One of the most-asked questions of 2021 is “what is Compound Finance?” It's hardly surprising that this is such a popular question, as it allows holders to generate extra money on their crypto. All you need is an Ethereum wallet and some crypto coins.
This new technology is based on De-Fi (decentralized finance), and it's allowing everyday folk the chance to do something that had always been the sole preserve of banks. Earn interest on your assets by providing liquidity. If this sounds like something you would benefit from, then read on our Compound Finance review, how to get started, and the pros and cons of this new way to make money.
In April 2021, Compound Finance made international headlines by becoming the first De-Fi lending exchange platform with over $10 billion TVL. This means that $10 billion is locked on the platform. It started in 2021 with less than $2 billion TVL. Even by crypto standards, this is an incredibly fast rise in revenue. The second place exchange, Maker, has just over $8 billion TVL.
Numbers like this have got the attention of both crypto enthusiasts and traditional finance investors alike. Read this Compound Finance review to find out everything you need to know about it.
What Is Compound Finance?
Compound Finance is the platform that set the wheels for De-Fi in motion. It was launched in September 2018, one of the first platforms to begin trading. Based in San Francisco, the company was able to raise funds from some of the biggest names in the industry, including Coinbase and Polychain Capital. The list of investors makes for impressive reading.
At the time of its launch, Compound Finance only offered trading on wrapped Ethereum, ZRX, Bat, and REP. The image below shows the different coins available today. More coins are likely to be added later this year.
Compound Finance offers benefits for both lenders and borrowers while sidestepping a lot of the hassle that comes with a traditional bank loan.
Borrowers can use their crypto as collateral to receive money quickly and easily. Lenders can leave their crypto coins on Compound Finance and generate interest on their holdings.
Essentially, Compound Finance works in the same way as a bank, but they want crypto deposits rather than fiat currency. The big difference is that your funds are not held by a central authority. When you send money to a bank, the money is held by the bank. Compound Finance is fully decentralized, and your crypto is sent to a smart contract instead of a bank vault.
Who Is This Product for?
Compound Finance is perfect for anyone looking to take control of their own finances without having to use a bank. It's also great for crypto holders who want to earn extra money on their coins but don't want to run the risk of trading. This type of use-case appeals to a broad range of people, and if De-Fi and Compound Finance takes off, it could be the future of lending and borrowing.
The pricing and rates are competitive and often better than you would find at a bank. They're certainly miles ahead of payday lenders and others who charge extortionate rates for a similar service.
Compound finance is easy to use, as you simply download the Compound Finance app and transfer some crypto onto it. You can also link directly to a Coinbase or Ledger wallet.
By downloading the Compound Finance app, you gain the opportunity to borrow or lend crypto on their exchange. The app also gives users a voice in the governance of Compound Finance. The app is free to download and contains everything you need to get started in De-Fi.
The app does require you to transfer some Ethereum (ETH) before you can start borrowing or lending. You can borrow and lend against a range of cryptocurrencies, but the initial deposit must be in Ethereum.
Overview of Features
Compound Finance lets you choose between lending or borrowing. Once you have downloaded the app, you can select which option you wish to use. An important feature of Compound Finance is that they are upfront with their interest rates. These are clearly listed next to each token. There is no hidden small print or legal jargon to worry about.
Another feature of Compound Finance that gives confidence is that the company claims to have been fully audited. The cryptosphere is often compared to the Wild West, so Compound Finance scores top marks for being a legitimate company. This is surely a big part of the reason they were able to become a De-Fi powerhouse in such a short span of time.
The governance of Compound Finance is decentralized and runs through the native token, COMP. Users who own more than 0.1% of the total COMP supply are able to vote on issues such as which new tokens to add.
How to Install and Use
Installing Compound Finance couldn't be easier. Simply download the app on your cell phone or desktop. Once your account has some Ethereum, you are ready to go. Compound Finance can also be linked to your Coinbase or Ledger wallet.
For a more detailed guide on how to borrow and lend on Compound Finance, take a look at the YouTube video below.
Alternatives to Compound Finance
There are lots of DeFi platforms offering a similar service to Compound Finance. In terms of volume, the main competitor is Maker. Like Compound Finance, Maker uses Ethereum protocol.
There are two main reasons for using an alternative to Compound Finance. One is that you find a competitor offering a better interest rate. The other is that Compound Finance doesn't have the specific coin you are looking for.
Future of Compound Finance
DeFi is a great way for crypto holders to generate extra income on their holdings. The easy borrowing options also provide global financial inclusion. This is a key point; financial inclusion is a hot topic at the moment, with prominent voices such as Christine Lagarde, President of the European Central Bank, speaking out in favor of a more inclusive financial system.
We also know that digital central bank currencies will soon be joining traditional cryptocurrencies. With digital money going mainstream, lending platforms like Compound Finance are going to be very attractive options.
It seems likely that DeFi is going to play a big role in the world's financial future. Thanks to the stable ownership, stable app, and competitive rates, Compound Finance is a good bet to be a major player. There have been no hacks or other security breaches on the platform.
Reasons for Caution
One issue that the DeFi space will have to come to terms with within the very near future is the high Gas Fees on the Ethereum network. Some ERC-20 networks have come to a halt over recent months because of this. If Ethereum is unable to fix this issue, DeFi networks running on the network are unlikely to succeed in the long run.
Another problem with DeFi is the speculative nature of the market. Many of the users put their crypto into DeFi to borrow more money to reinvest in other coins. During a bull market, this isn't a problem. If market sentiment changes, there is a risk of a major exit rush from worried investors. This can cause widespread liquidations. One event that could cause this is the pending issue of crypto regulations.
Ripple is in the middle of a legal dispute with the SEC who has charged them with selling unregistered securities. Although this might not seem relevant to the wider crypto market, it could be significant.
During the hearing, the SEC confirmed that Ethereum and Bitcoin don't yet have regulatory clarity. A previous statement by an SEC lawyer had appeared to suggest that the SEC did not class Ethereum and Bitcoin. However, this is not the case, and Bitcoin and Ethereum don't yet have clarity. Crypto regulation is coming. If it brings bad news for Bitcoin or Ethereum, the whole market could collapse in the blink of an eye.
Compound Finance Review – Conclusion
Compound Finance is already in a strong position, and the future looks bright. They have trusted partners, a well-regarded CEO and board, and a good track record. If you are looking to generate some extra earnings on your crypto holdings, Compound Finance is a great place to start.
Compound Finance founder recently gave an interview and spoke of his vision for the future of DeFi. He said that he could see a time when DeFi becomes multi-chain, connecting different assets across a variety of live blockchains. If this comes to pass, Compound Finance could become a household name in the not-too-distant future.
Compound Finance Review
- Easy to use for both borrowers and lenders
- Fastest way to get a loan
- Cuts out KYC and allows financial inclusion
- Allows lenders an easy way to make money on their holdings
- Borrowers can lose their deposit if they don't make repayments
- Coins stored outside of a hard wallet are never 100% safe from hackers
- Price volatility can be an issue