How to

Compound, an Ethereum platform specialized in loans

Key facts:
  • Apply for loans with a collateral ratio of up to 1.5x.

  • It provides liquidity to the market within the complex and earns dividends.

Important: To use this platform, it will be necessary to have a wallet that allows you to interact with the Ethereum blockchain. To do this, we recommend using Metamask, which will be used in this tutorial. You can see the tutorial for this wallet here.

Compound is an application that runs on the Ethereum blockchain and allows users to generate interest through their deposits and request loans between the five cryptocurrencies traded there: ether (ETH), 0x (ZRK), dai (DAI), basic token (BAT), and augur (REP).

Through its protocol, you can make deposits in ETH or any other of the above tokens, which will offer liquidity to the market and allow other users to request loans that generate dividends thanks to the interest they accumulate.

Thanks to the liquidity that lenders offer to the market, you will be able to apply for loans with a collateral ratio of 1.5x. Which means that for every $100 in credit, you’ll need to have at least $150 in deposits.

Interestingly, when you make a deposit, regardless of the cryptocurrencyyou can request a loan in any other crypto assetso it also serves as a crypto exchange.

So that every operation within the platform worksCompound uses Ethereum smart contracts. However, the administration of the platform falls entirely to Compound Labs, Inc. which have power over all funds deposited in it.

Therefore, despite being written on the Ethereum blockchain, Compound It is a centralized application. However, development group Compound has plans completely decentralize the applicationin a way that it is managed by the user community.

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What you can do with Compound

  • Request broker-free loans in any cryptocurrency managed by Compound that you can pay whenever you want.
  • Give loans that will generate income through interest and that can be withdrawn at any time, without any restrictions.
  • Make an exchange between crypto assets.

Credit system

With Compound you can request loans for the amount of cryptocurrency you wantas long as a ratio of 1.5x is maintained between the amount requested and the amount deposited.

This collateralization relationship was created with the purpose of mitigating the effects of the volatility that characterizes the crypto market. In this way it is avoided possible loss of funds in sudden rises or falls in pricesbecause there is a guarantee between the amount paid and the total amount we receive as a loan.

The deposit can be made in any cryptocurrency that Compound supports.

Another important aspect to consider when applying for a loan is the annual interest rate. This rate is updated every time a block is added to the Ethereum blockchain.and it will vary depending on the supply and demand in the market where we are looking for a loan.

Become a lender

On Compound, if you are a long-term cryptocurrency saver, there may be an opportunity to generate income. For starters, this platform allows users to make deposits to offer liquidity in any market available on it.

With each deposit made within Compound, and depending on the duration within the platform, The system will pay us interest that will vary depending on supply and demand that these have. That is, if you offer liquidity to a market where few people are seeking loans, the interest rate will fall as an incentive to borrowers. Otherwise, if the market is in high demand, interest rates will increase to motivate lenders to offer liquidity to the market.

Now, the interest rates we see in each market are annual rates (APR). Although the update of the said interest is calculated in every block added to the Ethereum blockchain.

But How much will I earn for my deposit?

Since the deposit can be withdrawn at any time, The interest payable is calculated depending on the number of blocks that were within the complex. Considering that a block is added to Ethereum every 15 seconds, approximately 2,102,400 blocks are added in one year.

Let’s assume that at the end of the term of 2,102,400 blocks the annual interest is 5% and it will be paid in full. So if we make a deposit of 1 ETH, at the end of the cut we will get a total of 1.05 ETH, with an interest rate of 5%.

So What happens if I withdraw my funds before the year?

To do this, Compound will calculate the current interest rate, dividing by the number of blocks that our deposit was within the platform and will divide it by the yearly average of blocks received by the ETH blockchain. Later, you will multiply it by the annual interest rate that was at the time of withdrawal.

That is, if we deposit 1 ETH, and withdraw it 1,000,000 blocks later, with an annual interest of 6%, the calculation would be: 1,000,000 / 2102400, which would result in 0.475. Later, we would multiply this result by an annual rate of 6%, resulting in 2.85%. This means that when withdrawing, we will receive 1 ETH + 0.0285 ETH which corresponds to the interest earned.

