What is Compound (COMP) and how does it work? Understanding the basics of DeFi governance

What is Compound (COMP)?

Compound operates as a decentralized software protocol on the Ethereum network, with its native ERC-20 token, COMP, incentivizing a network of computers to manage a fully decentralized financial market.

As a prominent decentralized finance (DeFi) protocol, Compound enables users to collateralize various crypto assets to access financial services. This system allows for decentralized borrowing and lending, where users can deposit cryptocurrency into lending pools for others to borrow from, earning interest in the process.

Upon depositing cryptocurrency, users receive cTokens, such as cETH, cDAI, and cBAT, which represent their share in the pool. These cTokens can be freely transferred and traded, but can only be redeemed for the underlying cryptocurrency. The protocol uses autonomous smart contracts to facilitate this process, ensuring users can withdraw their deposits at any time.

How does Compound work?

Compound (COMP) facilitates lending and borrowing by utilizing smart contracts on the Ethereum blockchain.

Users on Compound fall into two categories:

• Borrowers: They provide cryptocurrency collateral and can borrow other supported cryptocurrencies at a specified percentage of the collateral value.
• Lenders: They deposit cryptocurrency into lending pools from which borrowers can borrow. Lenders earn interest on their deposits.

Lenders receive COMP tokens, Compound's ERC-20 token, as rewards. These rewards are determined by the amount of cTokens held in their wallet and the interest rate, which varies based on the token's liquidity. Tokens with higher liquidity have lower interest rates.

Users who provide assets for lending on the protocol can also borrow any other cryptocurrency supported by Compound. However, this creates the risk of liquidation for borrowers if the borrowed asset appreciates in value, surpassing the value of the collateral they deposited.

Who founded Compound? (Exploring the history of Compound)

Compound was established by experienced entrepreneurs Geoffrey Hayes and Robert Leshner.

In 2018, Compound secured $8.2 million in funding from notable venture capital firms Andreessen Horowitz and Bain Capital Ventures.

The subsequent year, Compound raised an additional $25 million from many of the same investors, as well as new contributors like Paradigm Capital, a VC fund associated with Coinbase.

A portion of the total supply of COMP cryptocurrency was initially allocated to investors in the company and the team.

What sets Compound apart from other platforms?

Compound stands out in the decentralized finance (DeFi) space due to its incentivized model. In addition to the typical DeFi advantages, users receive COMP tokens as rewards for their engagement.

COMP tokens not only provide users with added value for their involvement, but they also serve as governance tokens. This incentivizes users not only to engage with the protocol but also to retain their tokens for voting on future decisions that could affect aspects such as interest rates and other factors impacting their potential earnings.

What is the value proposition of Compound (COMP)?

As noted earlier, a significant aspect of COMP's value lies in its holders' ability to participate in governance decisions that shape the platform's future.

COMP holders also have the option to delegate their voting rights to another party. This enables an external entity, such as a legal or financial expert, to vote on behalf of COMP holders, especially in matters requiring specialized expertise.

What is the circulating supply of Compound (COMP) tokens?

Similar to Bitcoin, the total supply of COMP tokens is capped at 10 million, with less than one third currently in circulation.

4.2 million tokens will be distributed to users of the Compound protocol over a 4-year period.

Around 2.4 million COMP is allocated to shareholders of Compound Labs, Inc. Another 2.2 million COMP tokens will be distributed to the founding and current Compound team with a 4-year vesting schedule.

Additionally, 775,000 COMP are reserved for incentivizing community governance, while the remaining 332,000 tokens will be distributed to future team members.

The rate of COMP generation can vary over time, as COMP holders/voters have the ability to change this rate through community governance proposals.

Other technical data

The Compound protocol relies on five main components for decentralized governance:

1. COMP: This ERC-20 token determines a user's voting power. The more COMP held in a wallet, the greater the weight of their delegation or vote.
2. Delegation: COMP holders must delegate their voting rights to an address before they can vote or create proposals. This address can be another user's or the holder's own wallet.
3. Proposals: These are executable code segments that modify the protocol. To create a proposal, a user must have at least 1% of the total COMP supply (equivalent to 100,000 COMP) delegated to their address.
4. Voting: Once users have delegated their voting rights, they can vote for or against individual proposals. Voting periods last 3 days, and proposals that receive a majority vote are queued in the Timelock.
5. Timelock: This feature requires all governance and administrative actions to remain in a Timelock for a minimum of 2 days before implementation.

What measures are in place to secure the Compound Protocol?

As a decentralized application (dApp) operating on the Ethereum network, Compound's security relies primarily on Ethereum itself.

Compound operates using smart contracts, which enable the autonomous execution of all activities within its protocol.

Additionally, the future development and trajectory of Compound are secured through its governance system, facilitated by the native COMP token.

How to use Compound?

Users can directly access the Compound protocol through compound.finance using a dApp browser or a regular browser with MetaMask or other wallet options.

After connecting, users can utilize Compound for collateralized loans or earn interest by depositing their cryptocurrency for lending.

How to choose a Compound Wallet?

The choice of COMP wallet depends on the intended use and the amount to be stored.

Hardware wallets (cold wallets) offer the highest security with offline storage and backup. Ledger and Trezor provide solutions for COMP storage, with Ledger supporting native COMP lending. However, hardware wallets can be more complex and costly, making them suitable for storing larger amounts for experienced users.

Software wallets are free and easy to use, available as smartphone or desktop apps, and can be custodial or non-custodial. Custodial wallets manage and back up private keys, while non-custodial wallets store private keys on the device. While convenient, they are considered less secure than hardware wallets and are suitable for smaller amounts or beginners.

Online wallets (web wallets) are free and accessible from various devices via a web browser. They are considered less secure than hardware or software wallets and are suitable for holding smaller amounts or experienced traders who trust the platform's security and custody.

In conclusion, Compound (COMP) offers an attractive opportunity for individuals seeking to earn extra income through cryptocurrency lending or borrowing.

Beyond its financial benefits, holding COMP tokens grants users a say in the protocol's future. COMP holders can participate in decisions regarding interest rates and other matters that could directly affect their earnings.