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What is a Compound and how can someone start to use it? Some refer to Compound as the starting stages of DeFi (decentralized finance). So it is very important for any blockchain and DeFi enthusiast to know how to use Compound. And in this article, we will see the same.
The Compound protocol provides anyone free access to the essential financial services that include the potential to earn interest along with lending and borrowing services. Over the years, this platform has become among the most eminent DeFi protocols and stays as a massive service provider with billions worth of funds locked in it. In this article, you will also understand how does Compound DeFi work?
Compound Vs Traditional Banks
Before we get into how to use Compound, you may be asking, why do people lock up their funds in platforms like Compound when they have the option of traditional banks? Isn’t it way riskier since it is operated on smart contracts? You cannot even contact the support desk in case something goes awry.
In some ways, decentralized finance is indeed riskier, since all the protocols are new and there are no middlemen to reverse the transaction in case of any mistake. Keeping this risk in mind, the rewards are far greater in comparison to the traditional centralized banking protocols. If you are well accustomed to security and DeFi, then these permissionless structures can become far more attractive in comparison to any offer in the world of traditional finance. So now without any delay, let us see how to use Compound app.
How To Use Compounds?
Now let us come to the main part of how to use Compound. The simplicity of Compound makes it a fundamental candidate for those who wish to make money from their crypto holdings. With its user-friendly interface, the complete Compound protocol is very plug-and-play-like. For people who have never used decentralized finance apps before, Compound is a great way to begin. And even though it is a good jumping-on point for starters, it also is a safe place for experienced professionals and has been subject to high security audits.
Understanding your way around Compound finance also offers you the foundation to the basics of Yield Farming and also other techniques that crypto users use in order to reap some gaudy rewards. With all that said, let us get started and also learn how to use Compound.
1. Start With A Crypto Wallet
Even though not necessarily the ideal or most secure wallet, the easiest go-to app for decentralized applications is Metamask. Ethereum is the most famous crypto on Metamask, but there are other digital currencies that can be slotted in and then used with Compound.
First, you will be required to have funds in your wallet to begin, which may differ as per the wallet you are using. There are various guides on how to deposit funds on Metamask, which should be a good option for how to do so on other wallets that are compatible with Compound.
If you already have a funded wallet, go to the compound.finance. From here, you can select the top right corner to enter into the application in order to start using the application. Once you are in, it will provide you with a list of wallets that are compatible with Compound. You can choose the wallet of your preference and then move forward to the dashboard.
2. Compound Dashboard
After connecting, you will be taken to the Dashboard where you will get to see a list of digital currencies that are supported by Compound. Here, you can learn the fundamentals of earning APY in crypto and receive valuable DeFi experience. This is among the applications where you can go from starter to a veteran, from dipping your toes into the space to making strategies for your crypto investments for the ideal returns possible.
On the dashboard, you can see the borrow and supply balance of your account, which will alter when you have deposited funds, along with the varied APY of the tokens. There is also a collateral tab that you can use once you have deposited tokens to use as collateral to receive APY or to borrow other tokens from the Compound structure.
If you have any funds present in your wallet, the amount should be portrayed on the dashboard. Tap on it to see what you can utilize that deposited crypto for.
At the top, you can manually put how much ETH you want to supply to Compound. The APY for supplying the network via Compound will be showcased to you. If there is any borrowing limit, that will also be given. Once you have typed in the portion you wish to supply at the top, click the supply button.
You will then be taken to confirm the transaction and the amount of crypto for transaction charges that you are required to pay. Be careful, as some networks have got congested with high trading volume and several user activities. Ethereum has changed to being notorious for high gas fees, so at times it is ideal to wait for lower rates at varied times. Keep that in mind when you confirm transactions on Compound.
After you have confirmed, you will be shown the crypto you select to supply and also its value in dollars. The number will constantly change under the supply balance, portraying in real-time the amount of crypto that you are earning. Congrats! You are presently earning crypto via Compound and taking benefit of their interest rates and yield.
3. Borrowing
In case that you require to borrow other digital coins for a promising trade, Compound enables you to do so with the funds that you have supplied. You can utilize any crypto that you have supplied to borrow other tokens. You can just remain to supply tokens and receive yield if you are a beginner. But once you have learned the ins and outs of this space, there may be trades that tempt you to take loans to earn a good profit.
What you are required to realize, though, is that this DeFi platform operates with over-collateralization, which implies you have to use more funds as collateral than you actually take out. At first, this does not make any sense. Why would you supply more money than you take out?
However, the crypto world changes fast. The asset you borrow for a trade maybe just in time for a very attractive trade and you can get way more for the price that you initially put in. Also, over-collateralization safeguards the network. For instance, you could be liquidated if the crypto price decreases too low.
To borrow funds, initially, you are required to deposit them, which you would have already done with the instructions that have been mentioned above. You should click the collateral tab so that Compound is sound that you will use it as collateral. After this, you can start to borrow tokens from Compound. Click on which token you are searching to borrow with your deposited crypto. Let us take for example the BAT (Basic Attention Token) for this case.
At the top, you can put the amount of crypto that you wish to borrow, which will have an 80 percent limit. To repay what you have borrowed, simply select on the same crypto and tap the replay button. If you have the crypto funds, your loan will be repaid. Hopefully, by this time, you are well aware of how to use Compound easily and without any hassle. So if you are wondering how does Compound finance work, then this is your answer.
The Bottom Line
Even though armed with enough elements for beginners of DeFi, Compound is used by a broad variety of professionals in order to make complete use of the crypto space. With the increase of crypto in 2021, the protocol is anticipated to have a bright future ahead. Sooner or later, we may see the everyday individual lock funds into Compound as the yield, in this case, is much better than traditional banking structures. Time will tell, but the more people become sound in the decentralized finance space, the more successful platforms like Compound will be. But what is the purpose of knowing about this platform if you cannot use them? So in this article, we have discussed the various steps on how you can use Compound for easy supply and borrowing.
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