Borrow Crypto With Compound

Cryptocurrency, known as digital money, was initially designed to ease payments without going through a bank or using a financial intermediary. As DeFi developed, the need to introduce more banking services became greater as demand increased. Since the objective of DeFi is to decentralize financial services and reduce entry barriers through blockchain, several DeFi protocols like Compound emerged. Its primary concern is to offer borrowing and lending services.

However, many users find it difficult to utilize the borrowing and lending services on Compound. This review explains how to borrow crypto with Compound and earn interest.

What is Compound Crypto?

Simply, Compound Crypto is a permissionless borrowing and lending protocol built on the Ethereum blockchain. By permissionless, anyone can access the services instantly without undergoing any verification process and borrow crypto, using any other supported digital asset as collateral – giving Compound the flexibility they need to settle a trade. For instance, a user that needs DAI but has BTC may supply it to Compound to borrow DAI.

Founded by Robert Leshner and Geoffrey Hayes, Compound also offers users the chance to increase their crypto portfolio with crypto lending. Users can deposit any of the accepted tokens and receive interest. The interest borrowers pay is used to settle lenders on the platform. As long as users borrow assets from Compound and pay, lenders will continue to earn interest for the lockup period. The interest is determined by the supply and demand of coins in the pool.

How Does Compound Crypto Work?

As mentioned, Compound is a borrowing and lending protocol – users take crypto with collateral and also lend to generate interest. It connects borrowers and lenders through Ethereum smart contracts. However, you can’t borrow and lend all cryptocurrencies. The protocol only supports a few, such as DAI, ETH, USDC, USDT, ZRX, WBTC, BAT, REP, and SAI. Anyone with these cryptos can borrow and lend instantly. Of course, you don’t have to bother with any financial intermediary.

Note that whether you are borrowing or lending, you must deposit crypto. In the lending aspect, all users need to do is lock or deposit a certain amount of the supported crypto. Locking is similar to putting your money in a savings bank account but in a wallet of Compound. You begin to earn interest on your crypto once the protocol has confirmed your deposit. The interest you earn is denominated in the same crypto that you deposited. For instance, if you lent DAI, you profit in DAI. Your deposit is added to a pool of that same token in the Compound’s smart contract.

On the flip side of borrowing, you will be able to borrow once you have made your deposit. Compound doesn’t need to carry out credit checks to know your eligibility, so anyone anywhere in the world can borrow. However, only Compound reserves the right to determine how much you can borrow based on the type of asset. For example, if you locked BAT worth $1000 and Compound set the collateral at 50%, you can borrow $500 worth of any other supported digital asset. This principle of borrowing is called over-collateralization. You will have to pay the interest on the borrowed money.

Note that Compound distributes the governance token COMP to both lenders and borrowers. This distribution happens every 15 seconds (technically anytime an ETH block is mined) in an amount proportional to the accrued interest on your locked crypto. The benefit of holding COMP is that you get voting rights and get to propose changes to the protocol. It is similar to being a major shareholder and a member of a bank’s board.  The amount of COMP determines the number of votes.

How to Earn Interest with Compound

To earn interest with Compound, you need to deposit the crypto you want to provide liquidity for. Typically, lenders lock the crypto into a liquidity pool. When lenders do that, they get the Compound token or cToken. cTokens are developed from the Ethereum blockchain as ERC-20 tokens. For example, if you lock 1000 USDT in the protocol, you will get 1000 cUSDT.

The cUSDT can be used on Ethereum-based DApps. It can be transferred or traded, while you earn interest. So, your locked-up capital isn’t truly locked up like it would be if you lent in a traditional setting. You can make use of the cryptocurrency if you pay back your cTokens. To skip all the technicalities, you can interact with Compound using interfaces like MetaMask wallet.

The value of the token is equivalent to the crypto in the pool. The value of the cToken will increase as interes

t in the crypto appreciates. The value of the cToken will decrease if the value of the crypto in the pool fluctuates.

Interest Rate

Interest rates are determined by the supply and demand of assets in the pool, meaning they fluctuate. The algorithm monitors the size of the liquidity in the pool. The interest rates tend to be low if the liquidity in each pool is large because there’s plenty to be borrowed. You won’t get paid handsomely to add to that pool. However, if the liquidity in the pool is small, the interest rate becomes higher, and you earn more if you add to the pool.

