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2) COMP is the governance token of

@compoundfinance

, a DeFi company. I've known and liked the Compound team for a while--especially

@cjliu49

, but only took a deep dive into their product more recently.

Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications.

3) compound.finance is a DeFi lending portal. You can deposit one ERC20 token and borrow another, getting ~3x leverage or so. So far not too unique--there are lots of DeFi lending platforms.

compound.finance

Compound

4) One cool thing about Compound is the interest rate calculation--it looks at the supply and demand of each coin and algorithmically determines an interest rate. So if lots of people want to borrow USDC and no one wants to lend, rates will increase until that evens out.

5) The really cool things, though, are the cTokens. Rather than just paying you interest directly, Compound tokenizes it. What does that mean?

6) Say you deposit 5 USDC and lend it out for 1%/year. Compound takes your USDC and in return gives you cUSDC, $1:$1. So if cUSDC is worth $0.25, it'll give you 20 cUSDC for you 5 USDC. All cUSDC is fungible--you can send it to a friend, who can then redeem it back for 5 USDC.

7) So cUSDC is basically an IOU for 0.25 USDC, which Compound gives you in return for the USDC you're loaning out. Now, when Compound goes to pay interest to the USDC lenders, it doesn't send them USDC. Instead, it just increases the number of USDC you get per cUSDC.

8) Since all USDC lenders are owed the same % interest, Compound can just increase the value of the cUSDC they all have. And so if you earned 10% total interest, when you go to redeem your 20 cUSDC, you get 5.5 USDC back instead of your original 5.

9) So cUSDC is basically just an every-increasing number of USDC, growing at the interest rate on Compound. I'ts kinda like a coin that can only go up! (Unless there is a liquidation failure/hack/etc. on the platform, in which case it can go down.)

10) Here's the kicker--this means that you can effectively lend USDC on Compound without ever touching the platform! All you have to do is buy cUSDC with your USDC, and it'll grow at the Compound interest rate. It's a tokenized DeFi interest rate, which is really cool!

Replying to

and

If the cUSDC tokens you can buy give the same effective return as lending USDC on the platform, what is the incentive to lend USDC when you can just buy the tokens?