Compound Chain: A Comprehensive Guide

Compound Chain is a distributed ledger with the ability to transfer value and liquidity between peer ledgers. It means that Compound Chain allows users to borrow and lend cross-chain assets from different blockchains like Polkadot and Tezos. It will have its own native token called CASH, which will be used to pay for transaction fees on the platform. 

The traditional Compound Governance structure will still execute the governance of the blockchain. Its traditional governance structure relies on COMP tokens on Ethereum. The team is building a limited-feature testnet implementation that will be released in early 2021. 

According to the statement by Compound's founder Robert Leshner, "we want to announce the designs for a blockchain that can scale Compound ver the next century." The whitepaper revealed that there are three major limitations of the current Compound supported by the Ethereum blockchain. The limitations include high gas fees, the inability to serve assets on other chains, and all the supported assets aggregate each supported asset's risk.

All those new supported assets were not thought to be limited to blockchains of the trustless, permissionless variety as well. The new Compound Chain will support the forthcoming and rumored digital assets from investment banks and central banks. This new blockchain will be a reimagination of the Compound protocol, serving as a stand-alone distributed ledger. 

It will possess the capability to solve the Compound Protocol's limitations by proactively positioning for rapid adoption of growth and digital assets on emerging blockchains like Eth2 and the central bank digital currency ledgers. 

The Compound Chain is now part of the blockchain interoperability efforts. However, it is unique to attempt to do so in an application-specific manner. 

The Governance of the Compound Chain

Although it is an entirely new and standalone blockchain, the Compound chain will be governed by the COMP token. This is the same Ethereum based system that runs Compound v1. Immediately the Compound Chain is live; it will be a considerable new set of powers accruing to the owners of COMP. 

While the COMP token will govern the Compound Chain, the platform also introduces a new cryptocurrency called CASH. The native CASH token will be used to pay for transactions on the network. It will be minted the same way as DAI, as a debt against locked collateral held on the Compound Chain. 

Cash will start arbitrarily pegged to the United States dollar, but its peg will be subject to governance decisions. Unlike DAI, all CASH will earn a yield from a portion of the interest that will be paid against loans on the blockchain. The actual amount will be one of the things that will be determined by COMP holders that take part in governance votes. 

The main essence of the chain is to function like Compound but in a cross-blockchain way. 

How Compound Chain will Improve Interoperability 

Immediately a user uploads an asset on the Compound Chain ecosystem, the asset will also be available or lending to other users. However, users can decide to borrow against their assets or not. While on the Compound platform, such users can be able to borrow any supported asset. They will start with CASH, which is unique to the Compound Chain. 

The one foreseeable prerequisite is that the blockchain should be able to support smart contracts. Smart contracts required for moving assets between Compound and the smart contract chains are all referred to as "starports." According to the Compound whitepaper, "The Compound Governance system on Ethereum established a distributed decision-making process. It is also capable of streaming governance actions to the Ethereum starport, which the Compound Chain validators receive instructions from."

Also, the chain can mint new assets. However, early user's ability to upload assets from other blockchains will be seen as more important. Users can upload an asset by moving the asset into a smart contract on layer-one chains (an example is Ethereum or Cosmos). The Compound Chain validators will witness the assets' move and then mint the corresponding Compound Chain wallet. According to the whitepaper, compound Chain is designed to enable bridging value between its connected "peer" chains. 

More Information Underway

At the time of this writing this post, Compound Labs is yet to indicate the type of technology Compound Chain will be built on. They only revealed that it would rely on proof-of-authority architecture. All parameters will be set by the decisions of the participating COMP holders. The proof-of-authority is similar to proof-of-stake, but it is important to note that validators are only selected based on COMP holders. Leshner said that if a user can appoint malicious validators, it is the same as the user stealing all Compound funds. As an incentive to operate the protocol efficiently, validators earn a portion of the interest paid by CASH borrowers, for every block they author. The incentive (reward) for validators scales with the amount of cash in existence, thus increasing as a function of assets.

According to Leshner, proof-of-authority is just the launch setup. The governance can remove itself and switch to a fully open proof-of-stake system. However, this might take a while before taking effect. This system's main intent seems to be to help drive DeFi into all parts of the crypto ecosystem. The compound Chain team is already considering new business lines that could be enabled by this new chain. 

For instance, some centralized digital currencies like the JPM coin may need known liquidators that have passed through compliance checks. This could be the role that the team could play for some more-restricted assets. Upon its launch, the aim is to replicate the user experience of Compound but with a completely clear path to be able to support all blockchain systems and assets. 

The Fear of Centralization by the DeFi Community

Since it announced the launch of Compound Chain, there have been several negative reactions. Many respondents have expressed their concerns regarding the perceived centralization associated with the project. One of the major critics of the project is Set Protocol's, Anthony Sassano. Anthony pointed out that the reason for the expensive Ethereum gas fees is because of its high decentralization. According to Anthony, for Compound Chain to have fewer gas fees means that it will be less decentralized. Also, it is a proof-of-authority chain where COMP governors will choose the validators. 


The new chain adopts a more centralized consensus mechanism, which has received a mixed reaction from the DeFi community. If the interoperability feature is exactly as the whitepaper has described, then it will be a great addition to the blockchain community. 

Also take a deep dive in Uniswap V2 Protocol.

Compound Defi Protocol Explained


Decentralized finance (Defi) is arguably the most promising application of Ethereum blockchain, and Compound Defi protocol is taking advantage of this potential. With Defi services, users are granted access to multiple financial services that were previously offered by banks and other traditional institutions.
Defi platforms like Compound leverage the features of smart contracts to offer accessible decentralized alternatives. This is the reason, it often refers as open finance. Some of the best-known uses cases of decentralized finance include lending protocols, decentralized exchanges, stable coins, and payment networks.

