What Does Compound Use as Collateral?

08/10/2023 10:04 • Metaverse Matters • 80 views

Editor’s note: This article is from 8btc (ID: bitcoin8btc), author: Overnight Porridge, authorized publication by Star Daily.

Compound is the first decentralized lending product that adopts an automated market maker model. Based on the Compound protocol, it also introduces a solution called “Oracle” to provide collateral asset liquidity.

The total supply of COMP tokens is 10 million, with 60% locked in smart contracts and 20% issued by other projects. Currently, COMP tokens can be used for various DeFi applications, synthetic assets, stablecoins, etc. These assets are tied to ERC20 tokens anchored to Ethereum and Bitcoin.

This allows users to use ETH as collateral to mint DAI or USDC and other digital assets. When Compound introduced this new system, users on the platform can earn income by pledging their assets and profiting from the market. If someone wants to invest in a project and is interested in participating in its future development, they can use decentralized platforms like MakerDAO.

So why use digital assets like DAI or USDC to create such a system? Because MakerDAO chooses which assets or types of assets to support as reserves based on its own needs, while Compound does not.

The more tokens in the Compound protocol, the more likely it is to generate income. However, when we transfer ownership to an address, if there is not enough transaction medium, funds cannot be fully released from the wallet, making Compound’s governance unsustainable.

Now, the Compound team has also announced that they are launching a new collateral tool called “AaveV2” to achieve this goal, providing services for borrowers and lenders of their native tokens. This is a trustless way that allows anyone to easily complete borrowing and liquidation through a simple interface without waiting for one or even several days.

Therefore, to solve the problems Compound faces, two main factors need to be considered:

1. How to use existing collateral methods for borrowing and redemption?

2. How to design effective risk management strategies?

3. How to establish a reliable mechanism to ensure that borrowers are adequately compensated within the Compound protocol.

For those who want to use the Compound protocol, the most important thing is to understand the logic behind the Compound protocol, its design principles, and how it operates in order to determine if they have genuine economic value.

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What Does Compound Use as Collateral?

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