How You Can Make Money Every 13 Seconds Through Compound Finance

BLOCK6
BLOCK6
Published in
5 min readMay 12, 2022

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Compound protocol | compound.finance

The DeFi space has provided numerous benefits for its users ranging from the ability to borrow and lend without the monitoring or authority of an intermediary like the traditional system to the permissionless and inclusive feature of the DeFi system, which enables users to carry out transactions anywhere, anytime without having to wait for bank transfers or verifications.

These and many more are being offered to DeFi users day in, day out. But, most importantly, the ability to earn passively from your assets through DeFi platforms has given DeFi the much-needed boost it requires in the blockchain and cryptocurrency space. Users can earn passively and actively on various DeFi platforms through investments, staking and liquidity pools.

What is Compound Finance?

The Compound is an Ethereum-based algorithmic money market protocol and one of the most popular DeFi stack applications. A money market, by definition, is a market that deals in short-term loans and provides liquidity to the global financial system and capital markets.

The Compound works like a money market, but it is built on Ethereum’s decentralized peer-to-peer architecture, eliminating the need for banks and financial institutions to act as middlemen. Instead, Compound allows you to borrow assets in exchange for collateral, usually short-term leverage.

Earning platforms on Compound Finance | compound.finance

Available Assets on Compound

Like the majority of the DeFi platforms, compound finance supports various crypto assets which users can lend or borrow. The most popular and highest-grossing of these assets is the Dai Stablecoin. Some other assets available for carrying out lending and borrowing transactions on Compound are:

  • Ethereum (ETH)
  • USDC
  • Dai
  • Sai (The legacy single-collateral form of Dai)
  • REP Token by Augur
  • WBTC
  • ZRX Token
  • BAT (Basic Attention Token)

When a user supplies an asset to Compound’s liquidity pool, the supplied assets are mostly represented as cTokens. For instance, cDai, cBAT, cETH, and so on.

Compound’s cToken

The protocol’s essential logic is contained in Compound cTokens, which are assigned an interest rate and risk model (algorithmically computed depending on current liquidity and market use) and allow accounts to provide and redeem Money, as well as borrow and repay what has been borrowed.

Users can borrow up to 50% to 75% of the value of their cTokens, depending on the quality of the underlying asset. If their debt passes the threshold where it becomes under-collateralized, anybody can sell the assets for a 5% discount.

Users can use cTokens as collateral and earn interest through the cToken’s exchange rate, which increases in value compared to the underlying asset, by minting cTokens.

Supplying assets to the compound Protocol

On the Ethereum blockchain, the Compound Protocol is a set of interest rate marketplaces. When users and applications supply the Compound Protocol’s large liquidity pool with an asset, they immediately earn a variable interest rate. This interest compounds every Ethereum block, which takes around 13 seconds, and customers can withdraw their principal plus interest at any time.

Users obtain cTokens from Compound in exchange for supplying assets. cTokens are ERC20 tokens that can be redeemed for the underlying assets. cTokens are redeemable at an exchange rate (compared to the underlying asset) that constantly grows over time, based on the rate of interest earned by the underlying asset, as interest accrues to the assets given.

There are different ways a user can supply assets to the compound protocol. For technical users, assets can be supplied to the protocol using Web3.js JSON RPC and through proxy smart contracts live on the blockchain. This can be done using several programming languages such as JavaScript and Solidity.

Meanwhile, for non-technical users, assets can be supplied to the protocol by interacting through an interface like argent, Coinbase wallet or Metamask wallet through the Compound Finance Website Application.

Compound Finance Market Overview | compound.finance

Using the Compound Finance Website Application

Before you can start supplying assets to the compound protocol, some key pre-requisites include:

Purchase/mine ETH to put into your own Ethereum wallets such as Metamask, Coin98 or Coinbase wallet (or faucets on test nets). This will be used to cover the cost of gas.

In this example, obtain an ERC20 token, such as Dai or ETH. Purchase some Dai for your Ethereum wallet if you work in a production setting.

Install any of these wallets as an extension on your browser. Most preferred is Google Chrome.

A step-by-step guide to supplying assets to the Compound protocol

1. Go to the Compound website application here: https://app.compound.finance/

2. Click the Connect Wallet icon at the top right corner of the interface

3. Select Metamask or Coinbase wallet from the drop-down that pops up on your screen, depending on your wallet to store your ETH.

4. Click on the Connect icon to connect your wallet to the protocol.

5. Confirm that your wallet has prioritized Ethereum at the point of connecting.

6. Open the Wallet Extension.

7. Select the asset you want to supply to the protocol.

8. Provide the amount you wish to supply to the protocol. Ensure that all the details are checked.

9. Then Click on the Supply icon.

10. Check the gas fees to approve the transaction. You have successfully supplied assets to the compound protocol.

Photo by Giorgio Trovato on Unsplash

How does the Interest Compounding work on the protocol?

Take, for instance; The Compound protocol receives 1 ETH from Alice. The supplyRatePerBlock is 0.000000000037893605 ETH per block at the time of supply. For three Ethereum blocks, no one interacts with the cEther contract. Bob steals some ETH on the fourth block after that. 1.000000000151574420 ETH is now Alice’s underlying balance.

In succeeding blocks, interest will be accrued on Alice’s underlying ETH balance based on the new value of 1.000000000151574420 ETH instead than the initial 1 ETH. The supplyRatePerBlock number may vary at any time due to real-time market fluctuations.

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