Compound Tutorial: How to Make Crypto Money Work for You
October 13, 2020
Add: Veronica Zubrii
Representing the new generation of DeFi services, Compound protocol enables cryptocurrency deposits and earning interest at variable rates. This is a comprehensive solution for those who need a safe and profitable deposit/borrow option.
The Compound protocol is a network of smart contracts based on the Ethereum blockchain. It allows users to deposit their cryptocurrency and enables borrowing from the pools of supplied assets, instead of getting connected to the peer-to-peer platform.
There’s no need to place an order and wait for a taker to accept the deal – users can access the simple interface which interacts directly with the Compound protocol’s smart contracts.
Why is Compound special?
Compound eliminates extra fees and middlemen, not to mention saving users’ time since all transactions are processed instantly – participation of a second user is not required. Instead, it unites financial markets made by each asset. For each market, the interest rate varies and adjusts every second, depending on the supply and demand for this asset.
It works in the following way:
- Deposits from users and the pool make up for the overall liquidity
- When people borrow, the floating interest rate increases depending on the demand curve
- Higher interest encourages users to add more liquidity, which in its turn brings interest rates down to restore the market balance
Since the interest rate is calculated according to an algorithm, users don’t need to negotiate and adjust rates, transaction timeframes or collateral.
The platform might prove useful for the safe storage of assets on the market with non-custodial smart contracts and conversion of savings into stablecoins. Crypto enthusiasts consider it the alternative to traditional savings in banks.
Compound boasts a large liquidity pool and a comprehensive array of available crypto markets:
Among Compound’s advantages, the following benefits should be highlighted:
- Instant transactions
- You can use hardware (Ledger) or web wallets with it
- Wide range of community-built services and interfaces that are integrated with the protocol and provide additional features
Yet, there is one flaw: since Compound offers variable rates, it’s hard to predict the final deposit/borrow APY. For example, in June 2020, the supply APY ranged from 5% to 20%. In August 2020, these rates stayed at around 2-3%. The borrowed APY decreased two-fold as well. Hence, you should always assess your risks before using this service.
Without further ado, we will review the processes for depositing and borrowing.
How to deposit in Compound
Open the Main page and click on ‘App’ in the upper right corner. You will proceed to the Dashboard after automatic connection to your wallet. If you don’t have a web/hardware wallet deployed, you need to link one:
Pro Tip: In order to compare the current APY lend/borrow rates, you can use the DeFiRate.com service or any similar platform. Don’t forget to check rates in QDAO DeFi – it boasts more lucrative APY’s for particular cryptocurrencies.
In the Dashboard, you will see a list of cryptocurrencies available with their APY rates and the amount available for lending or borrowing on your wallet:
Click a cryptocurrency to open the transaction window. You will see the supply APY, distribution APY and the borrowing limits. Some coins such as 0x must be enabled before making deposits – this is a matter of one click. When it is done, enter the amount of cryptocurrency you want to deposit and click on ‘Supply’.
You will need to confirm the transaction fees. Click on ‘Edit’ to select the speed of the transaction and the fee, which will vary accordingly. Click on ‘Confirm’. You can select the suitable fee on ETH Gas Station and check the status of the transaction on EtherScan.
Once the transaction is complete, you have the token enabled in your account. Go to the transaction window again and click on ‘Supply’. Repeat the procedure again by confirming the ETH fee. The transaction processing will take several minutes. When it’s finished, you will see the Supply balance shown in your Dashboard.
How to borrow in Compound
Before you can borrow a cryptocurrency, you first need to make a deposit and enable it as a collateral. If you do not make a deposit, you will see the following (borrow and distribution APY is shown, but no funds are available):
After making a deposit, you will have assets available for borrowing. Open the transaction window and enter the amount of crypto you want to borrow. The maximum borrow limit will be specified along with other transaction details:
Click on ‘Borrow’ and proceed to the fee confirmation window. You will be charged some ETH for the transaction. Click on ‘Edit’ to select the transaction speed and fee, which varies accordingly. Transaction processing might take from a couple of minutes to a couple of hours, depending on the speed chosen. When it’s done, cryptocurrency will be transferred to your account instantly.
When doing transactions on the Compound platform, users earn COMP governing tokens. They allow users to vote for changes in the Compound protocol or to delegate voting power.