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Understanding Compound (COMP)
Built by Robert Leshner, Compound Finance is one of the world’s first fully open and decentralized global banks. It’s also a DeFi primitive - one of the earliest available protocols for such purposes and it’s building block. It is concerned with providing the core functionality of lending and borrowing of crypto-assets. The lenders can earn interest, based on the amount and quality of the supplied collateral to the pool, while the borrowers can gain access to assets on interest payments, in just a few clicks. As with any bank, when you borrow assets you pay a certain interest rate, which goes to those who deposited the asset - this supply and demand is completely open and transparent.
It’s also known as an “automatic algorithmic money market” protocol because smart contracts can generally alter the rates without continuous human intervention. This is one of the most important reasons why Compound (and all of DeFi) is so valuable. Full time automation, auditability and decentralization. Since its launch in 2017, Compound has consistently maintained its place in the top five DeFi protocols by total value locked (TVL) metric. If you want to learn more about DeFi metrics, you can do that at DeFi Pulse.
What is COMP the token?
The COMP token is the native governance token of the Compound protocol. It’s an Ethereum ERC-20 standard token, which is utilized for protocol’s governance. The token gives the holders the right to create proposals and vote for them, known as governance. It also gives holders the right to claim a portion of the cash-flow that the protocol generates from the protocol users. It’s a part of the new decentralized global monetary system, which operates without restrictions or trust.
The token has a total supply of 10M COMP tokens (or 10,000,000) - out of which more than 5M COMP tokens are in circulation (or 5,000,000+). It’s traded on all major centralized and decentralized exchanges. Also forms part of all DeFi index funds. The current valuation of the Compound token is around $4 billion with around $11 billion of diverse healthy assets locked inside. It has a total addressable market (TAM) in the hundreds of billions or even beyond.
What is a Compound Chain?
Compound Chain is an initiative by the Compound protocol, which aims to develop a separate standalone blockchain (build on Polkadot Substrate) for DeFi applications. Currently, Compound operates on the Ethereum blockchain, but it plans to migrate to its own. The plans for the Compound Chain were unveiled in Dec 2020 and it’s still under development.
The rationale provided is that the scalability issues on Ethereum limit Compound usage and growth, plus it can’t connect to other blockchains directly. Compound Chain is proposed to lower fees, offer faster processing and cross-chain value transfer. It might also be offered to central banks around the world for their digital FIAT equivalent on the blockchains.
Compound Protocol is a major DeFi project, which has seen significant adoption and usage. It’s a top 50 project by market capitalization and COMP prices are estimated to appreciate in value greatly in the future. Being a DeFi blue-chip and a building block, it has excellent liquidity and billions in TVL locked across multiple crypto-assets, which give it integration with the rest of the market and enhance it’s value.
Decentralized Finance (DeFi) has exploded in value in a short period of time. With the inefficient traditional finance infrastructure and the great advantages that DeFi offers over it, it’s understandable that we are just beginning and COMP offers an excellent opportunity to get in, with optimized risk/reward ratio.
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