Compound Finance is an algorithmic, open-source protocol built on the Ethereum blockchain. This autonomous money market protocol allows users to earn interest or borrow assets against collateral without the need to rely on a counterparty or peer.
The protocol works through the liquidity pool, as such that the liquidity supplied to the market by one user can be borrowed by another user, rather than the process of lending assets directly to each other.
How Does it Work?
Any user can supply assets to the pool and earn interest that compounds continuously. The interest accumulates on every Ethereum blockchain and the rate is determined algorithmically on every market based on demand and supply. Once the user supplies assets to the protocol, they receive the tokenized balance called cTokens. These tokens can be used as collateral to borrow assets and they determine how much you can borrow.
To facilitate the quick borrowing or withdrawing of the funds, the protocol ensures that each market has excess liquidity, i.e. the assets supplied are always greater than the assets borrowed.
The Compound protocol and markets can be accessed by using the community-built interfaces such as Compound Interface, Zerion, DeFi Saver, Pool Together and Coinbase Wallet, among others. It is one of the more widely used products in the DeFi ecosystem.
What if I still have Sai instead of Dai? How Do I convert?
You need to convert Sai to Dai on Compound.Finance while the window of transition is still open, as the old Single-Collateral Protocol is being phased out, and the old system will trigger a shutdown.
How do I earn Interest?
It’s simple, all you have to do is use an Ethereum web3 compatible wallet and goto Compound.Finance and Lend your Dai tokens. You can take out your tokens anytime you wish, there is no commitment.