Getting started with Compound

The first thing we have to do to start using this platform is to go to portal principal de spoj.

What we have here is the initial part. In it we will find some information about the platform such as:

  • Cryptocurrencies managed by Compound, among which we will see WETH, which is a wrapper token for ETH, used to manage Ethers within the platform.
  • How to get credits and exchanges.
  • Information about the platform’s white paper, official blog and source code.

To begin, we will select the option Start using composite, which we saw in the previous image.

Now we need to connect our Metamask wallet to Compound, and to do so, we will see a notification window, which informs us that we must confirm the connection. To continue, press Connect.

Once the connection is confirmed, we will now be inside the Compound.

The section we are in is the APP section, as you can see in the top menu. This will be the main panel from where we will manage the assets we have within Compound.

This section is divided into two boxes, which I have divided into: Balance Sheet and Cryptocurrencies.

In the Balances section we have:

  • Supply Balance: This balance is the sum of the amount expressed, either in ETH or USD, of all the cryptocurrencies we have deposited in Compound.
  • Borrow balance: This is the amount, expressed in ETH or USD, that we requested in credits.
  • Loan available: This is the amount we have available to request a loan. This amount will depend on the total amount we have deposited and the security ratio of 1.5x.

In the Cryptocurrencies section, we find all the cryptoassets that are sold here and are organized as follows:

  • Asset: The name of the cryptoasset.
  • Installments (APR): That is the current annual interest that will be paid to us. Recall that this fee is updated every time a block is added to the Ethereum blockchain.
  • Balance: It is the amount we have crypto-currencies deposited in Compound.

Now let’s go to the Markets section located in the top menu.

Here I have divided it into two groups, Totals and Cryptoactives. Regarding the latter, we will have 5 different boxes, about each of the cryptocurrencies managed by Compound. However, the same data as the first one is saved in each of them.

In the Totals section we have:

  • Gross Supply: It is the total liquidity, expressed in ETH or USD, that the platform has. This amount falls on each of the crypto assets that Compound has.
  • Gross Borrow: It is the total amount, expressed in ETH or USD, that is currently on loan.
  • Request collateral: Current collateralization ratio.
  • Liquidation discount: The percentage that is deducted in case the loan is settled.
  • Origination Fee: Commission for every movement within the complex.

On the other hand, we have the Cryptoactive box, in which, along with the name, we will find the approximate value it has, expressed in ETH or USD. And we also have:

  • Market liquidity: The liquidity that this market has, expressed directly in the corresponding crypto asset. In this case BAT.
  • Sponsored by Equity: This is the amount the Compound retains. Between 10% and 15% of interest generated by borrowers is charged to cover any misalignment.
  • Total Supply: The actual amount of crypto assets this market has.
  • Total Borrow: The amount currently allocated to loans.
  • Supply APR: Current annual interest, which will be charged by those who offer liquidity to this market.
  • Borrow APR: Current annual interest to be paid, for those looking for a loan in this market.

Generate interest with your deposits in Compound

At the beginning, I showed you how interest is calculated and how it is paid. We will now test how we can start earning dividends by offering liquidity to the market within Compound.

We’ll start by going to the APP section, and once here, We will choose the cryptocurrency of our choice to send funds. We can choose from BAT, ZRX, REP, DAI and WETH. Let us recall that the latter token is called Wrapped Ether, which is used to manage ether within Compound, in the form of an ERC20 token.

Here we have the market specifications, with some data that we have already seen in the main part of the APP section.

Before proceeding with your deposit, if this is your first time using Compound, you will need to unlock the token in order for your Metamask wallet to handle it. To do this, we will select Enable WETH, considering that WETH is an ERC20 token.

Now, The next step will be to confirm the unlock transaction with Metamask, at a relatively low price. All that remains is to press Confirm and wait for the transaction to be confirmed within the network.

Once the transaction is confirmed, we will be ready to make the payment. On the right side we will have options that allow the transfer of funds from Metamask ​​to Compound, albeit with WETH something special is happening.

