Decentralized finance has transformed the way we interact with money. This change started as far back as 2009 (i.e., the creation of blockchain technology) but decentralized finance has taken it a step further.
Now we have cryptocurrency projects that allow you to access traditional financial services like lending, borrowing, and investments in a decentralized manner. One of those platforms is Compound Finance.
Compound is a decentralized blockchain-based platform built on the Ethereum network. One of the most popular DeFi projects in the industry, Compound allows users to give out and obtain loans using their crypto assets as collateral.
Compound’s main objective is to create an open ecosystem for crypto-backed lending and borrowing. On this platform, lenders can put their digital assets to work and earn interest while borrowers can get access to loans without worrying about unnecessary paperwork and third-party regulators.
COMP is the native utility token of the Compound protocol where it’s used to achieve community-led governance for the ecosystem.
In this article, we will be reviewing the COMP token and how it powers the Compound protocol.
What is Compound (COMP) Token?
COMP token Logo
COMP is an ERC-20 token used in governing the Compound protocol. Users of the Compound platform are allowed to vote and decide the compound platform’s future if they own the COMP token. You can vote or delegate your voting power on new requests for changes and updates to the platform.
What happens is this: when you own COMP, you’re automatically considered a stakeholder of the platform with power to suggest new proposals and vote on changes regarding the protocol.
According to Compound Finance,
“By placing COMP directly into the hands of users and applications, an increasingly large ecosystem will be able to upgrade the protocol, and will be incentivized to steward the protocol into the future with good governance collectively.”
The Compound Governance token works on a Delegated Proof of Stake (DPoS) consensus algorithm. By allowing anyone to propose changes for the platform gives it credibility: a truly decentralized platform. However, only proposals that are backed by 1% of COMP total supply are sent forward for voting.
These proposals may include adding support for a new asset, changing an asset’s collateral factor, changing a market’s interest rate model, or changing any other parameter or variable of the protocol that the current administrator can modify.
These proposals are sent as codes, not suggestions for the Compound team to implement. Through the governance function of COMP, the Compound protocol will ultimately become a Decentralized Autonomous Organization.
If a proposal has received enough backing and is sent forward for voting, it will be allowed 3 days for all COMP owners to vote.
“Once a proposal has reached a 4% quorum with majority support, the proposal is queued in a Timelock and can be implemented after 2 days.”
Metrics of COMP Token
COMP token currently stands at $121.29 on Coigecko, that’s 0.00663213 BTC or 0.24318367 ETH. There are about 4,161,399 COMP tokens in circulation, with a total supply of 10,000,000 COMP tokens.
According to Coingecko, the total market cap for COMP tokens is 26,032 BTC ($472,464,136) and the 24-hour trading volume for COMP is 2,353 BTC ($42,708,554) at the time of writing.
COMP currently sits at number 43 on the list of top cryptocurrencies on CoinMarketCap.
COMP has a total supply of 10,000,000 tokens. The token distribution is outlined as follows:
- 42.3% for protocol usage
- 24% to shareholders of Compound Labs, Inc.
- 22.25% to Compound founders & team, subject to 4-year vesting
- 7.75% reserved for future governance participation incentives
- 3.72% to future team members.
How Is COMP Used on Compound?
COMP token is unique. It is used for governance on the compound protocol. When you purchase or earn your COMP token, you are eligible to debate and vote for proposals that determine the next decision to be made as regards the future of the protocol.
This is the main objective for creating this token. It takes away decision making responsibility from the team and puts the mantle in the hands of the community.
This is what a truly decentralized platform looks like.
The best place to get started on using compound is the native interface.
Compound works a bit like a bank. You can deposit various cryptocurrencies and earn annual interest on your deposits. However, the main difference with Compound is that nobody really owns your cryptocurrencies. You are sending your crypto and interacting with a smart contract, rather than with a company, your bank, or another user. This feature is important because it means that no one controls your funds, but yourself.
