Updated: Dec 20, 2019
The compound is a fully decentralized lending platform, which allows users to lend their tokens to others in the close-knit blockchain community. The compound protocol is the latest in trust-less borrowing and lending on the Ethereum Protocol. Smart-contracts are used to manage these loans automatically and in a predictable manner, without having to go through any intermediaries.
The protocol uses cTokens, which are simply ERC20 tokens for real assets on the Compound protocol. For instance, if you wish to use ZRX, then Compound shall wrap them up into a cToken, and turn them into cZRX. The same goes for DAI, which is the only 100% stable coin available in the crypto market. It is backed by the popular MakerDAO project and has a fixed value for 1 DAI = 1 USD. ETH is used as collateral in this decentralized cryptocurrency. cDAI is nothing but DAI tokens wrapped in cToken that puts ETH as collateral.
This short guide will attempt to explain the purpose for which cDAI is designed, the developing team behind it, the way it works, and the various uses and applications of the coin and platform.
What Is Compound Dai Designed For?
Lending is a popular way of DeFi for users to earn interest. The Compound, a money market protocol has attempted to make it even easier. Compound Dai is designed as part of Compound v2, which includes the addition of Compound tokens, or cTokens. These allow users to earn a variable interest rate in return for the supply of tokens, those other users can profitably borrow.
Before creating Compound Dai, the money market protocol used a single smart contract for all assets. However, the upgrade has allowed it to create an individualistic contract for each token asset, through something called an asset gateway. This gives users the benefit to enjoy ERC20 tokens when they deposit DAI into Compound. They also get to check the lending or supply balance, and whether any substantial interest has accrued.
Who Is the Team Behind Compound Dai?
The compound was founded by Robert Leshner, who is also the CEO. Compound DAI is essentially built by a significant team including CTO Geoffrey Hayes (who is the Maintainer of Exthereum and technology founder of two startups), Torrey Atcitty (who led mobile development at Postmates, Kahuna, and Aha Mobile), and Jayson Hobby (who led product design for Coinbase Pro and Coinbase Custody).
How Does Compound Dai Work?
In the earlier version of Compound, the interest a lender earned was simply added to their account balance. This balance remained untouched in Compound. However, by adding DAI tokens to Compound in v2, cDAI is provided in exchange.
The Compound Protocol is a collection of Smart Contracts like every other protocol, built on top of Ethereum. You can lock your assets, such as DAI or Ether into a smart contract with Compound Protocol, called supply. Borrowers can agree to borrow this supply at a certain interest rate, which puts your assets to work and brings in value without having to trade or sell them.
The exchange rate was started at 50 cDAI for every 1 DAI, and it is expected that every cDAI will grow exponentially and be worth more DAI tokens, as interest accrues in the market. The idea behind cDAI is that as your interest accrues, you would require fewer cDAI to redeem your underlying assets (DAI).
In other words, the exchange rate between cDAI and DAI is intended to grow proportionally with increasing interest rates.
What are Current and Future Applications of Compound Dai?
cDAI is an awesome idea simply because Compound designed it as an ERC 20 token. This has opened up a whole new world of liquidity and functionality. All assets that were previously locked up in the Compound ecosystem are free to move about, which can be used towards numerous other purposes.
cDAI can be transferred, traded, or sent to cold storage like any other Ethereum based token. You can even integrate the tokens into other protocols, which allow locking of tokens and accept cTokens. This way you can earn additional interest on top of the interest and other benefits that the Compound protocol already offers.
The Uniswap Dai-to-cDai liquidity pool is the perfect example of this interoperability, that showcases the DeFi’s compensability. Compound’s interest-based exchange rate can be taken advantage of by users and smart contracts, by swapping DAI (or any other token) into cTokens.
This is more beneficial than simply holding regular DAI. One can earn interest on your DAI holdings while being exposed to trading fees on Uniswap, when one pool the iDAI tokens into cDAI.
DAI and Compound are two of the most significant products in the DeFi field. The Compound Protocol is expected to carry out some very ambitious plans in the future. It currently has over $92.7millions in assets earning interest. Their v2 is running live on mainnet since May 2019, and already has multiple other assets, apart from DAI pooled with cTokens.