Since WETH is an ERC20 token that pools the ETH we send to Compound, we will not send ETH directly to Compoundbut we will wrap the ether we want to use on the platform from our Metamask wallet.

This extra step only applies to ETH, as with other tokens it will be necessary to send only the amount we want to borrow.

So the first thing we’re going to do is put the amount to wrap in the Ether to Wrap box and then we’re going to press Wrap and a Metamask notification will pop up that we have to confirm to continue.

As you can see in the red box, we already have a balance in WETH to continue.

What follows is to offer our WETH platform as loans and earn interest on it. For that we position ourselves on the Quantity in the WETH box.

Here we will set the amount of WETH we want to set as the liquidity offer. Then we will click on Supply, where we will have to confirm the transaction from Metamask.

Note that on the left hand side you will be able to see the current annual interest (bid interest rate) that will be paid to us after 2,102,400 blocks have passed through the network since our deposit was made. Another important aspect is that this rate is not fixed, and we will be paid at the existing rate at the time of expiration of the number of blocks or at the time of withdrawal.

Withdraw funds provided in loans

There is no time limit for withdrawing funds invested in loans. Because you can withdraw them one block after your deposit is confirmed.

To begin with, we need to go to the token section that we borrowed from the APP section, and when it appears there, we will select the Withdrawal tab.

Now, to remove the All that remains is to put the amount to be deducted in the Amount in WETH field. and then select Pull. Then confirm the transaction from Metamask to finalize said withdrawal.

Before finishing, in the case of ETH, at the time of withdrawal, you withdraw your WETH, which you later have to convert to ETH, and to do this, you will have to put the WETH that will be unwrapped (Unwrap) inside the appropriate box and click on Unwrap, and thus recover ETH in Metamask wallet.

Apply for loans with Compound

In the complex, applying for a loan is quite simple. The only requirement is that you offer liquidity to any market within the platform before applying.in order to obtain a loan.

You can request loans in any cryptocurrency for which you have not offered liquidity.

With the deposit made, we start by going to the APP section.

Here, above the Available for Borrowing field, we will see the amount we can request, expressed in ETH, which will depend on the amount of our deposit along with a security factor of 1.5x.

Before applying for a loan, consider the interest rate, i settlement conditions.

Now, the next thing we will do is choose a crypto asset where we will request a loan. In our case it will be DAI.

The first thing will be to unlock the tokens inside our Metamask walletto do this, we will click on Enable DAI, where later we will need to confirm the unlock transaction from our Metamask wallet.

Once the DAI is unlocked, we will select the Borrow tab, as we see in the image above. Here we will see the amount available in DAI, which allows us to claim a ratio of 1.5x. On the left side, we will have data on the current annual interest rate (borrowing interest rate), What will be the percentage to pay after expiry 2,102,400 blocksalthough this percentage will vary depending on market supply and demand.

You can request as much credit as you want, as long as the collateral ratio is greater than 1.5x.

What follows is to enter the amount of the loan in the field Amount in DAI and click on Borrow for the loan to be effective, all that remains is to confirm the transaction from the Metamask wallet.

Where are the DAIs I was looking for?

Once the loan is confirmed, The requested DAI will not be in Compound, they will be sent directly to your Metamask wallet.

Pay the loan

You can pay any loan you are looking for in the installments you want and at the time you want. Of course, depending on the remaining amount to pay, interest will accrue. So, to pay, you have to go to the crypto asset where you selected the loan and go to the Repayment tab.

The loan payment will be made in the same cryptocurrency that you requested.

Once here, you can enter the amount you want to pay for the requested loan. On the left side, you will see the amount of the loan you requested together with the interest that has been accumulated so far.

So, to pay, you simply enter the amount and click Payout. This will open your Metamask wallet, from where you will confirm the said transaction.

So, when you see the Procurement and Lending tabs, it means that the loan is fully paid, that is, there is no debt to pay.

Loan settlement conditions

Firstly, It must be taken into account that the security ratio of 1.5x is the minimum, because if it is lower than this, the loan is settled and we lose part of the deposit. An example showing how a relationship can be lost would be: Suppose we have DAI deposited totaling $150 and we request a $100 credit from ZRX. The collateralization ratio is only 1.5x. And at a certain point, the value of the ZRX goes up, making the total value of the ZRX we have now $120, which makes the collateralization ratio now 1.25x, which would translate into closing our loan.