The role of cTokens
Compound has introduced cTokens that act as twins of the original token. When users provide Dai (for example) to the Compound protocol, their balance is represented in cTokens. The interest you will earn by depositing your Dai is represented by the cDai token whose price increases compared to Dai. All Dai tokens received are bundled by the Compound smart contract.
The exchange rate between the cDai and the Dai increases over time as the total amount of borrowing in the market increases. When users remove their balance from the protocol, the cDai is automatically converted to a Dai at the current rate and includes the additional accumulated interest.
Deposit cryptocurrencies on Compound and earn interest
On the Compound site, you can earn interest when you deposit (Compound calls this “supplyinh”) cryptocurrencies on the platform. To do so, start by loading an Ethereum account with one of the cryptocurrencies supported by Compound. Then, on the dashboard, choose the cryptocurrency you want to sypply to the platform by clicking on it.
Borrowing cryptocurrencies on Compound
You can use your deposited cryptocurrencies as collateral to borrow other cryptocurrencies. Compound forces users to collateralize cryptos in order to be able to borrow. You have to “block” a value greater than the value you want to borrow.
For example, if a user provides 100 DAI as collateral and the collateral ratio displayed for the DAI is 75%, the user can borrow a maximum of 75 DAI. Each asset on Compound can have a different collateral ratio.
However, there are risks involved in doing this. If the ratio goes down then the cryptos you have blocked to borrow will be used to pay your debt. This is called liquidation. And if you get completely liquidated you will lose all your collateral.
Borrowing cryptocurrencies also requires you to pay a fee. So you will have to make sure that you keep your ratio always above the starting ratio but also that you are able to pay your interest. The goal is to use the tokens you borrow to generate more interest than you pay on your loan. But this is risky.
The risks
As with all Defi protocols, the main risk is probably an error in the code and the development of smart contracts. Contrary to a centralized platform, there is no entity that can correct this error. Contracts are also vulnerable to hacking.
From a more personal point of view, the biggest risk is to get liquidated if you generate a loan on the protocol. It should also be noted that other users may intervene and repay part of your outstanding loan in exchange for part of your guarantee. This incentive to liquidate other users will result in the liquidation of the borrowers and they can potentially suffer huge losses.
Creators of COMP Tokens
The Compound protocol and its native COMP token were created by Robert Leshner and Geoffrey Hayes. The platform was launched in 2017. The co-founders of the platform had previously worked in management roles at Postmates and now hold executive positions at Compound Labs, Inc.
Robert Leshner currently serves as the CEO of Compound Labs while Geoffrey Hayes serves as CTO.
Robert Leshner has been a cryptocurrency and blockchain believer long before he co-founded Compound. He has invested in cryptocurrency platforms like Blockfolio, Argent Wallet and Opyn.
What Is the Future of COMP Token?
COMP token is perceived as one of the most valuable cryptocurrencies in the industry. This is because it plays a major role in the future of one of the top DeFi projects in the business.
According to Wallet Investor, the price of COMP token will not surge in the next year, we should even anticipate a drastic fall in the value of the token in the next year.
The next couple of years is important for the future of COMP tokens. New features on the platform mean more users. With the platform expected to go mainstream in the next few years, the number of people interested in the governance token will increase, causing a massive rise in the value of the token.
Where To Purchase/Get COMP Token
There are two ways users can own COMP. You can either purchase COMP from cryptocurrency exchanges like Binance, Huobi Global, Binance.KR, and OKEx.
You can find the full list of pairs available on coingecko.
The other method is to accrue COMP tokens. Every time you interact with the Compound protocol, either by withdrawing, lending, borrowing, or repaying loans, COMP will be automatically transferred to your wallet. You can withdraw your COMP token once you have accrued up to 0.001 COMP.
Conclusion
The Compound protocol is indeed a unique one. It is the DeFi project considered to be truly decentralized, all thanks to the governance token COMP that took the decision-making responsibility from the developers and placed them in the hands of the community.