Earn passive income with Compound.

Learn about supplying stable-coins and risks involved.

What is Compound?

https://compound.finance / White-paper: https://compound.finance/documents/Compound.Whitepaper.pdf

The Compound Protocol is a group of smart contracts deployed on the Ethereum blockchain that enable borrowing from pools of supplied assets instead of a centralized exchange or peer-to-peer platform.

Compound Interface is a user-facing application that allows suppliers and borrowers to interact directly with The Compound Protocol’s smart contracts.

What makes Compound unique?

  • Each asset pool is a money market with a floating interest rate which is algorithmically adjusted based on the supply and demand for that asset. Meaning as more people borrow from a pool of supplied assets, the floating interest rate will increase based on the demand curve (centrally codified by Compound). Higher interest will incentivize suppliers to add more liquidity to that asset pool, bringing interest rate down until market equilibrium.

  • Because the interest rate is algorithmically derived and the supply is aggregated, users do not have to negotiate terms such as maturity, interest rate, or collateral with a peer or counter-party.

  • Interest accrues every block (~15 seconds).

  • Suppliers are able to withdraw supplied assets and accrued interest at anytime.

Best use-case:

Supplying stable-coins (coins pegged to $1 such as USDC/Dai) to earn interest.

  • Why?

    • Compound offers one of the safest positive-yield approaches to storing assets available on the market with non-custodial smart contracts.

    • Competitive alternative to traditional savings/CD/money market accounts. Currently ~13% annual interest rate for supplying DAI and ~9% for USDC compared to <3% average across traditional finance accounts.

    • Supplying stable-coins as opposed to crypto-assets avoids exposure to market volatility and focuses on generating guaranteed interest income, which is also denominated in stable-coins, and is available for withdrawal back to USD at anytime. Hence stable-coins are top markets on Compound:

      Source: https://compound.finance/markets
      • Dai: value is guaranteed by collateral (Ethereum) which is locked in order to generate Dai coins (up to 66% of collateral’s worth). As of Aug 1st, 2019: Circulating supply = 77.2M and Volume (24hr) = 35.3M (full network stats: https://mkr.tools/tokens/dai)

      • USDC: value is guaranteed by a centralized exchange - Coinbase. As of Aug 1st, 2019: Circulating supply = 435M and Volume (24hr) = 81.9M (more info: https://www.coinbase.com/usdc)

      Why is DAI interest rate > USDC even though they are both stable-coins? Most likely it’s because DAI to USD exchange rate sometimes drops a few points while Coinbase exchange always guarantees a 1 to 1 conversion for USDC-USD. Coinbase users are also able to convert USD to USDC with no-fee while USD to DAI conversions incur a fee. Thus DAI suppliers came to a higher interest rate equilibrium to make up for any conversion slip-age and exchange fees.

  • How it works:

    1. Deposit USD to Coinbase Pro (no fee).

    2. Convert USD to USDC (no-fee) or DAI (~1.5% fee).

    3. Purchase $2-5 worth of Ethereum to cover transactional costs.

    4. Install a Metamask Chrome extension and create a new wallet (no fee).

    5. Deposit USDC/DAI + ETH into your Metamask wallet (small miner fee).

    6. Visit Compound App and connect your Metamask wallet (no fee).

    7. Enable USDC/DAI (~$0.25 smart contract fee paid in ETH).

    8. Supply your USDC/DAI and start accruing interest (~$0.50 SC fee paid in ETH).

    9. Withdraw accrued interest and supplied USDC/DAI at anytime (~$0.50 SC fee paid in ETH).

    10. Convert USDC (no-fee) to USD or other assets (~1.5%-2.5% fee).

  • Important disclosures and potential risks:

    • Users are required to convert their fiat currency (USD) to stable-coins (DAI/USDC) to start using to Compound and then back to fiat if they want to take profits, which could incur exchange fees. Coinbase users are able to convert USD to USDC with no-fee (except NYS residents) while USD to DAI conversions incur a fee (~1.5%). So in order to make up for the fee paid for DAI conversion, DAI suppliers would need to accrue interest for almost 3 months. But they will start compounding more interest by month 5 compared to USDC suppliers. Essentially, if you are willing to hold DAI for longer than 5 months, you will earn more compared to USDC even though you suffered a loss initially when you converted USD to DAI. Quick sample scenario below:

    • Users are required to have some ETH to interact with the Compound protocol (~$0.25/smart contract transaction).