So What happens if my loan is paid off?

Continuing with the previous example, where now our ZRX has a total value of $120 with a ratio of 1.25x, the system will liquidate our loan and return us a total of $30 in DAI to maintain the ratio of 1.5x, because the $120 in Adding $30 in DAI to ZRX would give a total net worth of $150. It must also be taken into account that when liquidation occurs, A 5% commission is deducted from the part that will be returned to us.

All this is stated in Compound’s official blog.

Likewise, and in order to avoid loan payments, It is advisable to maintain collateralization ratios greater than 1.60xalthough, of course, the larger the deposit and the smaller the loan, the higher the coefficient and the lower the risk.

Complex operating costs

Each operation within Compound has a cost of 0.025%, with GAS spent to send each transaction. This is for the simple reason of avoiding SPAM operations that disrupt the proper functioning of the platform.

On the other hand, every time we receive a payment for a portion of the interest generated by our deposits, Compound takes 10% of the total received, this to cover operating costs and possible failed settlements.

Another commission we will have is that when the requested loan is settled, Compound will keep 5% of the total amount that the platform returns.

Different ways to generate income with Compound

In addition to earning dividends through the interest generated by our deposits, Compound can be used as a tool that allows us to make a profit by buying and selling crypto assets between Compound and external exchanges. For this I have brought you some examples. But first, I need to clarify two trading concepts: long and short positions.

Long positions happen when you buy a certain amount of an asset, in this case a token for ETH, and wait for its value to rise and then sell. On the other hand, a short position occurs when you own a certain number of assets, and decide to sell them in the hope that their value will fall, and then buy back, at a lower price, a larger amount of the original asset.

Earn dividends with long positions

In the case of long positions, you must be aware that the market may be going up. So, we will assume that we have 1,000 BAT and predict that its price will rise against ETH.

  • The first step is to deposit 1,000 BAT in Compound and request an ETH loan, which will give us 0.6 ETH with a real value of 600 BAT due to the collateralization ratio of 1.5x.
  • We currently owe the platform 0.6 ETH.
  • Later we withdraw ether to another exchange and buy a total of 600 BAT with 0.6 ETH.
  • When the price of BAT rises, we can now buy 0.8 ETH with 600 BAT.
  • We will now be able to pay off the loan for 0.6 ETH, leaving us with a profit of 0.2 ETH plus the 1,000 BAT we originally had.

Earn dividends with short positions

As with long positions, we need to be aware of the possibility of a price drop. Now let’s assume that we have 1 ETH and we know that the value of ZRX will decrease against Ether.

  • The first step will be to send our ether to the platform to request a loan for 600 ZRX with a real value of 0.6 ETH, remembering the ratio 1.5x,
  • We now owe 600 ZRX to Compound.
  • The next step is to withdraw 600 ZRX to another exchange and sell them for 0.6 ETH.
  • When ZRX price drops, we can buy 900 ZRX for 0.6 ETH.
  • Now we will be able to pay our 600 ZRX loan and we will have 1 ETH, which was the amount used to request the original loan, plus 300 ZRX profit.

Conclusions

Compound is a very special platform in the field of financial technologies that is becoming increasingly popular in the Ethereum blockchain. Despite being centralized, it offers interesting opportunities for those people who own cryptocurrencies and don’t know what to do with them.and they also want to generate dividends.

Another important aspect, which concerns the use of the compound as such, is that you will need to understand and be clear about each of its concepts, such as the collateralization relationship or loan settlement terms. In this way, you can use Compound completely carefree.

Its interface is simple, although it can be a bit overwhelming for the untrained eye, given the amount of information you need to handle. Although, as I mentioned in the previous paragraph, with clear concepts, using the platform becomes easy.

Although there is nothing negative to point out, there are some caveats, and for loans we have to pay interest, because some rise more than 10%, which becomes quite expensive.

Without anything else to add, I have no choice but to invite you to use this platform.

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