What is Compound and how can one start using it? Some point to Compound as one of the beginning stages of decentralized finance.
The Compound protocol offers anyone free access to basic financial services, including the ability to earn interest as well as lending and borrowing services. Over the years, Compound has become one of the most eminent DeFi protocols and remains a massive service with billions worth of funds locked in it.
Compound Versus Traditional Banks
You may be asking: why do people lock up their funds in DeFi protocols like Compound when we have traditional banks? Isn’t it way riskier since it’s run on smart contracts? You can’t even call a support desk in case something goes awry!
In some ways, DeFi is indeed riskier, since the protocols are new and there is no middleman to reverse transactions in case of a mistake. With this risk in mind, the rewards are far greater than traditional centralized banking structures. If you’re well versed in DeFi and security, these permissionless protocols can become far more lucrative than any offer in the world of traditional finance.
The main criticism of traditional banks is that their interest rates have been too low for far too long. A common rate you would get today is 0.05% (based on your jurisdiction) if you lock it up in a savings account. You would be lucky, you could probably hunt for a bank that offers interest rates as high as 2%.
In DeFi, an interest rate of 6% or more is quite common because of the current mechanics of crypto. Although 6% seems high when compared to traditional finance, crypto’s valuation has seen massive spikes, so locking up your funds in a protocol would be well worth it if the price of cryptocurrencies’ continues going up.
Another benefit of protocols like Compound is that there are no mandatory Know-Your-Customer (KYC) loops that you have to hop through to make an account, You don’t have to risk revealing your identity by giving your passport or income, which makes it more convenient and secure for a person to use.
Add this to the fact that 31% of the world is unbanked (2017 data), making decentralized finance a way for those who haven’t had what should be a fundamental right – a chance to have free access to global money markets. Having an account where you can pull money from should be the bare minimum for most people. Decentralized finance and protocols like Compound fix
How To Use Compound
Compound’s simplicity makes it a prime candidate for those who want to make money from their crypto holdings. With its user-friendly interface, the whole protocol is very plug-and-play-like. For those who have never used decentralized finance applications, Compound is a great way to get started. And although it’s a good jumping-on point for beginners, it also is a secure place for experienced professionals and has been subject to extensive security audits.
Knowing your way around Compound also gives you the foundation to the basics of Yield Farming and other techniques that crypto users use in order to reap some gaudy rewards.
With all that said, let’s get started and learn how to use Compound.
How to Use Compound? Start with A Crypto Wallet
Although not necessarily the best or most secure wallet, the most convenient go-to app for decentralized applications is Metamask.
Ethereum is the most popular crypto on Metamask, but there are other cryptocurrencies that can be slotted in and used with Compound.
First, you need to have funds in your wallet to get started, which may differ depending on the wallet you’re using. We have a guide on how to deposit funds on Metamask, which should be a good primer for how to do so on other wallets compatible with Compound.
If you already posses a funded wallet, head over to compound.finance. From here, you can click the top right corner to enter the application in order to begin using the app.
Once you’re in, it will show a list of wallets that are compatible with Compound. You can select the wallet of your preference and proceed to the dashboard.
Compound Dashboard
After connecting, you’ll be led to the Dashboard where you will see a list of cryptocurrencies supported by Compound. Here, you can learn the basics of earning APY in crypto and gain valuable DeFi experience. This is one of the applications where you can go from beginner to a veteran, from dipping your toes into the space to strategizing crypto investments for the best returns possible.
Here, you can see the supply and borrow balance of your account, which will change when you’ve deposited funds, as well as the different APY of the tokens. There is also a collateral tab you can use once you’ve deposited tokens to use as collateral to earn APY or to borrow other tokens from the Compound protocol.
If you have any funds in your wallet, the amount should show up on the dashboard. Click on it to see what you can use that deposited crypto for.
At the top, you can input how much ether you want to supply to Compound. The APY for supplying the network through Compound will be shown to you. If there is a borrowing limit, that will be given as well. Once you have typed in the amount you want to supply at the top, click the supply button.
You will then be prompted to confirm the transaction and the amount of crypto for transaction fees that you need to pay. Be careful, as some networks have become congested with high trading volume and user activity. Ethereum has become notorious for high gas fees, so sometimes it is best to wait for lower rates at different time. Keep that in mind when confirming transactions on Compound.
After confirmation, you will be shown the crypto you chose to supply and its value in dollars.
The number will continuously change under the supply balance, showing in real-time the amount of crypto you’re earning.
Congrats! You are now earning crypto through Compound and taking advantage of their interest rates and yield.
Borrowing
In case that you need to borrow other cryptos for a promising trade, Compound allows you to do so with the funds that you have supplied. You can use any token that you’ve supplied to borrow other tokens. You can just stick to supplying tokens and earning yield if you’re a beginner. But once you’ve learned the ins and outs of crypto, there may be trades that tempt you to borrow loans to make a good profit.
What you need to realize, though, is that Compound works with over-collateralization, which means you have to use more funds as collateral than you take out. At first, this doesn’t make any sense. Why would you put more money than you take out?
However, the crypto world moves fast. The asset you borrow for a trade maybe just in time for very lucrative trade and you can get way more for the value that you initially put in. Also, over-collateralization protects the network. For example, you could be liquidated if the crypto price drops too low.
To borrow funds, first, you need to deposit them, which you would have already done with the instructions above.
As shown in the graphic, you should click the collateral button so that Compound is aware that you will use it as collateral.
After this, you can begin to borrow tokens from Compound.
Click on which token you are looking to borrow with your deposited crypto. In this case, the Basic Attention Token was chosen.
At the top, you can put in how much of the crypto that you want to borrow, which will have an 80% limit.
To repay what you’ve loaned, simply click on the same crypto and hit the repay button.
If you have the token funds, your loan will be repaid. Hopefully, by this time, you would have made a good trade with your borrowed loan so that the transactions were worth it.