Decentraized Finance (DEFI) movement is still on its initial stage, but yet we have seen one of the best applications of DEFI system through Compound.
INTRO
Compound is an autonomous, algorithmic interest rate Protocol built for Developers, to unlock an universe of open financial applications, For those who don't know what a Protocol is.A Protocol is nothing but simply the rules and guidelines that used to achieve a certain task.And Compound is that guideline which allows us lend or borrow assets over the blockchain.The Comopound Protocol is an collection of Ethereum smart contracts, its both autonomous and decentralized, allowing users to earn interest in trustless authority.
With Compound we can earn assets by supplying them to the Protocol, while Other users can borrow that and then they pay interest on that borrowed asset.All borrowers and suppliers combine to form a series of blockchain based interest market.When someone supplies a compound, it is added to the global liquidity pool, from which users can borrow from, by providing collateral upfront.When an borrower in the compound market accrues interest, the compound protocol automatically distributes it to suppliers like Maya, this idea is already well-established in traditional finance.
Compound has no fixed terms, Once a crypto asset is supplied to compound, interest is automatically calculated and distributed within Ethereum block, every 15 seconds.Any app that holds an crypto asset can integrate compound's interest to offer brand new features and services.Compound provides platform to developers to launch fture proof decentralized financial services and applications, that can pass down compounds benefits to the users.
Borrowing Crypto From Compound
One can directly borrow crypto assets from compound, using assets supplied to the Protocol as collateral, this process is called Over-Collaterallized Lending.One can instantly use the borrowed crypto asstts, and can also leverage over those assets to borrow more assets.The more supplies the higher the borrowing limit increases.
To Limit risk compound gives each assets it's own unique collateral factor, that means supplied asset will effect the borrowing limit, for example Eth's collateral factor is 75%.Net Cost for borrowing
Net Cost for Borrowing = BorrowRate - Interest Earned on Supplied Asset
Interest rate for each asset is dynamic and based purely on supply and demand and calculated per block.- Markets with fewer suppliers and more borrowers will become more expensive to borrow from and more supply rewarding and vice versa