Money markets have been around for ages in the traditional finance world – now the crypto world has one of it’s own called Compound Finance.
Compound is an Ethereum-powered decentralized money market network that allows users to earn interest on deposits and borrow against collateral for interest rates that are based on supply and demand. It does require some technical skill to reap all of the benefits though.
For newer users there are a few handy graphical wallets that can make the process easier.
Join us as we go over the basics of Compound Finance and how to get started earning and borrowing.
Compound Finance: The Basics
You can think of Compound Finance as a big pool of money that operates on a set of transparent rules. Anyone can participate by depositing Ethereum assets like ETH or any compatible ERC-20 token. Because it’s completely decentralized and automated, there are no KYC checks or application rejections. Anyone with an Ethereum wallet can interact with Compound either directly or through a compatible app that offers integration with the platform.
Here’s how it works…
- When you deposit crypto into the pool, you immediately start earning interest after each Ethereum block (about every 15 seconds).
- The interest you earn comes from people that borrow from the pool and pay a higher interest rate that you earn by depositing.
- Unlike with a bank account, deposits made into Compound are turned into a new type of Ethereum token called a C token.
- For example, if you deposit USDC, you will receive cUSDC in return – a different ERC-20 asset. cUSDC is designed to proportionally increase in value as interest is accrued in the pool.
- Since your deposit is completely under your control at all times, you are free to either cash out your deposit at any time to claim your interest. Or, you can directly sell your cUSD (or other C token) on compatible exchanges.
Borrowing assets on Compound Finance is more complicated than just making a deposit but it uses the same core…