Compound For Beginners Explained - A Step by Step Guide
Compound 🚀 for beginners is an explainer video for newcomers where we touch insightful points around:
What is Compound?
What are COMP & cTokens?
How to buy cETH?
How it works?
How to get involved?
Everything you need to know about Compound for beginners, we delve into all the information you will need to get started.
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Read our Video Script:
What is Compound and how does it work with cETH?
The Compound Protocol is a DeFi (decentralized finance) project that is focused on lending and borrowing and allows users to lend their crypto coins to earn interest, or borrow coins and pay interest. Crypto assets are lent to the Compound network and there are several different lending pools to choose from. The largest pool is based on lending in Ether and when funds are deposited in Ether, users are given a certain amount of cETH (which is the token of the Ether-based lending pool). How this works, is that the original investment will be held in Ether, while interest is earned in cETH tokens. The original Ether funds cannot be traded or transferred while your funds are held on the protocol, but when the investment is redeemed, cETH earned is converted to Ether and paid into the investor’s account. This Ethereum-based protocol establishes money markets as a result, creating pools of assets with interest rates that are derived algorithmically, based on supply and demand.
Robert Leshner founded Compound Labs in 2017, which is the company that is responsible for creating the cETH token. He is a Chartered Financial Analyst with a degree in Economics, and is the founder of Safe Shepherd, which is a consumer data protection service that accumulated over $1 million with minimal funding from investors and was sold 4 years after being founded.
Compound supports the borrowing and lending of Dai (DAI), Ether (ETH), USD Coin (USDC), Ox (ZRX), Tether (USDT), Wrapped BTC (WBTC), Basic Attention Token (BAT), Augur (REP), and Sai (SAI). Compound does not require credit checks, which allows anybody to borrow crypto and how much you can borrow is determined by the value of the asset - not your credit history. Once a deposit is made, Compound awards a new cryptocurrency called a cToken as interest earned to the lender. Every time a user interacts with a Compound market (by borrowing, withdrawing or repaying the asset), they are rewarded with COMP governance tokens.
The Compound Protocol uses two main tokens, namely COMP tokens and cTokens. COMP tokens are governance tokens that allow users to vote on platform changes and operations, and lenders are also rewarded in COMP (in addition to cTokens). On the other hand, cTokens can take the form of CERC20 (which wraps an underlying ERC-20 asset) of CEther (which wraps Ether itself). The value of cTokens depend on the prices of their underlying assets, and will fluctuate from time to time. The name of the cToken will depend on its underlying asset, so by lending Ether to the protocol, you will earn cETH. Alternatively, if you lend DAI to the protocol, you will earn cDAI. There are only 10 million COMP tokens, but cTokens have a dynamic supply the will change depending on the lending activities of Compound users.
Compound Ether can be bought on some exchanges, such as Coinbase or Uphold, the same way other tokens would be bought - but essentially this token (as well as COMP tokens) are given as a reward for lending cryptocurrencies to the Compound Protocol.
Lending and borrowing digital assets has never been easier, and with Compound Labs, you now have the potential to earn interest for lending coins you are not using or no longer want. Perhaps the markets are volatile and you would rather earn interest over the long-term for lending crypto, than sell them on an exchange for a once-off profit (or loss) - or you are too busy to trade but would still like to be rewarded for being a token holder. If you are looking for a way to diversify your investment portfolio and earn a passive income, then Compound Labs is the perfect platform for you!
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