What is compound (COMP)? Your ultimate guide

Compound allows people to get involved in decentralised finance, but how?

Compound is a system that allows people to both make and supply the money for cryptocurrency loans, and COMP is its native token. But what is compound (COMP)? How does compound work? What is compound “coin” used for? Let’s take a look and see what we can find out about this cryptocurrency.

Crypto and DeFi

One of the goals that many cryptocurrencies have is for the coin or token to be used like any fiat currency. People being able to carry out everyday purchases in crypto is a dream that many online currency founders have. Right now, though, one of the reasons that crypto has not taken over to the extent that some of its enthusiasts think it could is that there are other things fiat currencies are better at. For instance, it is much easier to financing projects through loans. If we can use crypto to make and receive loans then a world of possibilities opens up for cryptocurrency.

In fact, it's the aim of providing traditional banking services through non-traditional means that powers pretty much the whole concept of cryptocurrency. Let’s not forget that bitcoin was set up following the Great Recession in order to let people pay for things without having to use banks. However, there is another important concept which works with crypto, and that’s decentralised finance, or DeFi for short. 

The World Bank says there are 1.7 billion people who do not have a bank account. However, roughly 66% of them own a mobile phone, and advocates of decentralised finance are hoping to reach these people which will, it’s hoped, promote financial inclusion. 

The aim is for a fairer version of traditional financial services, which people can access online. The idea is to provide a modern, fairer alternative to banking services using tools called decentralised apps, or DApps for short.

There are also theoretical benefits for international financial transactions, too. One issue a lot of people have when sending money around the world is the high commission fees and remittance services charge, while another is the cost of currency conversion. The idea is that with a cheaper alternative, remittance charges and commission fees will drop and currency conversion will have to get cheaper to be more competitive.

The start of compound

Anyway, when it comes to the issue of making loans via cryptocurrency, there was certainly a gap in the market back in 2017, when entrepreneurs Geoffrey Hayes and Robert Leshner teamed up to form Compound, a system that allows cryptocurrencies to be borrowed and lent. The protocol was launched in 2018 and, at the time, Leshner said: “As it currently stands, just about the only thing you can do is move your assets off of exchanges (where they are vulnerable to hacks and losses) and into your own control. And then… wait until you’re ready to sell.”

The programme allows people to deposit their cryptocurrency into a pool, which is used to make loans. People who make deposits earn interest based on the amount they put in. Perhaps more interestingly, they receive something called a cToken, which can be transferred or traded to anyone at any time – but it can only represent the cryptocurrency that has been deposited. So, for instance, there are cETH tokens, representing ethereum and cBAT, representing basic attention token, cDAI for the DAI stablecoin and so on. 

The system runs on the Ethereum protocol. Everything on Compound is automatic, meaning that people can withdraw their deposits at any time. People who lend are able to take out a loan worth the value of their deposit in another cryptocurrency. If the value of the cryptocurrency loaned goes up and becomes worth more than the deposit, borrowings can get liquidated. If that happens, then other users can repay a portion of what’s outstanding in return for a share of the collateral at a discount to the contemporary market price. There are, basically, two sorts of users, lenders and borrowers. 

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According to the network’s whitepaper, Compound: The Money Market Protocol, the protocol allows for “frictionless borrowing of Ethereum tokens without the flaws of existing approaches, enabling proper money markets to function, and creating a safe positive-yield approach to storing assets”.

What is compound (COMP)?

Representation of the COMP token next to a pair of dice decorated with the words ‘hold/buy’ and ’hold/sell’’
COMP is the native token of the Compound network – Photo: Shutterstock

Compound has its own native token, called COMP. If you use the Compound system in any way, whether it’s by borrowing, repaying or withdrawing, you can earn COMP. People who own COMP have voting rights when it comes to the system’s protocol, and they can assign those rights to someone else in return for more rewards paid in the compound cryptocurrency. Theoretically, someone can assign their voting rights to someone outside of the Compound system, which means that, should a vote be about to take place on a matter that requires specialist knowledge, you could assign your rights to someone with that particular expertise. 

Also, the token can be staked, which gives the people who do so the opportunity to make money through interest. This means that, at least in theory, there is the potential to profit without actually having to do too much. 

The compound cryptocurrency was launched on 16 June 2020. Since then, it has become a pretty popular cryptocurrency and, as of 4 May 2022, it had a market cap of $724.5m, making it the 91st largest crypto by that metric. There were 6,728,639.96 COMP in circulation out of a total supply of 10 million. As far as the money tied into the system itself goes, there was, at the time of writing, a little under $6bn tied up into Compound. In terms of its price, it was trading at around $108 on 4 May 2022, down from an all-time high of $911.20, which it reached on 12 May 2021. 

One important thing to note about compound (COMP) is that it is based on the Ethereum blockchain, meaning that it is really the COMP token, rather than the COMP coin. That said, you will see references to the COMP coin, so don’t get confused – it is the same thing. 

So that is compound (COMP) explained for you. As always with cryptocurrency, if you want to invest in the token, then you will need to do your own research, remember crypto is highly volatile and prices can go down as well as up, and never invest more money than you can afford to lose.

FAQs

How many compound coins are there?

As of 4 May 2022, there were 6,728,639.96 COMP tokens in circulation out of a total supply of 10 million. 

Who created compound?

Compound and, by extension the COMP cryptocurrency, were created by entrepreneurs Geoffrey Hayes and Robert Leshner. The protocol went live in 2018, but the token itself did not start trading on the open market until 2020.

What makes compound unique?

Something that makes COMP a little different from other cryptocurrencies is it helps power a system that allows people to both lend and borrow crypto. 

Further reading

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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