What is Compound Finance and how does it work? It is legitimate?

Is Compound Finance a real DeFi platform?

What power do users have?

Everything suggests that decentralized finance is the future. For this reason, new initiatives such as Compound Finance are springing up every day that try to solve this need while offering their grain of sand to the world of cryptocurrencies.

In this article we are going to tell you everything you need to know about Compound Finance so that you understand what it is, how it works, what it is for and above all, if it is really a secure platform.

What is Compound Financing?

Compound is a decentralized finance (DeFi) platform that relies on an algorithmic system to unlock open finance applications. Compound Finance runs on the Ethereum blockchain and allows users to automatically earn interest or take out loans on the platform.

It's certain?

Although the Compound Finance project seems surprising to us, it is essential to analyze the security of its platform. The first thing that stands out is that Compound was born in September 2018, so one would expect it to be an unstable project with few security measures.

However, Compound Finance has been formally audited and has passed all the necessary exams to operate in its industry. Additionally, its algorithm runs on top of the Ethereum blockchain, so all of its transactions are community-verified.

Finally, it should be noted that Compound Finance has no specific regulations for its activity. The speed at which blockchain has advanced has left bureaucrats behind, so it does not have specific support from institutions.

This does not mean that the platform is not secure. Indeed, thousands of people have trusted it and use it on a daily basis, both to earn interest and to borrow money.

How does it work?

The first thing you need to know if you want to use Compound Finance is that you don't need to create an account to get started, just connect your cryptocurrency wallet. As the project is in constant development, the available wallets may change, but today they are:

• Dappradar
• register
• Wallet Connect
• Coinbase Wallet

Once you have connected your wallet to Compound Finance, you can start trading within the platform. All operations are carried out through specific functions, and although there are dozens of functions, the main and most important are the following:

• Mint: The mint function allows cryptocurrencies to be transferred to the protocol. These assets start earning interest from the first moment, and in return you receive cTokens. The interest you receive will mainly depend on the asset you have converted into cTokens, and the number of cTokens you will receive will depend on the exchange rate at the time.
• redeem: In the same way that you can convert an asset into cToken, you can do the opposite thanks to the redemption function. In this way, you get back the underlying asset that you had used to create these cTokens. Again, the exact amount will depend on the exchange rate at that specific time.

However, the amount of cTokens you withdraw must be less than the liquidity in the account. Account liquidity and the amount in USD that you could borrow without your account being liquidated to have negative liquidity.

• Borrow: One of the most important features of Compound Finance is the Borrow function. That is, in Compound you can borrow assets from the platform(take a loan), creating a debt with the platform. The amount you borrow must be less than the liquidity in the account.
• Transfer: Of course, as you can do with any cryptocurrency wallet, you can also send tokens to other wallets. This transfer is done with the transfer function which, to guarantee the security of the transaction, uses an ERC-20 protocol.

What is the risk of the loans?

Although it may not seem like it, in Compound Finance you can take out real loans, so its risks are similar to a loan you can take out in a bank.

However, in the case of Compound Finance loans, a second factor comes into play, namely that the loan balance(what you owe) accumulates over time based on the interest on the loan of each asset.

Therefore, it is important to have your feet on the ground and only take out loans that you can repay. In addition, and as in conventional loans, you need a guarantee( collateral on the platform).

If you can't pay it, other network users can pay all or part of your debt. But why would anyone do that? Of course, such acts are rewarded.

Concretely, if you repay the debt of another person, you will receive what is called a " liquidation incentive “, that is to say a part of the guarantee that the person had used to contract the loan.

How is the governance?

One of the main reasons why Compound Finance has become so popular in such a short time is its governance system. The first thing to understand is that decisions about the direction of the platform are made by the community.

To do this, a token called COMP is used. COMP tokens are ERC-20 contracts that give their owner( COMP token holder) the right to vote or to delegate his vote to any other portfolio.

To make this all work properly, they use Governor Bravo as a protocol module, which in Spanish would sound like “El Gobernador Bravo”. More than what does the Governor Well done?

Its main role is to allow wallets with 100 COMP or more to propose changes to the protocol. When this happens, voting periods are open for 3 days during which any platform user can contribute.

In the Compound Finance web application, they have a section dedicated to voting. Specifically, you can see how many voting credits you have and which proposals are active at that particular time.

If after 3 days of voting, the proposal has reached at least 400 votes, the proposal is queued with the rest of the measures to be integrated and is implemented after 000 days.

In addition, the minimum amount to make a proposal, the deadlines for voting and implementation can also be changed during the vote. Therefore, the community itself has great power over everything that happens within it.

You can keep up to date with what's happening on the platform in his forum.

Pros and cons

The main ones bespoke of Compound Finance are:

The community has a very high power over everything that is done or not done on the platform. This allows members of the Compound Finance community to strongly advocate for their interests.

Any person within the platform can vote in favor of the proposals made by the other members of the platform or submit their own proposals to the vote.

It allows you to earn interest in a stable way by adding funds to the platform.

You can take out loans, but you have to be very careful with the interest.

The main ones cons of Compound Finance are:

The platform is complex and it can be difficult to understand how it works if you are not a developer and have no knowledge of programming languages.

Taking loans is “too easy”. This can cause serious problems for some people.

It cannot be connected to a large number of wallets o However, they are constantly evolving and it is only a matter of time before someone proposes it and puts it to the vote.

Conclusion

Compound Finance and other platforms decentralized finance(DeFi) are causing a real revolution in the economic sector. No doubt the future of finance will be similar to what these platforms offer, especially because of the power they give to the community.

Compound's case is quite interesting because not only did they give all the power to the users, but anyone can initiate a change in the platform and pursue it if they have enough support.

As for the rewards that can be obtained both for exchanging your money for cTokens and for paying the debts of other users, it should be noted that they can be quite interesting.

However, moving around the platform and getting those feedbacks is not easy. You need to know the advantages of certain assets over others, consider exchange rates and interest rates and, of course, make good use of your funds.

It is also unclear what will happen in the future when governments and different institutions decide to get their hands on the matter. So while the future of all these platforms looks bright, it is subject to the interests of bureaucrats.

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