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What is Compound Finance All About?

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The financial sector is changing gradually to make things easier. Compound finance is a form of a savings account and allows you to lend and borrow cryptocurrencies. This makes it possible for users to earn interest from lending your crypt to borrowers. To take advantage of compound interest, all that you will need is an Ethereum wallet with some funds and you can venture into this business. Unlike conventional savings accounts, with compound finance, you will not have anyone holding your funds; you are in full control.

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Compound finance is another type of DeFi protocol that is executed on the Ethereum blockchain. As a lender, you can lock your crypto in a decentralized protocol so as to be able to lend to borrowers. This technology comes with so many other functions as it allows you to trade, use money and also transfer it to other decentralized finance platforms. Compound finance has a native token, which is known as COMP. There are so many exchanges that allow you to buy COMP.

One of the main benefits of compound finance is that it has made lending and borrowing in DeFi protocols easier. The user experience of this technology has been simplified and it is quite smooth. This protocol has been in the testing phase for quite some time and it has proved to be a game-changer. To make sense of all of this, let us look into detail how compound finance works.

How Compound Finance Works

The supplied assets in the compound are known as positions and these are tracked down in cTokens. These are ERC-20 tokens, which are used as a representation of a claim to crypto assets in a compound pool. When the tokens are locked up in the compound protocol, as the depositor, you will get an equivalent amount of cTokens, which serve as collateral. At any given time, you will have to ensure that the collateral is above the amount of crypto that you intend to borrow.

Also Read: 4 Easy Ways To Make Money With Bitcoin As A Beginner

Failure to ensure this, the crypto will liquidate the collateral and be used to offset the loan. As soon as you have repaid the crypto loan, your assets will be available for withdrawal from the compound protocol and you can Bitcoin Circuit The supply and demand of each crypto asset will be the basis of calculating the interest rates. With the borrowed ERC20 tokens, you can trade and use them on other decentralized applications. This is a great way to keep you in the cryptocurrency business at all times.

Using your Ethereum wallet, you can easily generate the cTokens. Some of the crypto assets that compound finance allow you to lend and borrow include ZRX, BAT, WBTC, ETH, DAI, USDC, and REP. Each time a compound user deposits assets into the protocol, there will be new tokens generated. You can borrow or lend these tokens.

How Compound Finance Works

Compound Finance Governance

Initially, compound finance started out as a company that was primarily funded by venture capitalists. However, it has evolved to decentralized finance through its native COMP token. With this token, the holders are entitled to governance rights and fees over the platform. This means that the token holders can make changes to the protocol through on-chain votes and improvement proposals. As a way of making the playing field leveled, each token is a representation of a single vote.

Also Read: 5 Ways To Finance Your Business Startup

Conclusion

Compound finance has gained popularity as one of the best lending and borrowing DeFi protocols. The technology is gradually transforming with the main goal being to become a fully decentralized finance system. When this happens, all the rights will be transferred to the Decentralized Autonomous Organization for proper governance. This is bound to shape the crypto markets significantly.

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