Compound

What is Compound (COMP)?

Compound is one of the leading names in decentralized finance (DeFi). As its name suggests, Compound aims to help cryptocurrency holders compound their gains from holding their tokens.

Compound aims to change the fact that many investors simply park their tokens on exchanges and fail to earn a yield on them. Compound’s solution is an open lending platform with which users can interact trustlessly.

Better yet, Compound lets users play the part of both borrowers and lenders. You can deposit your crypto and earn interest or decide to use your deposit as collateral and take out a loan.

Governed by its community, Compound is a trusted name in the DeFi space and is already well into the third iteration of its platform.

When Was Compound Launched?

Compound debuted in September 2018 and was a pioneer of the DeFi niche. As a matter of fact, it was the first platform to offer user-to-protocol collateralized borrowing as opposed to peer-to-peer.

Less than a year later, Compound II went live. This second protocol iteration introduced portable collateral tokens (cTokens) and began Compound’s journey toward decentralization.

On August 26, 2022, Compound III went live following a successful COMP Governance proposal.

A glance at the voting on this same governance proposal is an enlightening look at how decentralization often works. While undeniably democratic, it is telling that venture capital firms like Polychain Capital and a16z (Andreesen Horowitz) were able to dominate the vote.

Who are the Founders of Compound?

Compound was founded by Robert Leshner and Geoffrey Hayes, former colleagues at the online food delivery service Postmates. Leshner is the CEO of Compound, and Hayes holds the position of a CTO.

Both Leshner and Hayes are graduates of the University of Pennsylvania, and the pair co-founded a privacy web service in 2011 called Safe Shepherd.

The company behind Compound, Compound Labs, was founded by Leshner in August 2017. It is headquartered in San Fransisco, California.

The aforementioned Andreesen Horowitz and Polychain Capital are among the seed investors of Compound, alongside the likes of Bain Capital Ventures and Coinbase Ventures.

The May 2018 seed round raised $8.2 million for Compound, while the platform’s Series A round in November 2019 led by Andreesen Horowitz raised $25 million.

How Does Compound Work?

Compound is a decentralized application (dApp) deployed on the Ethereum blockchain. It takes advantage of the Ethereum Virtual Machine (EVM) and its programmability and is built using smart contracts.

Locking funds into Compound allows users to earn a yield similarly to compounding interest, hence the platform’s name.

Compound eliminates the archaic peer-to-peer matching processes of traditional platforms by implementing liquidity pools. Users can deposit their cryptocurrency tokens into these pools, which are the source for borrowers.

When borrowers return money to the pools, they do so along with an interest payment. This interest is paid to lenders—the same users that provided tokens to the pool in the first place.

Compound’s cTokens help facilitate this. When users deposit funds into the Compound protocol, they are given cTokens representing their holdings at a 1:1 ratio. These cTokens can then be used to yield farm.

Compound III is a streamlining of the protocol that, as per a blog post by Robert Leshner, removed complexity from the process. In Compound III, each deployment features a single borrowable asset. When a user supplies collateral, it remains their property and is no longer rehypothecated.

What Makes Compound Unique?

Compound is unique for the pioneering role it played in the world of DeFi, and the protocol was one of the trailblazers of the industry.

Not every first mover is able to sustain long-term success, but Compound has stayed at the top of its game ever since it launched. With its third iteration in the form of Compound III, the platform has gone back to basics and offers investors a secure, streamlined product.

Borrowing from Compound is overcollateralized, with a loan-to-value (LTV) of between 50% and 75% depending on the collateral used. This provides an additional element of safety, along with the removal of Compound II’s rehypothecation model in Compound III.

The DeFi space is often in the headlines for hacks, with smart contract vulnerabilities seeing users lose plenty of funds. Compound has not seen a high-profile incident of this type, but the platform did mistakenly pay out some $90 million to certain users in a protocol error in October 2021.

Compound founder Robert Leshner drew criticism for his handling of the situation. While offering a 10% reward, he also threatened to report the users to the IRS (Internal Revenue Service of the US) and doxx them.

How is the Compound Network Secured?

The October 2021 incident was an excellent case study in blockchain immutability since Compound had no way to reverse the erroneous transactions. Since Compound uses the Ethereum blockchain, they would have had to perform a 51% attack on Ethereum to do so.

Even a multimillion-dollar company with significant VC backing would struggle to even contemplate this, and thus had to resort to a combination of threats and begging.

