In the world of cryptocurrencies interesting projects appear every day, created in part to offer more scalable alternatives to Bitcoin (BTC) or Ethereum (ETH) and of course leave behind the questioned fiat model. In this sense, a project that is giving a lot to talk about is Compound (COMP), which is presented as a decentralized finance protocol designed to offer users an ecosystem of loans through credits to its users by applying interest on the assets they have within the system.
Compound operates with various platforms including Ether (ETH), 0x (ZRX), DAI (DAI), Basic Attention Token (BAT) and Augur (REP). The purpose that seeks to establish valid investment pools to offer loans, which will be used to monetize the system and those who provide liquidity to the ecosystem (users who place their funds as investors), applying their operations on a set of smart contracts developed on the Ethereum blockchain.
The history of Compound (COMP) takes us to San Francisco in 2017, at that time the company Compound Labs Inc. was founded by Robert Leshner and Geoff Hayes. The company's goal was to design a protocol that would allow the creation of financial exchange markets with interest rates based on their assets.
After many years trying to make this project a reality its developers through the support of strong investors from the crypto world, invoking the grace of companies such as Coinbase, Polychain Capital, Andreessen Horowitz, Bain Capital Ventures among others their wish finally came true in 2018, when Compound managed to accumulate the amount of $8 million to start their project.
Of course Compound is not the only platform offering loans or investments
in the world of decentralized finance, however, it offers an alternative that makes it unique, as is the ability to create liquid money markets for cryptocurrencies by setting interest rates and using algorithms that adjust these values in real time and in a decentralized manner. In this way, Compound establishes pools with significant liquidity, providing its fund providers with the best performing interest rates in the cryptomarket.
Compound operates similarly to conventional banks but from a space in the cryptosphere. Basically, to use this platform it is necessary to generate a deposit of any token in one of its pools, thus the system will offer the user the possibility of earning interest income. Another aspect that makes Compound interesting is that in order to be part of this platform, users do not need to formalize the identification process 'Know Your Customer (KYC), and the system does not generate costly commissions.
All the funds that users place in the pools are lent to those who wish to acquire credits under a determined interest rate, which will then be distributed to the liquidity providers. The interest paid on the loan is transformed into interest payments for the users who have invested in the pools.
Of course, these loans are secured by collateral, a guarantee whose value is usually greater than the amount requested (for every US$100 borrowed, the equivalent of US$150 in tokens must be placed to guarantee the loan). Once the US$100 of the requested loan and the interest have been paid off, the US$150 in tokens are returned to their owner. On the other hand, if the price of the token being pledged reduces to the point of risking the loan, the smart contract is programmed to sell the pledged cryptocurrencies, as a way to protect investors or liquidity providers in case someone does not want to return the borrowed cryptocurrencies.
Another important aspect of the way Compound works is represented by the so-called cTokens, which are tokens generated by the platform to track and control the loans and interest established in the system, acting as a unit of account itself. For example, when a user enters his funds to a pool of loans, the system provides him with an equivalent balance in cTokens, which is directly proportional to his participation in the pool.in this way each asset supported by Compound has its pair in cToken (DAI has its cDAI, Ether has its cEther and so on).
Compound (COMP) was initially set up as a centralized project, with Compound Labs Inc. maintaining control over the operation of the system. Shortly thereafter this began to change in May 2020, when Compound shifted to community governance.
It was for this purpose that the COMP token was created, with which holders of these tokens have the power to set proposals and vote on any kind of decisions related to the future of the Compound community. In total there is only a total supply of 10 million COMPs, of which 24% (2,396,307 COMP) is for Compound Labs, Inc. shareholders, 22.25% (2,226,037 COMP) for founders, 3.72% (372,707 COMP) for future team members, 42.3% (4,229,949 COMP) for protocol reserve use and 7.75% (775,000 COMP) for the protocol governance reserve.
COMPs are formed automatically according to the rate imposed by the community (currently they are issued the equivalent of US$ 0176$ in COMPs per block on the Ethereum network). Under this issuance criteria Compound is able to be economically self-sustaining, a situation that benefits the developers and the whole team behind the project as well as the investment system itself.
As I always say, everything described above in this publication should not be considered as an investment advice or recommendation, people interested in Compound should consider this article as an informative tool to support their own research process.