In traditional banks, once you have deposited your money, you can only earn interest but cannot use the money in any other way. Think about a situation where you can spend the money on your savings while still saving the money. This is exactly what Defi is trying to offer to its users. Compound Defi protocol is one of the companies working on providing such services.
In this article, we will explore how this Ethereum based project is trying to allow people access to their savings.

What Is Compound Defi Protocol

Compound Defi protocol is a lending protocol that runs on the Ethereum blockchain. It is a pooled algorithm money market protocol. Like other Decentralized Finance (Defi) protocols, Compound Defi protocol is a network that is an open-source smart contract.

The focus of the Compound is to allow borrowers to access loans and lenders to provide loans. The Compound is able to achieve this by locking their crypto assets into the protocol. Each crypto-asset determines the demines the interest rate. Every mined block generates an interest. Borrowers can pay back the loan at any time, while assets can also be withdrawn in the same manner.

The Compound decentralized fiancé protocol also has a native token (cToken) that allows users to earn interest on their money. Users can also transfer, trade, and use the money in other applications. On the surface, you may think that the Compound is completely designed like other Defi protocols. The Compound protocol differs in the tokenization of assets locked in the system. We will talk about the cToken later on in this article. The Compound protocol is completely open; hence there is no need for any paperwork or intermediary.

If you have an Ethereum-enabled wallet, you can be part of the Compound market. The Compound provides users with three main services:

As a market player on Compound, you are not guaranteed a fixed interest because there is no duration to your participation. As a lender or borrower on the platform, you can only know what the interest rate is at that moment. The interest rate can change at any point. The design of the Compound protocol ensures that there is no counterparty risk. However, it would be best if you didn’t forget that there is also the risk of code vulnerabilities.

The Interest Rates On Compound Defi Protocol

When we consider the interest rates on the Compound, we will undoubtedly see an interesting pattern. On the platform, it is obvious to see that it is attractive to supply Dai, Sai, or USDC stable coins compared to other crypto assets. By supplying Dai, you could earn an interest of up to 8% every year. This is contrary to the paltry 0.01% interest you earn when you supply Ethereum.
It is glaringly to us that stable assets are the most desirable assets to supply on the Compound protocol. If you borrow volatile assets on the Compound protocol, the amount you will have to repay becomes more uncertain. Therefore, you will have to consider both the unstable interest rates and the volatile value of the crypto asset. Hence, making a prediction on your repayment would be very tricky, if not difficult.

The Compound Native Token (cToken)

The Compound tokens (cToken) are ERC-20 tokens that represent a user’s fund deposit on the Compound protocol. When a user puts another ERC-20 coin like the USDC in the protocol, the user gets an equivalent amount of cTokens. For instance, when you lock up USDC in the protocol, it generates cUSD tokens. These cUSD tokens automatically earn interest for you.
Whenever you want, you can redeem your cUSDC for the normal USDC, including the interest paid in USDC. The cTokens act as twins of the original Compound token. When a user supplies Dai or any other crypto assets to the Compound protocol, their balance will be represented in cTokens. This is how the interest rates are calculated on the Compound Defi protocol.
For example, when Dai gets supplied to the Compound protocol, the wallet is represented in cDai. Meanwhile, the interest is represented by the Dai token, which increases in price relative to Dai. All the received Dai tokens will be pooled together by the Compound’s smart contract. Over time, the exchange rate between cDai and Dai increases, just as the total borrowing balance also increases.
When a user withdraws his/her balance from the Compound protocol, the process automatically converts cDai into Dai at the current rate. This transaction also includes the additional interest rate. The cTokens always appreciate their counterparts.

The Compound Governance

Although Defi implies that there is no single point of failure, however, that is not practically the case, all decentralized finance (Defi) projects are developed by companies who also retain full control of the smart contract development. By a simple flip of a switch, the entire protocol can be turned off, and the Compound is not excluded.
The idea behind such a scenario is to have failsafe in situations like unexpected blockchain forks, black swan events, and smart contract hacks. However, Defi with all its highlighted flaws is far better than traditional financial institutions. Recently, Compound announced the release of a new governance token (COMP), which aims to remove the largest point of failure in the protocol. The Compound team is seen as the largest point of failure in the system, and anyone with at least 1% of the total COMP token can vote for proposals. These proposals are executable code that is subject to a three-day voting period.

Borrowing On Compound Defi Protocol

The fact that Compound aims to have a zero counterparty risk means that borrowers will have to deposit collateral before borrowing from Compound. The ability to maintain excess collateral ensures that there is a near-zero chance of a borrower defaulting with payment.
For example, if you want to borrow Dai, you will have to deposit ETH as collateral. Each borrowing position is over collateralized; therefore, the value you borrow will be less than what you will deposit. Meanwhile, the underlying collateral is also volatile and could drop below a certain threshold. If it drops, the smart contract trigger will close the position (liquidation).
In this instance, the borrower gets to keep the borrowed asset but loses the collateral. For a user to get back his/her collateral, the user will have to repay the credit, and that includes the outstanding interest.

Lending on Compound Defi Protocol

It is akin to a typical cash account where you earn by leaving your money in the bank. In Compound, you will need to deposit your crypto asset before you can earn interest. You can withdraw your asset at any time since there is no duration lock, and you won’t get penalized.


Compound Defi protocol wants to help you have more control over the money you save and earn. Although the Compound project has its shortfalls, the long-term goal is to become completely decentralized.

To learn about DeFi Categories, read our article on Decentralized Finance Categories Explained.

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