    • Compound team has central control over the ability to list new asset markets, update interest rate models per market, update the oracle address and withdraw asset reserves.

Walk-through tutorial:

  1. Deposit USD to Coinbase Pro (takes a few days to clear).

  2. Purchase USDC with no fee.

    Note: USD/USDC trading pair is not available in some areas such as NY state. If you cannot purchase USDC, your next best bet is to purchase ETH and immediately convert it to DAI which will amount to around 1.5% in fees. So if you are purchasing $1000 you will get 985 DAI.

  3. Purchase $2-5 worth of Ethereum to cover transactional costs.

    Note: You can complete Coinbase’s Earn Tutorials to get free DAI and ETH to cover these costs: https://www.coinbase.com/earn

  4. Install a Metamask chrome extension from https://metamask.io/ and create a new wallet (make sure to back-up and store your private key offline).

    Note: You can use almost any other web or hardware wallet.

  5. Deposit USDC/DAI + ETH from Coinbase into your Metamask wallet (small miner fee).

  6. Visit Compound App and connect your Metamask wallet (no fee).

  7. Enable USDC/DAI (~$0.25 smart contract fee paid in ETH).

    Checking Etherscan, enabling Dai costs $0.20:

  8. Supply your USDC/DAI and start accruing interest (~$0.50 SC fee paid in ETH).

    Checking Etherscan, supplying Dai to Compound resulted in a $0.49 transaction fee:

  9. Withdraw accrued interest and supplied USDC/DAI at anytime (~$0.50 SC fee paid in ETH).

    Coming soon: 4X Margin Trade using Fulcrum. Subscribe to get full access.

    View DeFi Product Directory

Introduction to DeFi.

Pre-requisite: Basic understanding of blockchains, smart contracts, Bitcoin, and Ethereum.

What is Decentralized Finance or ‘DeFi’?

DeFi represents a broad category of financial applications that are being developed on top of open, trust-minimized, programmable and censorship resistant networks to improve upon the legacy financial system or create entirely new use-cases.

DeFi vs FinTech:

The internet tremendously improved communication and trade execution speeds but was not able to transform finance at its most critical point: the creation of new instruments.

Ethereum enables anyone to programmatically control digital value through ‘smart contracts’. Smart contracts are essentially computer programs that escrow and then reallocate value based on certain conditions.

These conditions could effectively replicate swaps, options, futures, bonds, or other financial instruments which are executed by and settled on Ethereum’s decentralized network with immutable records.

Why is this important?

What's interesting is that anyone is able to write smart contracts and create new financial instruments such as money markets, exchanges and asset management solutions.

The internet disinter-mediated traditional media over the last twenty years by providing wealth building tools to content creators. Blockchain technology is doing to finance what the internet did to the media by democratizing the creation of new financial instruments.

Current traction.

So far DeFi’s most popular product has been Maker’s stable-coin, Dai which is backed by collateral loans (aka CDPs - collateralized debt positions). Users lock up Ethereum as collateral in smart contracts in order to generate Dai (up to 66% of locked ETH’s worth). Below is a chart showing recent growth in ETH locked up in Maker’s CDPs:

Source: DeFi Pulse - the analytics & rankings hub for DeFi.

Explore DeFi Directory of popular products:

DeFi Directory

Learn how to generate passive income by supplying stable-coins with Compound:

Compound Tutorial

Loading more posts…