Should You Invest In Compound?

Smart contracts are blockchain-based programs that are executed automatically when the terms of an agreement are met. Compound is built on Ethereum, which is a smart contract-compatible blockchain.

Blockchain

Compound uses smart contracts to manage lending and borrowing, which allows for the smooth adjustments of interest rates. Compound works in the following ways:

• COMP tokens: These are Compound’s unique tokens, used for governance – namely helping to decide how the system evolves.
• Types of users: There are two primary types of users on the Compound network: Borrowers and Lenders. Borrowers are individuals or entities who provide cryptocurrency as collateral in order to borrow other cryptocurrencies from Compound. Lenders are users who lend their cryptocurrency to Borrowers and earn interest on it.
• Reward system: Lenders are rewarded with COMP tokens. The amount they receive depends on the number of cTokens they hold and the current interest rate, which changes based on how much of a particular asset is available. Typically speaking, the more available an asset is, the lower the interest rates on that asset.

Transactions

Transactions on Compound follow a simplified process:

1. Initiation: Users connect to the Compound protocol via an Ethereum wallet and choose to lend or borrow assets.
2. Transaction details: Users specify the asset, the amount they wish to transact, and any other necessary details.
3. Confirmation: Upon confirmation, the transaction is broadcast to the Ethereum network.
4. Execution: The transaction is processed, validated, and executed per Compound’s smart contract instructions, with all actions recorded on the Ethereum blockchain for transparency.