The interest rate usually comes in the form of an annual interest rate. It accrues each time a user mines an Ethereum block. The value of the cToken mentioned earlier increases every 15 seconds.

Compound Crypto Lending

We already explained how Compound crypto lending works. The user will have to deposit crypto into the Compound Wallet, which is then added to the liquidity pool in a smart contract. Pools also contain tokens sent by thousands, sometimes hundreds of thousands of other people from around the world. Interest rates vary but are added to your deposit daily.

What Do You Need to Borrow Crypto with Compound

Users who need to borrow crypto with Compound need to understand certain terms beforehand. Below are terms that are associated with borrowing with Compound.

● Borrowing Power

As customary, borrowers need to deposit collateral before they access crypto. Deposits grant them borrowing/collateral power. You will be able to take tokens that equate to your borrowing power. In essence, the maximum amount you can borrow is affected by the collateral power of the assets you supplied. You can see the borrowing power of each asset using the Comptroller contract.

● Collateral

Collateral is required before you can borrow crypto. The good thing about supplying collateral is it earns interest in the protocol, although you can’t use it while it serves as collateral.

● Enter Markets

The protocol doesn’t identify the crypto you supplied as collateral immediately. To inform it, you need to enter the market for that particular asset.

● Calculating Liquidity

Maybe you have multiple collateral assets that you would like to use but don’t know the maximum allowed borrowed amount. You can use the Comptroller contract to calculate it. The amount is usually denominated in USD.

● Price Feed

Compound’s Price Feed checks the recent exchange rates of all supported crypto.

● Borrow Balance

This is the total of the unpaid borrowed amount plus accrued interests.

● Liquidation

When the borrowed amount surpasses the amount allowed by the collateral factor, the account becomes insolvent. Users can repay part of the debt in exchange for a small percentage of the collateral. This is called a liquidation incentive. It is offered to liquidators at an 8% discount. If a borrower’s account is liquidated, they lose some of their collateral.

You can borrow crypto with Compound in three ways – using JavaScript, using Solidity, and using interfaces. The first two require a little bit of technicality, and may not be suitable for beginners. Using interfaces like an Ethereum wallet is preferred as the process is slightly more comprehensible than JavaScript and Solidity code.

Let’s walk you through the steps of borrowing using an Ethereum wallet. We recommend using MetaMask Wallet.

1. Log into Compound Finance.
2. A pop-up will appear asking you to connect your Ethereum wallet. Select MetaMask wallet.
3. Ensure you have a minimum of 0.05 ETH.
4. Your wallet address will be displayed at the top-right of the screen.
5. Select “Borrow Markets” on the right-hand side.
6. Click on the digital currency you would like to borrow.
7. Type the quantity you want to borrow.
8. Tap on “Borrow” and submit.

How to Make Money with Compound Crypto

You can make money with Compound crypto in two ways – by becoming a lender and by HODLing. Lenders earn interest by sending crypto to Compound Wallet. HODLing is the regular method of buying crypto and selling it over time when the price appreciates. Becoming a lender is better for beginners as it eliminates the stress of monitoring the market regularly.

Conclusion

Compound is changing the game and expanding the DeFi space by unlocking decentralized financial services. Thanks to its model, this protocol has become sustainable over the years. Compared to most lending platforms, it offers a slightly higher interest rate for all its supported assets. This is good for lenders who want to maximize their profits. For borrowers who don’t mind over-collateralizing their assets, this is one of the best platforms to borrow crypto instantly.

Frequently Asked Questions

● How much can you borrow?

Compound relies on collateral power to determine the maximum allowed amount you can borrow. There’s no fixed amount of crypto the user can borrow.

● Can I borrow against my crypto assets?

Compound uses the principle of over-collateralization, meaning you can borrow crypto against your assets. You can borrow against multiple assets at once, but it is not usually advisable for liquidation reasons.

● What do you need to do to borrow crypto with Compound?

First, you need to understand the borrowing terms to avoid any confusion ahead. Also, you need to connect a compatible Ethereum wallet. Furthermore, you need to have a minimum of 0.05ETH in the wallet for gas fees.