DeFi (Decentralized Finance) is an exciting innovation for Blockchain, it represents the industry’s thinking and exploration of future finance. Currently, Ethereum DeFi products have attracted much attention. Bitpie wallet has always paid attention to these financial innovations, and recently launched a number of DeFi products for Ethereum holders.
Today, as the first one, we will introduce a star product: Compound.
What is Compound?
Compound is among the top three mortgage lending DApps in the Ethereum DeFi DApp market, which allows users to lend their cryptocurrency to earn interest, or mortgage your cryptocurrency to lend other tokens (such as mortgage ETH lending DAI/USDC). Currently, BAC, ETH, DAI, Augur, USDC, and 0x are supported.
Interest and loan interest rate
Compound’s deposit interest rate is related to the loan interest rate and the loan ratio. When the borrower is willing to pay higher interest on the loan, and there are more people borrowing, the corresponding interest on the deposit will be more. As shown in the picture left, the current lending rate is 13.58%, DAI’s liquidity is 4,000,736, and the lending rate is 71.52%. The interest rate at this time is 8.74%.
Mortgage rate and leverage
The collateral for all loans is 1.5 times the value of the loan. If I pledge 1.5 ETHs, then I can lend 1 ETH equivalent DAI or other digital assets. This allows the user to make a long/short trade with modest leverage.
Alice wants increased long exposure to ZRX. She supplies 10,000 ZRX to Compound, and uses it as collateral to borrow 30 WETH. Alice unwraps the WETH, and sends Ether to her favorite exchange to purchase 6,000 more ZRX. Alice now has long exposure to 16,000 ZRX, and owes Compound 30 WETH. She is long ZRX/ETH. If ZRX/ETH increases in value, Alice will be able to repurchase the 30 ETH she owes Compound for less than 6,000 ZRX. She can then repay her debt, and keep the excess ZRX as profit.
Bob wants short exposure to ZRX. He supplies 100 WETH to Compound, and uses it as collateral to borrow 12,000 ZRX. Bob sends the ZRX to his favorite exchange, and sells it for 60 ETH. Bob now has long exposure to 160 ETH, and owes Compound 12,000 ZRX. He is short ZRX/ETH. If ZRX/ETH decreases in value, Bob will be able to repurchase the 12,000 ZRX he owes Compound for less than 60 ETH. He can then repay his debt, and keep the excess ETH as profit.
Degree of Decentralization
Compound is currently one of the most decentralized lending platforms. It adopts a particular algorithm to balance the investment and the loans on the platform. 100% decentralization is an ideal. Since there must be a certain interest gap between the borrowing and lending, Compound makes some contributions to the shares of market making in both the lending assets and the borrowing demand. In a nutshell, it’s quite decentralized when it comes to a solution of lending.
Thanks to the algorithm balance protocol, Compound is doing very well to both borrowers and lenders in terms of high liquidity. For borrowers, its liquidity is 100%, and the loans are accessible anytime — it’s the main reason why it’s very popular amongst the similar Dapps. For lenders, recovering the borrowed assets are also easy, because it’s a dynamic balance of the assets pool backed by the protocol.
Capital and Influnce
Compound has a star investor-lineup: Bain Capital Venture, a16z, Polychain etc. with $USD 8.2 million. It’s noticeable that Compound is also strongly supported by Coinbase. This platform in totally is attractive; up to May, the protocol has accumulated up to $USD 40 million.
Why DeFi makes sense?
In the decentralized applications, the “Tokens” (ERC20) are fungible and swappable with each other on-chain. However, the “Coins” like BTC and ETH are not “Tokens”, so they are not swappable on-chain with each other. Given that, we have seen the creation of the two-way backed tokens like WETH and WBTC so as to swap with other tokens.
How to Use Compound in Bitpie Wallet?
Open your Bitpie wallet and click “Discover” to enter the DeFi page. Input Dapp name “Compound” in the search bar.
Select the currency you want to lend and pay some Gas fee.
Step 3: Select “Supply” to start your lending.
After lending ETH, you can recieve the interest paid by Compound.
Step 4: How to Withdraw your ETH
When you are ready to get your ETH assets back, you can choose to withdraw the assets.
- Enter withdrawal amount
- Click on “Withdraw”
- Pay Gas fee
When the contract is executed, you will receive your ETH.