The security of the COMP token balances the blockchain that secures Compound. More of a concern is the Compound protocol itself, given that this incident took place thanks to an error in Compound’s own code.

To minimize this risk, Compound takes security seriously and has third-party specialist firms like OpenZeppelin and ChainSecurity carry out security audits.

What is the Use of COMP?

The COMP token is the native token of the Compound platform and is primarily used in governance. COMP token holders can vote on the platform’s future direction.

Who Controls Compound?

Compound as a protocol is controlled and owned by its community, with governance being carried out by holders of a set amount of COMP tokens. Governance is simple and easy to manage, with the protocol being a monolith and parameters being set through a single Configurator contract.

The current Compound III market and all future deployments are controlled exclusively by COMP Governance.

In fact, the codebase uses a business source license which COMP Governance can modify and grant usage to. This is in the shape of the community-owned ENS (Ethereum Name Service) domain—compound-community-licenses.eth.

However, the fact that Compound is owned by the community does not mean that retail investors make up COMP Governance. Any COMP holder has a vote, but as with any cryptocurrency, COMP has its “whales.”

One of the biggest fish in this particular sea is VC firm A16z, which owns a piece of many crypto pies. Polychain Capital isn’t far behind. While DeFi is often marketed as being a haven for retail, it is often institutions that are to be found chasing more and more yield.

How Much COMP Is In Circulation?

Compound has defined a maximum supply of 10 million COMP tokens, and over 7.25 million of these are already in circulation.

As per Compound Labs CEO Robert Leshner’s September 2020 update, over half of the total COMP supply is to be distributed to the community via different means.

Just under 2.4 million COMP tokens were distributed to shareholders of Compound Labs, and over 2.2 million COMP tokens went to the founders and team. 372,707 COMP were reserved for future hires at the time community governance went live.

How Do You Buy COMP?

COMP is one of the most popular tokens in the DeFi industry, and all of the top cryptocurrency exchanges feature the COMP token. You can use fiat currencies like USD to buy COMP on many exchanges, as well as stablecoins like USDT, USDC, and DAI.

Since Compound is a DeFi platform, it would be remiss not to consider picking COMP up in a decentralized manner. COMP is an ERC-20 token on Ethereum, meaning that it is abundantly available on Ethereum’s many decentralized exchanges.

Is It Possible to Buy Compound Instantly?

You can buy any cryptocurrency instantly on the top exchange platforms because they usually operate on a custodial basis. The exchange has its own wallets, where the COMP tokens are stored. Your account simply grants you an entitlement to some of the tokens in the CEX wallets.

Trading on a CEX, therefore, is just a matter of adjusting internal ledgers. If you want an actual on-chain settlement, you’ll have to withdraw your COMP from the exchange into your own wallet.

How Do You Store COMP?

As hinted, it is certainly possible to keep your COMP in an exchange account. Some exchanges might even offer you ways to earn a yield on your COMP, via on-exchange “staking”.

Unfortunately, when you use a custodian, you cannot take part in Compound’s governance. Rather, you are giving the custodial firm the ability to cast a vote using the tokens you paid for.

So, if you’d like to take charge of your own COMP tokens and exercise your Compound governance rights, you can use a variety of Ethereum-compatible wallets. Browser plug-ins like Metamask, for example, are common COMP wallets since they can connect to the Compound platform with a minimum of fuss.

Compound Energy Consumption

The COMP token is an ERC-20 token on Ethereum and currently doesn’t have its own blockchain platform. This may change in the future since Compound Labs has a prototype blockchain project called Gateway built on Substrate.

Gateway is also governed by COMP holders, but the COMP token remains on Ethereum for now. Ethereum has historically been subject to a lot of criticism on the energy front, but all of that no longer applies.

Now operating with a proof-of-stake consensus mechanism, Ethereum has shed its proof-of-work and accompanying energy requirements. In fact, the “merge” saw Ethereum cut its power requirement by an estimated 99.95%.

Is COMP a Good Investment?

The COMP token is the governance token of the Compound platform, which in itself ought to make it an intriguing investment. Compound enjoys a strong reputation in the DeFi industry and is one of Ethereum’s stalwart dApps. An opportunity to be a part of a project like this is hard to ignore.

The COMP token remains limited in its utility compared to many other cryptocurrencies, but given the sway that token holders have, this could certainly change in the future.