[B Note] Why compound is in the spotlight
[Sonya’s B Note] There were basically two industry reactions to Compound, a decentralized finance (DeFi) platform: excitement and concern. Compound listed its COMP on a DeFi token trading platform Uniswap on June 18. On its first trading day, the price jumped by more than 500 percent. On the back of COMP's price soar, its market cap shot up to No. 1 spot of $870 million, exceeding what was previously the top player, Maker, which had a market cap of $518 million. #What is Compound? Compound first came about in September 2018 as a platform that handles cryptocurrency deposit and mortgage loans. Users could receive interest by depositing cryptocurrency to the platform. The user can also borrow using a deposit as a security. Compound deals with eight types of cryptocurrencies, including Basic Attention Token (BAT), Dai, Ethereum (ETH), Augur (REP), USD Coin (USDC), Tether (USDT), WBTC and 0x (ZRX). Interest rates differ depending on the coin. As of June 22, interest of BAT was the highest, at 24.31 percent for deposits and 32.24 percent for loans. Compound operates every 15 seconds which is Ethereum's block making cycle. the benefit is that the user can use the deposit and loan service 24/7. Interest renews every 15 seconds, meaning the principal gets updated every 15 seconds with the interest added to it. How would Compound make money then? It makes money based on the net interest margin. For example, let’s say that the interest rate for USDT's deposits is 12.33 percent and for loans 17.68 percent. If a person deposited 100 USDT and another person borrowed the same amount, a 5.35 percent USDT net interest margin is achieved. For the past two years, Compound has handled $100 million in transactions and is the DeFi industry’s No.2 player after Maker. It is only recently that these two players switched their places. #Issuance of COMP changes the top spot Last February, Compound announced it will issue ERC-20-based token called COMP. Four months later on June 18, it was registered to DeFi platform Uniswap. Things started to change from this point. In just four trading days, COMP's value jumped by 400 percent from $63 to $330. The size of the deposit also jumped by threefold from $200 million to $600 million. In contrast, Maker's deposits fell from $490 million to $430 million. Things got reversed. All that Compound did was issuing the token. COMP is somewhat different from Maker's token. It is not a stablecoin like DAI and it is not a stability token like Maker's. From the user's point of view, he or she can obtain more COMP by borrowing from Compound. Since COMP’s price has soared so much, a user can make money even if he or she borrows from the platform. For example, if the user borrows 100 USDT from the platform, he or she pays $18 as interest but receives 0.08 COMP at the same time. Base on CoinMarketCap data, COMP’s price is $330 which means the user earns $8.4 by borrowing money from the platform.