Compound.Finance Review: The Guide to 1 of DeFi's Killer Apps

Compound.Finance Review: The Guide to 1 of DeFi's Killer Apps

Compound.Finance Review: The Guide to 1 of DeFi's Killer Apps
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Everyone’s saying it:

The stock market is going to crash.

Even then, there’s nowhere else to earn such high returns over the long run. Might as well “dollar cost average” and wait out the bear market right?

That was the game plan. Until the rise of DeFi (decentralized finance) applications like Compound.Finance.

In this Compound.Finance review, we’ll cover everything you need to know about one of DeFi’s “killer Dapps (decentralized applications)”, meant to turn the outdated financial system upside down.

What is Compound Finance?

In a nutshell:

Compound Finance lets you lend and borrow crypto assets without any middlemen.

Both lenders and borrowers get even more value from their crypto. Lenders earn interest, while borrowers deposit crypto to gain access to credit without the banking headaches.

How Compound Finance Works

Compound Finance works differently from other types of loan markets.

As a lender, you don’t lend money directly to a borrower. You lend assets to the Compound Finance “liquidity pool”, from which borrowers can borrow assets:

Illustrating the idea of a liquidity pool

The liquidity pool is not the Compound Finance team, a bank, but a series of smart contracts. These smart contracts automatically match borrowers to available assets. Then, the contracts automatically shuffle interest payments from borrowers to lenders.

That’s not all though. The smart contracts also determine interest rates with fancy algorithms that look at Compound Finance’s supply and demand at any given time.

Here are a few more facts that might interest you:

  • There is no minimum for either lending or borrowing
  • Lenders earn interest about every 15 seconds (every Ethereum block)
  • You can use Compound for as long as you like, without any penalties

Compound Finance ID Verification

Oh and about ID verification or KYC. There’s none of that either. Anyone from anywhere in the world can start lending or borrowing today. Truly permissionless - welcome to DeFi 😉.

Compound Finance White Paper

For more technical details on how the magic happens behind the scenes, read the Compound Finance white paper.

Is Compound Finance Safe?

Of course, while Compound Finance is new and exciting, when real money is on the line, everyone wants to know:

Is Compound Finance safe?

For both lenders and borrowers, the main risk with Compound Finance is the potential for hackers to exploit or hack the smart contracts that make Compound work. By doing so, they could steal crypto locked up in Compound’s smart contracts.

If you possess technical knowledge, Compound’s code is available for all to see. This means there are more eyes available to spot faulty code. Moreover, Compound offers bug bounties for anyone who discovers vulnerabilities. You can also see all of Compound’s security audits and formal verification on their security page.

Regardless of transparent code, bug bounties, and code audits, there are still risks associated with something as new as CF.

Even banks, which people often compare crypto to, have some level of risk (aside from hidden fees, lack of privacy, and limited control over your money).

For instance, something that can happen to banks is a bank run. This is when many bank clients withdraw their money from a bank at the same time because they think the bank is going out of business.

Bank runs happen in spite of things like deposit insurance. For example, during the Great Recession in the United States, clients of Washington Mutual Bank, fearing that WaMu was going bust, withdrew $16.5 billion in 10 days. The federal government stepped in by seizing WaMu and selling it to America’s largest bank, JP Morgan Chase & Co.

Federal regulators seized WaMu fearing that a full-on bank run on WaMu would’ve collapsed the federal banking insurance fund ($45 billion). That’s scary to think about when you consider that all savings deposits at the time equaled $3.96 trillion. That’s 88 times the federal banking insurance fund at the time.

Does deposit insurance really cover our bank accounts?

Bank run on American Union Bank, New York City during the Great Depression on April 26, 1932. The Great Depression was the worst economic depression of the 20th century. Half of international trade disappeared and as many as 1 in 3 people in some countries didn’t have jobs. Image credit: The Unwritten Record, National Archives

Aside from smart contract risks, Compound Finance also has risks similar to bank runs. This risk revolves around Compound’s “utilization rate”, or how much of lenders’ assets go out to borrowers. For example, if 70/100% of all lender assets go to borrowers, the utilization rate is 70%. This means only 30/100% of lender assets are available for withdrawal.

If something were to prompt lenders to withdraw all their crypto from Compound at once, this would be a problem.

To combat this, Compound uses their interest rate model. When borrowers borrow a lot, the utilization rate goes up. The interest rate will then increase to incentivize lending, while simultaneously disincentivizing borrowers from borrowing more.

Regardless, a “run on Compound” is less likely to happen than a bank run. Bank runs usually happen because of banks’ financial mismanagement. And people don’t know about that until it’s too late. Due to the transparent nature of blockchain, users would probably spot anything fishy way before any run on Compound.

While Compound isn’t 100% safe (nothing is), it’s one of the safest and most established blockchain projects. It has hundreds of millions of dollars worth of crypto locked in its smart contracts. In addition, it’s one of the main drivers of the billion dollar (and growing) DeFi market.

Not to mention Compound’s high interest rates for lenders, near-instant interest payments, absence of loan terms or penalties, and accessibility by anyone anywhere make it too good to pass up on. Especially compared to boring old banks.

Compound Finance Interest Rates (Compound Finance Fees)

Compound’s algorithms decide on interest rates. But you don’t need to know high-level computer programming to figure out what interest rates currently are. Check the Compound Finance markets page.

