With the rise of decentralized finance, a new breed of crypto asset has emerged: the interest-bearing token. In the past few months, a handful of these so-called “lending protocols” have launched on Ethereum, with each offering its own take on how to create a sustainable ecosystem for lending and borrowing digital assets.
One of the most promising protocols to emerge from this space is Compound, which has quickly found its place among the most used applications on Ethereum. The Compound coin is the native token of the protocol and plays a vital role in its governance and operation. Let's take a closer look at what Compound is and why you should consider investing in its native token.
What Is Compound?
Compound, otherwise known as COMP, is a decentralized lending and borrowing protocol built on the Ethereum blockchain. It allows users to earn interest on their cryptocurrency holdings or borrow crypto assets using their crypto as collateral. The protocol is powered by smart contracts and uses a system of algorithms to automatically match lenders with borrowers and set interest rates based on supply and demand.
As a decentralized lending platform, Compound is not subject to the same regulations as traditional financial institutions. This means that it can offer higher interest rates than many banks and other lending platforms. And because it’s built on the Ethereum blockchain, it also offers the added security and transparency of a decentralized platform.
How does it work?
Compound offers two main products: lending and borrowing. The lending product allows users to earn interest on their cryptocurrency holdings. Users simply deposit their crypto into a “pool” and receive interest payments in return. The interest rate is set by the protocol and fluctuates based on supply and demand.
The borrowing product allows users to take out loans using their cryptocurrency as collateral. Loans are typically issued in the form of Ether, the native currency of the Ethereum blockchain. The interest rate on borrowed funds is also set by the protocol and fluctuates based on supply and demand. If the value of the collateral falls below a certain threshold, the borrower will be liquidated and will lose their collateral.
Why invest in Compound?
Compound is an attractive investment for a few reasons. For starters, it offers the potential for high returns. The interest rates on both the lending and borrowing products are higher than what you’d find with traditional financial institutions. And because the interest rates are set by the protocol, they have the potential to increase even further as the platform grows in popularity.
Second, Compound is a decentralized platform built on the Ethereum blockchain. This offers a number of advantages over traditional lending platforms, including increased security and transparency. Finally, Compound is one of the most popular DeFi protocols in the space today. It’s currently the 4th largest cryptocurrency by market capitalization and is used by hundreds of thousands of people around the world.
How to invest in Compound?
There are a few different ways to invest in Compound. The easiest way is to simply buy COMP tokens on a cryptocurrency exchange. COMP tokens are the native tokens of the Compound protocol and give holders a number of benefits, including the ability to vote on platform governance decisions.
Another way to invest in Compound is to deposit cryptocurrency into the lending or borrowing pools. This allows you to earn interest on your holdings or take out a loan using your crypto as collateral. You can also invest in companies that are building on the Compound protocol. These companies are developing products and services that make it easier for people to use the Compound platform. And as the platform grows in popularity, so too will these companies.
Investing in Compound is a great way to earn high returns and gain exposure to the burgeoning DeFi space. The platform offers a number of advantages over traditional lending platforms, including increased security and transparency. And because it’s built on the Ethereum blockchain, it also offers the added benefit of being able to use Ethereum-based decentralized applications.
However, it’s important to remember that DeFi is a relatively new and untested space. This means that there are a number of risks associated with investing in Compound and other DeFi protocols. But for those willing to take on the risk, investing in Compound could be a great way to earn high returns and gain exposure to the exciting world of DeFi.