-20 token) were severely lagging behind and well under 0.20%. Looking at 30-day averages for these assets, these interest rates appear to be well within the normal range.
Comparing these income interest rates to other DeFi apps and platforms, the offerings on Compound are not at all competitive. On the flip side, the amount of interest available for TUSD deposits is top-tier. Interest rates for other ERC-20 tokens were typically between 1% and 5%. This means that Compound Finance may not be the be-all, end-all destination for all your DeFi deposits. Instead, you’ll need to look at the actual income rates and figure out what makes the most sense for your plan.
Interest rates change all the time. Once you’ve made your deposit, you’ll keep earning interest for as long as you hold your C tokens no matter what happens to the rate.
What are the Risks of Using Compound Finance?
Compared to other platforms that are on the bleeding edge of DeFi, Compound Finance appears to be a good choice in terms of trustworthiness from what we can determine. The platform claims on its homepage that it has been fully audited. The California-based company behind Compound also has an ongoing bug bounty program. So far, in its history Compound has not yet been the victim of any hack, theft, or other breach that we were able to find reports on.
One point to consider about Compound is not so much a technical risk but a legal risk. Since the company behind it is based in the US – a place that has been far from welcoming when it comes to crypto projects – it’s hard to say what the future of the platform is in terms of its interactions with major regulatory bodies like the SEC. So far there hasn’t been any friction on this front from what we can tell.
In terms of protection from market volatility, the platform has undergone what looks to be a robust examination by Gauntlet. In a 44-page report, Gauntlet notes that: “…the protocol, as currently parameterized, should be robust enough to scale to at least 3x the current borrow size as long as ETH price volatility does not exceed historical highs.” In other words, it would take an enormous, practically unprecedented black swan event to put Compound at any risk.
As with any DeFi project, it’s important to only invest what you are willing to lose. From our research, Compound looks like a safe bet. Make sure to do your own research and read up on the project before getting involved.
Is Compound Finance your DeFi platform of choice, or do you use something else? Share your experiences with us in the comments below.