Compound Finance App

Looking to get started with Compound Finance? If you’re looking to earn stock market-like gains without the negative volatility, you can do so in a couple of clicks:

It really is that easy! Deposit Dai and start earning right away. Not only is the interest high but Dai is a “stablecoin” meant to mirror the value of the US dollar. You get the benefits of crypto but with the relative stability of the dollar. Plus interest!

If you’re interested in lending non-Dai, lower interest assets or borrowing, use the Compound web interface* or one of the community-built interfaces listed on Compound’s website.

*Note that bad actors regularly exploit popular web-based cryptocurrency apps.

Compound Finance Loans

Though many fixate on the high interest rates for lenders on Compound, actually taking out a loan yourself isn’t too bad either. All you need is some crypto to deposit as collateral. No credit checks, income statements, or delays.

Though there are different interfaces you can use, Compound's web interface offers an easy way to get started.

How Do I Pay Interest on Compound Finance

As with taking out loans, you can pay interest on your Compound loans using Compound's web app.

Compound Finance Liquidation

If you’re taking out a loan, here’s what you need to know about liquidation (the protocol selling your collateral to pay your debts).

Instead of regular interest payments on your loan, you can pay back what you owe at any time! Though there is a catch:

If the value of your loan exceeds your Borrow Limit, you will be liquidated.

Your Borrow Limit is on the right hand side (% of Limit) Keep it below 100. Image credit: Compound

Also good to note is that if your account is in liquidation, a member of the community can repay up to 50% of your debt. For doing so, they receive a proportionate amount of your collateral for 5% off. For example, if they repay 50% of your debt, they receive 50% of your collateral at a 5% discount.

If you’re interested in liquidating risky borrowers, Compound has an Account Service API you can use to monitor at-risk addresses. A community member has also created a liquidation dashboard.

Compound Finance Growth Metrics (Daily Transaction Volume, Users)

Compound Finance Daily Transaction Volume

Compound is one of the biggest DeFi Dapps. But just how big of a Dapp is it?

According to Compound, they do about $1.59 million in daily volume (lending and borrowing) as of writing.

For a third party analysis, State of the Dapps puts Compound’s daily transaction volume at 3,429.274 ETH, or about $788k at today’s prices.

Compound Finance Users

As for users, Compound states there are 18,130 users (lenders and borrowers) as of writing. State of the Dapps doesn’t give a total user number but puts monthly active users at 5,603.

Compound Finance Team and Investors

Compound Finance Team

The Compound team is no amateur operation.

Compound Finance CEO Robert Leshner is a Chartered Financial Analyst, former economist, and 2x startup founder. He was also Product Lead at Postmates, the popular delivery app.

CTO Geoffrey Hayes and Application Lead Torrey Atcitty also held leading roles at Postmates.

Jake Chervinsky, Compound Finance’s General Counsel, is an adjunct professor at Georgetown University Law Center. He’s also known for his commentary on various aspects of crypto law like the SEC vs. Kik case, stablecoins, and BitMEX’s email leak.

Jake Chervinsky’s work at the intersection of crypto and law has landed him on lists of the top people in blockchain, such as The Cointelegraph Top 100. Image credit: Cointelegraph

Compound Finance Investors

Compound Finance also has the backing of some very prominent investors. These include Andreessen Horowitz, Polychain Capital, Bain Capital, and Coinbase.

For reference, Marc Andreessen created the first popular web browser - you know, that thing you’re using to read this. Polychain Capital is one of the biggest crypto investment funds. Bain Capital is the investment arm of Bain & Company, one of the “Big Three” management consulting firms. And Coinbase is one of the largest centralized crypto exchanges.

The point in saying all this? Big names such as these normally don’t invest money in something without doing their homework. Compound is a gamechanger for crypto, DeFi, and the world at large.

Compound Finance ICO

Compound Finance did not have an ICO. However, they are working on introducing a governance token called COMP in order to further decentralize Compound’s governance. But CEO Robert Leshner explicitly stated:

COMP empowers community governance — it isn’t a fundraising device or investment opportunity. Until the decentralization process is complete, COMP will not be available to the public.

The focus seems to be on security and stability before any token distribution:

When the governance system is operating in a reliable, distributed manner, we’ll suggest that the failsafe be removed — and that the remaining tokens be distributed to Compound protocol users. We’ll be releasing more details of this plan in the coming months — stay tuned!

To keep up with the latest, we recommend connecting with Compound Finance below.

Connect with Compound Finance

Compound Finance Website

Compound Finance Twitter


Compound Finance Reddit


Compound Finance Medium

Compound Finance Github

Compound Finance Crunchbase


We are finally seeing the promise of smart contracts and how they can take blockchain beyond just payments. The revolution is happening before our eyes, and Compound is one of the main players helping us leave outdated finance.

Its frictionless borrowing and lending, high safety standards, accessibility, DeFi market dominance, and rockstar team earn it two thumbs up!

Take a big step towards leaving the outdated financial system with a wallet that offers more than securing, managing, and exchanging assets. Thanks to Compound.Finance, you can now put your crypto to work.

We hope you enjoyed this Compound.Finance review. If you found it helpful, feel free to share using one of the buttons below!

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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