The evolution of blockchain and cryptocurrencies has led to the birth of a completely new ecosystem that involves regular exchanges between different blockchain platforms. The scope of financial services in the present world is much more beyond payments that may be in the form of lending or borrowing etc. And this is where Compound Finance comes into the picture which is designed to offer frictionless borrowing or lending of Ethereum tokens.
No doubt many centralized exchanges do offer all the trading services but they work within their restricted environment. In the present times, DeFi or Decentralized Finance has brought a revolution within the financial space and Ethereum is the backbone of the industry. The compound is one such protocol that mainly focuses on offering smooth financial services like borrowing 0r lending, etc of the ERC-20 tokens.
COMP, the governance token of the Compound protocol, is used for voting and also distributes rewards among the contributors. Each time whenever the user interacts with the Compound protocol to borrow or withdraw or repay the asset, they are rewarded with COMP tokens. COMP tokens can also be traded in the open market which carries some value similar to Bitcoin or Ethereum. At the press time, COMP price has slashed drastically almost close to the price levels before the beginning of the 2021 bull run.
Will COMP price replicate the 2021 bull run to hit a 4-digit figure in 2022? Let’s see!
What is Compound(COMP)-In Brief
Compound or more specifically Compound Finance is a decentralized platform that offers lending and borrowing of crypto assets. Here the borrowers can take loans and the lenders can offer loans by locking their crypto assets. Moreover, the platform is more focused on DeFi and offers tokenization of assets locked in the system using the COMP tokens. In short, Compound is an algorithmic, autonomous interest rate protocol that unlocks the universe of financial applications.
The compound was founded by Robert Leshner & Geoffrey Hayes and raised nearly $8.2 million in funding by notable VC’s like Andreessen Horowitz and Bain Capital Ventures, etc. Further, the platform raised an additional $25 million in 2019 from many investors by distributing a notable share of the total supply of COMP tokens.
The most unique feature of Compound Finance is the ‘c’ tokens. Once the deposits are made, the platform awards the lender with c-tokens like cETH, cBAT, cDAI, etc. Each c-token can be transferred or traded but is redeemable only for the crypto initially crypto at any preferred time. And the native token COMP is used to incentivize the above activity by rewarding the user with the token each time he/she interacts with the protocol.
Additonal Read: Top 10 most expensive NFTs sold
How Does Compound Work?
As mentioned before, Compound is the platform for lending and borrowing the DeFi tokens, the architecture of the protocol consists of the following,
Lending of Cryptos
Compound supports the lending of only some specific cryptos like ETH, USDC, WBTC, DAI, SAI, BAT, USDT, ZRX and REP. Any individual with these assets can easily lend, deposit, lock or send here on the platform without any intermediaries. Once the user deposits the assets, they straight away go to the Compound wallet. Further, the user earns interest for the assets deposited in the denominations of the same crypto. Like if you have deposited ETH, then you will be earning interest in ETH only.
Borrowing of Cryptos
The user who wishes to borrow any asset from Compound needs to initially lock a specific amount of crypto as collateral. The advantage here on Compound is the user does not require a credit check to borrow the cryptos. The borrowing limit is also set as per the value of the crypto locked. Moreover, the user also needs to pay the interest just in a similar way as you pay interest for the loans you take from the bank.
Interest in Compound Finance
The interest rates on Compound Finance keep on varying all the time. If you have lent your asset, you will earn interest or else if you have borrowed then you need to pay the interest. The lending and borrowing here are done using the c-tokens. The user gets these c-tokens once he locks his crypto on the platform in equal quantity. These tokens can be transferred, traded or programmatically integrated to other dApps in the DeFi space. The interest rates on Compound is dependent on the liquidity of crypto in each market. Hence, these rates tend to vary in real-time according to the supply and demand of the asset.
Liquidity Pools on Compound
The working on Compound Finance is based on the working of the Compound liquidity pool. Whenever you lock your assets in a large pool where huge amounts of cryptos are locked, the borrowing limit increases but you will earn less interest. On the contrary, if you lock your assets in a small pool, then you can earn large interest. In case of borrowing, you need to lock the asset with more value than you intend to borrow.
And hence the loan you borrow from Compound is over collateralized. On the other hand, the collateral has higher volatility that may experience price slash. Whenever the value comes closer to the borrowed c-token, then the smart contract closes the position automatically. This is called liquidation where-in you get the amount you have borrowed but lose the collateral.
Additional Read: Compound Token Technical Analysis
Will COMP Price Hit $ in 2022?
The Compound token price maintained a silent trend before the beginning of the 2021 bull run and surged like a monster to hit levels very close to $1000. But just within a month, the asset lost more than 77% of its value to reach the level close to $200. However, the COMP price somehow managed to surge high and hit $500 multiple times. Woefully, the asset faced a notable rejection each time.
The entire Q4 2021 was extremely bearish for the asset as it fell into a deep bearish well. The price kept plunging from the highs above $500 until it reached the current levels below $150. The very recent attempt of flipping through the bearish well also failed as the price appears to have been overpowered by the bears. And hence the asset is expected to continue plunging or maintain a consolidated descending trend until a major factor ignites a strong flip.
If the asset maintains the same trend, then it may attempt to surpass $500 by the end of Q2 2022 and hover around $750 to $880 by the end of the year. If 2021 like bull run ignites then the asset may not only rise above its ATH but comfortably form new highs much above $1000. On the contrary, if the bears take back control then the asset could maintain its price trend below $500 to end the yearly trade.
Factors Impacting COMP Price Today
ERC-20 Bases Lending & Borrowing
Compound Finance is a DeFi focused lending & borrowing mechanism primarily focused on Ethereum based tokens.
Fluctuating interest Rates
The interest rates here are dependent on the size of the liquidity pool and the amount of the assets locked. The larger the pool, the lower the interest and the smaller the pool, the larger the interest.
Interest is Compounded Annually
The interest on Compound is calculated annually and anyone can lend their assets and earn a passive income monthly
Secured Platform for lending & Borrowing
All the transitions are recorded on-chain and each lending or borrowing is based on a smart contract. And hence the platform becomes extremely secure as the audits are performed at regular intervals.
The user is required to lock the assets which have value more than the amount he intends to borrow. And borrowing here being more collateralized, the fear of Compound Finance running into debt is eased
Where & How to Buy Compound(COMP)
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