The concept of lending has been around for thousands of years and has become an integral part of the financial industry today. However, the process of matching borrowers and lenders has not always been easy. Traditionally, this task is undertaken by large financial institutions, such as banks. Compound Finance is one of the decentralized finance (DeFi) protocols that offers significant improvements over traditional lending while maintaining all the core components as well as offering users the chance to make passive income through yield farming. In this article we will explain what Compound Finance is and how this platform makes lending and farming better.
What is Compound Finance?
Compound Finance is a public DeFi lending protocol that allows lenders to earn interest on their crypto assets. Deposited assets are held in smart contracts called liquidity pools, and interest rates are adjusted automatically based on supply and demand.
The protocol is built on smart contracts that automate the calculation of interest rates and the issuance of loans, eliminating the need for intermediaries. Essentially, Compound Finance is an open marketplace where lenders interact with borrowers without the involvement of third parties.
How does Compound Finance work?
In simple terms, Compound Finance allows users to make cryptocurrency deposits as lenders and borrowers to take out loans. The Compound protocol is built on smart contracts that pool lenders’ assets into liquidity pools for each supported cryptocurrency. Borrowers can borrow from any liquidity pool, but not directly from lenders.
Compound is a public protocol that allows anyone with internet access to become a lender. In addition, the Compound protocol eliminates most of the bureaucratic aspects of traditional lending. All users need is crypto assets and a Compound-integrated wallet, including MetaMask, WalletConnect, Tally Ho (tally.cash) or Ledger. Compound uses smart contracts to manage assets that lenders have contributed to liquidity pools. The price of each asset in the liquidity pool is entered into the Compound protocol using the Open Price Feed system, based on Chainlink (LINK) oracles that collect cryptocurrency price data from various exchanges.
Crypto lending on Compound Finance
Crypto lending on Compound Finance or locking up assets in a liquidity pool is called “supply”. Locking crypto assets in the Compound protocol is similar to depositing money into a savings account. However, instead of a bank account, your cryptocurrency is sent to a Compound wallet.
As lenders provide assets to liquidity pools, their funds are temporarily converted into cTokens (an Ethereum-based ERC20 token issued by Compound) at a 1:1 ratio. The value of tokens issued to lenders reflects the value of the assets they contributed to the liquidity pool. Lenders can exchange cTokens for underlying assets at any time. Compound also allows lenders to exchange tokens for other supported crypto assets. The interest that lenders receive on borrowed assets is paid in tokens, which can be exchanged at an exchange rate relative to the assets lent.
Yield Farming on Compound Protocol
Compound Finance had a hand in creating Yield farming pools, one of the hottest trends in the world of decentralized finance (DeFi). In June 2020, the protocol began incentivizing both lenders and borrowers on the platform with the COMP token.
Yield Farming on Compound is carried out using the InstaDApp service. The app has a feature called “Maximize $COMP mining”, which increases the profit of COMP tokens by up to 40 times. InstaDApp provides such high returns by accessing multiple DeFi platforms in one application.
Benefits of Yield Farming using the Compound Finance protocol
Wide Range of Earning Opportunities
Compound offers users a wide range of earning opportunities with different liquidity pools, each with different rates of return. Compound Finance pays interest to lenders every 15 seconds. Additionally, lenders and borrowers can use the yield farming feature to generate even more income.
Another reason lenders turn to Compound is the availability of compound interest. The interest that lenders earn on Compound Finance can be reinvested automatically, increasing the return on your assets.
No Minimum Amount
Unlike many lending protocols on the Ethereum blockchain, Compound has no minimum loan amount. This opens the protocol to anyone who wants to earn interest or engage in yield farming.
Secure Lending, Borrowing, and Yield Farming
Compound protocol is one of the most secure lending platforms in the DeFi space. The Compound protocol has passed several rigorous security checks and has been recognized as a reliable and secure lending network.
No trading Commissions or Slippage
Compound Finance doesnt have any trading commissions and slippage makes it a more attractive service than its competitors.
At The End
Compound Finance is one of the leading DeFi solutions for crypto lending. The protocol allows owners of crypto assets to receive good passive income through Yield Farming and other great features. The time-tested business model of over-collateralization helps the Compound protocol to have a long-lasting presence in the DeFi space.