Borrowing and Lending: Compound
Borrowing and lending on the blockchain
The next project that we will learn about is Compound protocol. Scallop will also be integrating this project into its banking ecosystem. Much like Aave, it is a peer to peer lending and borrowing application. It allows users to borrow and lend by locking their assets into the protocol.. but with a slight twist.
- Compound is a project founded in 2017 by Robert Leshner
- It allows users to borrow and lend by locking assets into the protocol
- It uses smart contracts that automate the storage and management of the capital being added to the platform
- Built on the Ethereum network and built on the native ERC20 token cToken
- Ctokens allow users to earn interest on their money while also being able to transfer, trade, and use that money in other applications
All you need to get started with Compound is an Ethereum wallet and some funds, we will cover this later!
Why is this useful, why not just borrow from a bank? Well, with compound and Defi in general, you don't need to negotiate terms as you would in traditional finance - you interact directly with the Compound protocol which handles everything from collateral and interest rates. No third party holds the funds. The assets are held in smart contracts called liquidity pools.
Compound resembles other Defi lending protocols, in that you put up some collateral in the form of cryptocurrency assets, and once locked up you are able to interact with the protocol. Where Compound stands out is the tokenisation of the assets locked in their system through the use of cTokens. When you deposit assets into the protocol, like for example USDC, you get an equivalent amount of cTokens back. In the case of USDC, you get cUSD tokens back, which automatically earn interest for you. You can then at any time claim back the USDC plus the interest earned. The interesting part though is that these equivalent tokens (cUSD in this case) can be freely moved, traded and used on other decentralised apps. This means that you can combine protocols as building blocks, known as Money Lego's.
Compound issues cTokens which can be freely traded, moved and used with other dapps allowing you to combine protocols as building blocks
The biggest markets on the protocol at the time of writing
You will need an Ethereum wallet to interact with the protocol, at Scallop we use Metamask to interact with our staking platform and would recommend it. We have a tutorial on how to set up a Metamask here.
Lending is straightforward. Unlock the asset that you wish to supply liquidity for, and sign a transaction through your wallet to start supplying capital. The assets are instantly added to the pool, and start earning interest in real-time. This is when the assets are converted to cTokens.
enable access to your supply of a coin and start lending at 1.82% interest
Our vision at Scallop is to integrate these protocols into regular banking accounts, removing the need to create multiple accounts across myriad platforms. Digitial money, simplified!