Compound Coin: How It’s Fueling a New Way to Lend and Earn
DeFi is a hot topic in the crypto sphere, and it seems to grow hotter with every passing day. If you’re familiar with this world, chances are that you’ve come across compound coin at some point—and maybe you’ve wondered whether the attention it’s received is justified. Justification is tricky, but we can certainly examine how the protocol got to where it is today and what it offers.
Every crypto protocol likes to claim there was a massive buzz about its release, but anyone who is looking for how to invest in cryptocurrency when compound coin (COM) came onto the scene will surely remember the excitement. Its value increased around 418% within a matter of days, and the project continues to attract plenty of attention today.
Why so much frenzy, you might wonder what makes COM and the protocol behind it so unique. To answer that, you need to understand not only Compound’s history and how it functions but also the ins and outs of decentralized finance (DeFi)—the key to the value Compound offers. There’s no time to waste, so let’s get into it.
Compound coin review
Compound’s story begins in 2018, although compound coin wasn’t to follow until a couple of years later. The protocol was built using Ethereum and, interestingly, it initially had elements of centralization. Compound lent money directly to borrowers directly rather than letting its users lend to each other (as it does now).
However, Compound is now a decentralized autonomous organization (DAO), meaning it doesn’t have any central “leader” and is governed instead by a transparent set of rules enforced partly by a computer program and partly by its community.
As a decentralized lending protocol, users can either deposit their crypto assets into Compound and lend them out to others to earn interest on crypto, or they can borrow from said lenders. These exchanges are decentralized, so no intermediaries are needed. Instead, DeFi mechanisms are used to run operations, which we’ll delve into further shortly.
Perhaps the best part of Compound is that the rates it offers can get pretty impressive. At the time of writing, the best APY available for lenders hovered around the 3% mark, rates have gone as high as 25% in the past—that beats the average high-yield accounts.
What is compound coin used for?
Although we’ve barely mentioned it so far, compound coin is an essential part of the lending and borrowing process. After lenders deposit their funds, they receive the proportional balance in the form of another cryptocurrency called cTokens, which are also used to pay interest.
cTokens serve as a kind of contract and track how much money someone has lent, but they can be traded within the protocol (although they can only be redeemed for the same cryptocurrency the user deposited initially).
COMP is the final piece of the puzzle—it’s a reward users receive as they borrow, repay, or withdraw crypto, or carry out other activities within the Compound protocol.
It’s also a governance token, meaning it plays a crucial role in keeping Compound democratic and decentralized. Tokenholders have the right to vote on decisions made within the protocol and can even propose their own policies.
Compound coin was first launched in July 2020 at a price of $64.6. Despite an initial spike up to $337, it soon stabilized at a lower value, and hovered between $100 and $200 for the next few months.
When 2021 hit, COMP’s fate began to change—for the better. It benefitted from the crypto market surge around spring that year, with the price rising to $535 in early February and then peaking at $910.54 in May. It wasn’t to last, with the value dropping down to $256.60 by the end of June, and the price remains at a similar point now.
But the real question is: can we expect another spike any time soon?
Is compound crypto a good investment?
To know if compound crypto would make a good investment, we have to understand the value it offers.
One of the reasons for the buzz around the coin’s initial release was its potential for earning rewards and interest. As we’ve seen already, it’s lived up to this expectation. There are now hundreds of millions of dollars’ worth of assets deposited on the platform (with the latest figures available on the Compound website). So, it gets a big tick for having a core value proposition.
Since then, there have been many other signs of Compound’s promise. Binance has listed it, as have various other major exchanges, and it was the largest DeFi lending protocol at one point (Aave now holds that title). Clearly, it’s received some recognition, but it also has competition.
However, before you get overexcited trying to work out a compound price prediction for 2025, you’ll need to understand one of the key components: DeFi.
Proponents claim it’s one of the hottest investment opportunities in the coming years. But what exactly is DeFi? And should you invest in DeFi?
What is DeFi?
As we’ve seen, the concepts of DeFi and compound coin are closely intertwined. It’s hard to understand compound coin without a solid understanding of DeFi, so let’s get into it.
DeFi is short for decentralized finance, and it’s all about making the finance world private, secure, and (you guessed it) decentralized. Its principal aim is to create financial security solutions and take middlemen out of the equation when it comes to our private transactions and financial life.
Why should we rely on banks, brokerages, and other traditional institutions to manage our finances when we could do it all using the blockchain instead?
How DeFi works
This is made possible with a little help from smart contracts, which allow transactions to take place only when certain criteria have been met.
Let’s say that person A wants to buy something from person B. Instead of banks connecting the two parties, verifying their identities, and keeping the transaction on file forever, autonomous programs (known as dApps) take this role. They automatically verify that person B sent the right good and person B sent the right funds and approve the transaction.
Most dApps use the Ethereum blockchain, and DeFi protocols tend to rely on stablecoins like tether (USDT)—which is pegged to the dollar—in place of fiat currency. As a result, everything can remain truly decentralized.
But DeFi is about way more than just simple transactions. Decentralized peer–to-peer lending platforms like Compound are creating even more possibilities by helping people to invest their money and make significant returns while remaining secure and anonymous. Can you see why people are getting excited yet?
However, although Compound is one of the main players in the sphere, it’s far from the only promising DeFi platform. Kyber, Uniswap, and Yearn.Finance are all DeFi protocols (and there are far more examples).
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Compound is operating in a competitive space, but if its solid valid proposition has captured your interest, you might be considering getting involved. If so, why not take your compound interest investments one step further?
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