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The year 2020 will certainly be remembered for numerous events, with the world going “viral,” being just one of them. However, this year will go down in history for the cryptocurrency sector when Decentralized Finance (DeFi) protocols exploded.
One of the most impressive things about DeFi is that reliable projects spur overnight. In just a few months, they become global ecosystems backed by large communities that pour in millions of dollars. One such success story (at least so far) is COMP and its remarkable surge that everyone is racing to buy.
COMP – So Hot Right Now!
In February 2020, Compound became one of the latest Ethereum-based DeFi’s to release a governance token. They named it COMP and announced that it would not be available to the public until decentralization would be complete.
With the crypto market suffering from the COVID-19 backlash, some thought they would have to wait at least a year for the COMP’s public release. Fortunately, the wait was short, and on June 15th, the institutional holders of the coin decided to release it into the wild.
In a little over two months, COMP increased in both value and reputation, becoming one of the most sought for DeFi coins in the industry. As of August 2020, its market capitalization is soaring above $450 million, and the coin is trading above $170.
Still, not everyone knows exactly what COMP is, how it works, and where to buy COMP if you want to expand your investment portfolio. So, today we take a closer look at the latest DeFi sensation and how you can obtain it.
What is COMP?
COMP is a governance token for the Compound protocol. It enables its holders to propose, discuss, and enforce modifications to the system without the developers’ supervision, support, or approval.
Compound is a Decentralized Finance (DeFi) protocol on the market that allows users to earn interest in the assets they lend or borrow assets against collateral. Anyone can lend their assets to the Compound liquidity pool and start winning continuously-compounding interest.
The release of COMP marked a significant boost in the decentralization process that Compound Labs has been working on in recent years. The company’s goal is to become one of the most important DeFi projects on the market by letting the users take the reins.
Some of the main features of COMP include:
- COMP has a total supply of 10 million coins, out of which 42.3% is reserved for Compound users that earn rewards on the protocol
- In every market where it is active, the COMP is divided 50:50 between the lenders and borrowers within that market.
- The interest rate changes frequently, and users can verify it on the User Distribution page.
- COMP users can gain additional coins by voting on various governance proposals
- COMP is easily available on reliable exchanges like Coinbase and FTX
COMP has plenty of attractive features for investors. However, it owes its rapid increase in value and popularity to the solid backing that Compound receives from powerful entities outside the crypto industry.
How does COMP work?
In its essence, COMP is a regular ERC-20 token. However, it has properties that enable its unique functioning on the Compound protocol, equivalent to voting rights. Here’s how it works!
A COMP user can delegate their voting rights to a specific entity at an Ethereum address. That entity may be a project, a startup, a venture capital fund, another DeFi, etc. The user maintains custody over their coins while supporting said entity, and in exchange, it receives interest.
The loaner can even influence the direction of the Compound protocol. This happens when an address receives more than 1% of the total COMP supply. This mechanism gives more power to big loaners and prevents users who own a small amount of COMP to have a disproportionately high impact on the network.
When an address gets enough COMP, it can make suggestions for the protocol evolution’s next steps. Also known as governance actions, these suggestions become an integrated part of the Compound system once most users vote them.
The voting procedure lasts for three days, and if a suggestion gets at least 400,000 positive votes, it will enter a two-day timelock before becoming active. This timelock period ensures that the users will have plenty of time to prepare for the upcoming protocol modification.
The level of democracy and user control on Compound is so high that even the governance model can be changed. Users can propose any governance action and subject it to vote, as long as it can be coded.
Here are some of the governance changes that have been proposed and voted on until now:
- Enabling support for Tether’s USDT
- Releasing COMP to the public
- Updating DAI’s interest rate model to better support lenders
So far, it seems that the COMP community is not lacking in democratic harmony and consensus. Eventually, there will be suggestions that will fail to attract enough positive votes. There will be proposals that will fall on deaf ears, and so on. But, for now, everything seems to be going smoothly in the Compound ecosystem.
How to get COMP
You can get the native tokens on Compound by exchanging ETH for COMP on decentralized exchanges like Uniswap.
Additionally, you can buy COMP with US Dollars and Tether’s USDT on FTX, among other exchange platforms.
However, the most popular method of obtaining COMP is using the Compound protocol. When you use or borrow crypto on any market on Compound, including ETH, DAI, USDC, USDT, BAT, REP, WBTC, and ZRX, you should be able to claim as much as 2,880 COMP per day.
The number of COMP tokens that you can get on Compound depends on the level of interest that your project attracts and the popularity of the market.
According to their website, Compound distributes COMP equally between suppliers (lenders) and borrowers. However, several users have complained that this way of allocation is not entirely correct for all entities. While perfection is difficult to achieve, Compound is considering a handful of solutions to facilitate COMP distribution, and which include:
- Lowering the leverage that a user can take when borrowing assets
- Improving the interest rate models
- Redesigning the distribution formula
- Diminishing the speed of COMP allocation
Finding a solution will have to happen soon as, in four years, COMP distribution will have to end, and the Compound protocol should be fully decentralized.
Today, COMP seems an exciting investment opportunity for many crypto users. The feature that makes it one of the most popular digital assets is its utility for yield farming.
What is Yield Farming, and how does it work?
Yield farming is an investment strategy through which users temporarily put multiple crypto-assets and DeFi protocols to work and produce the highest possible returns on those assets.
On the Compound protocol, an investor can get up to 2,880 units every day, which they can use to reinvest or exchange for other cryptos. It’s like a gift that keeps on giving.
Yield farming enables the decentralized exchange of cryptocurrency to cryptocurrency, which is another reason why DeFi gets so much attention these days.
There are several forms of yield farming, but the two most profitable ones are:
Leveraging Your Cryptocurrency
In this case, you deposit a cryptocurrency into Compound that you use as collateral for a loan. Next, you exchange the loaned crypto for another asset. Then, you deposit the exchanged loan and repeat the process up to four times, claiming COMP every time.
This investment strategy requires paying for high gas fees, so it is best to engage in it if you possess a substantial amount of cryptos.
Here is a simple example of how you can get the COMP’s maximum by providing liquidity on the Compound protocol.
- You start by depositing USDC/DAI into Compound.
- Next, you withdraw USDT.
- Finally, you exchange the loaned USDT for USDC.
- Now, you repeat the process until you cannot take any more leverage.
It sounds almost too good to be true, which is why there have been some voices in the crypto community opposing yield farming. Some of the risks of this investment tactic may include:
- Vulnerabilities in the lending protocol or the cryptocurrencies involved in yield farming
- A sudden movement of the crypto market that could lead to sudden liquidation from leveraging too much of a particular asset
- Failure in the economic design of the protocol
- User error
For now, Compound does not have a solution to a yield farming crisis that would lead to COMP leveraging becoming an investment failure. However, there is hope that by upgrading the COMP distribution into a more stable and fair process, these risks should diminish considerably.
The Bottom Line – What is COMP, and why is everyone racing to buy it?
The ascension of Decentralized Finance protocols is one of the most inspiring and exciting movements on the crypto market since the Bitcoin bubble of 2017, and COMP is spearheading it.
The release of COMP in the summer of 2020 increased the DeFi ecosystem by 50% in less than a week. This coin that is now ideal for yield farming and advancing investments and projects on the Ethereum network is one of the most sought-after digital assets.
It is highly probable that other DeFi governance tokens will follow in the COMP’s footsteps and accelerate DeFi adoption altogether. From then on, investors and entrepreneurs will have another reason to flee from traditional markets and into a financial system that is not linked to any government or corporation.