Compound
Compound is a decentralized finance (DeFi) protocol on the Ethereum blockchain that allows users to lend and borrow cryptocurrencies. Users can earn interest by supplying assets to Compound's liquidity pools or take out loans by providing collateral.
What is Compound?
Compound is a decentralized money market where users deposit assets to earn interest or borrow against them. Interest rates adjust algorithmically based on supply and demand, creating a market-driven interest rate model.
How Does Compound Work?
The Compound protocol functions through several core processes:
Asset Supply and Demand: Users supply assets to earn interest or borrow by providing collateral, creating a dynamic, algorithm-driven interest rate.
cTokens: When users deposit assets, they receive cTokens (e.g., cDAI or cETH), which represent their stake in the pool and accrue interest.
Automated Liquidation: If the collateral value falls below the minimum threshold, the borrower’s position may be liquidated to protect the pool.
Why is Compound Important?
Compound is a key player in DeFi lending for several reasons:
Passive Income: It allows users to earn interest on their crypto holdings without actively trading.
Decentralized Borrowing: Compound enables users to access loans without intermediaries, enhancing financial accessibility.
Market-Driven Rates: Its algorithmic interest rate model reflects market demand, providing fairer lending rates.
In summary, Compound is a foundational DeFi protocol that enables decentralized lending and borrowing, offering users the opportunity to earn yield or access liquidity in a trustless environment.