What is Compound Ether?
Compound is a Decentralized Finance (DeFi) protocol founded by Robert Leshner and Geoffrey Hayes in 2018 after raising over $8 million in funding from venture capital firms, plus an additional $25 million in 2019 from some of the same and new investors.
cETH is the cToken generated by the Compound protocol when a user deposits ETH in a pool. This cETH token can be redeemed by its holder for the totality of the tokens that were deposited plus the generate interest over time, making every cETH more valuable than the ETH used to create it.
One of the most popular DeFi protocols in the 2020 boom, Compound enables its users to lend and borrow crypto assets without requiring an intermediary or traditional financial institution.
By having an Ethereum wallet and available liquidity in the form of crypto assets, users can borrow or generate interest by depositing without the need of paperwork or trusting a central authority as all the process is automated and supported by smart contracts.
cETH operates within the Compound ecosystem and represents an Ethereum token that has been deposited in the platform.
Compound was one of the most influential projects in the development of the DeFi movement and the gaining traction it experienced in 2020, closing the gap between consumers and digital finance by removing the need for intermediaries and creating a new level of accessibility.
The Compound protocol incentivizes all users, independently of their borrower or lends status, by rewarding them with the COMP governance token for every transaction they participate in.
What is the Purpose of cETH?
Compound was launched with a single purpose in mind: Giving its users the capability to trade the time value of assets. This means creating an ecosystem that allows harvesting the earning potential of a user’s cryptocurrency holdings.
At the time of Compound’s creation, the team behind it identified major flaws experienced by crypto assets. Not only were borrowing mechanisms extremely limited, but crypto assets had a negative yield when considering the storage costs and risks associated with them.
While some protocols and networks could incentivize their users to hold tokens by providing rewards, cryptocurrency owners were discouraged from holding most often than not.
The most common strategy to trade the time value of their crypto was for users to trade them in centralized exchanges by using “borrowing markets,” which was risky due to having to trust the exchange’s security practices and legitimacy.
With the inception of Compound, crypto investors had a new decentralized, trustless system that allowed them to borrow Ethereum tokens frictionlessly and generate gains by putting their assets to work for the benefit of the whole crypto ecosystem.
How Does cETH Work?
Compound uses smart contracts running on the Ethereum network to automatically connect lenders and borrowers while rewarding both parties for every transaction they complete.
A lender’s supplied cryptocurrency is registered using ERC-20 tokens native to Compound called cTokens, representing the lender’s rights to the tokens they deposited in the pool.
By holding cETH tokens, or any other cToken, will generate COMP rewards for its owner based on the interest rate the protocol determines at the time, which is inversely proportional to the liquidity in the pool.
By removing the need for paperwork, Know Your Customer (KYC) checks, credit scores, location, and other types of barriers, anyone can deposit crypto into a lending pool and immediately gain interests from users who borrow the funds. The opposite is also true for those looking to borrow funds by providing collateral.
Compound also reduces the risk for lenders by ensuring that a borrower’s position is liquidated by consuming the collateral if the value of the asset becomes more valuable than a certain threshold, which is one of the reasons why over-collateralization is required.