Built using smart contracts, Compound is a lending ecosystem that was created in 2017. Previously, when people invested in cryptos, the fact of the matter was that these assets just sat idle within their wallets or crypto exchanges, serving no purpose apart from waiting to be sold off for profits.
With Compound, users are able to deposit their tokens in the lending pools and get cTokens in return, which represent their original coins. As borrowers must pay interest, the lenders earn more cTokens which can be exchanged for the underlying assets.
With the mainnet launched in September 2018 by Robert Leshner and Geoffrey Hayes, Compound protocol is fuelled by its COMP token, which acts not only as a utility token, but a governance token too.
Compound and its COMP token have garnered interest from many crypto enthusiasts as it allows people to not only create a new source of income by lending tokens and earning interest, but also a complete money market where people can borrow the deposited tokens against their crypto assets for better interest rates. Let’s look at how the Compound price has changed and what major events have affected it.
As a leader in decentralised crypto lending and borrowing money markets, Compound was set up as a trustless environment where users could put their idle assets to work and earn with higher interest rates. Built using automated smart contracts, Compound does not require any intermediary and the complete system of lending, borrowing, loan-to-value (LTV) ratio and settlement operates using the contracts.
Initially, the platform only issued cTokens, the Compound equivalent of locked assets that could be traded within the ecosystem and also reflected the invested assets of users. Interest earned on the tokens would be given in the relevant cToken (if you lock ETH, for example, you would get equivalent cETH and the interest would be paid in it too).
As of April 2020, the native COMP token was launched, offering governance rights to token holders through a decentralised autonomous organisation (DAO) structure where the users make decisions about the platform. COMP has a capped max supply of 10 million tokens and as of July 2021, the current circulation is approximately 5.37 million COMP.
As COVID-19 started spreading rapidly in 2020 and the international global economy took a downturn as businesses were shut down, decentralised finance (DeFi) started to gain popularity. Offering much higher interest rates and hedging against inflation, DeFi took centre stage and Compound benefited from it too. The first quarter witnessed a spike in price, followed by another major increase in May 2020 when COMP hit its all-time high of $854.
In the future, Compound intends to add non-crypto assets such as fiat to increase its services.
Compound Labs is set up by the duo Robert Leshner and Geoffrey Hayes, based out of San Francisco.
The mainnet is launched in April 2020 and the protocol garners interest from top investors, securing $8 million in a seed round, backed by investors such as Bain Capital Ventures and Polychain, followed by Coinbase’s first-ever backing of a DeFi protocol.
The project becomes more popular, crossing $100 million in total value locked (TVL).
TVL crosses $200 million for the first time. COMP gets listed on Coinbase Pro and the price jumps 270% in 24 hours to reach $230, eventually reaching $337 before witnessing a sharp correction. For the last few months of the year, COMP remains below the $200 mark.
As COVID-19’s economic and financial impacts grow, people turn towards DeFi and COMP tokens also go up in value. The final days of January 2021 and the start of February see the COMP coin rise from $176 to touch $537, crossing the $500 mark for the first time. On 11 May, COMP reaches its all-time high of $854. Later that month, the Compound token falls sharply to as low as $342 as the crypto market crashes. After dipping below $200 in June, COMP regains $400 in July.
COMP is mainly designed to be a governance token that allows holders to have a say in the progress of the platform, such as changes in the protocol, altering the collateral ratios, the addition of supported pools and even how new COMP tokens are distributed. The significant interest in the token has led to a healthy rise in value and, as such, COMP has become a good trading and investment vehicle as price discovery has led to higher profitability ratios.
Compare Compound with the US dollar
The US dollar is a symbol of wealth and financial power. While it is subject to inflation like any other fiat currency, it is still considered the most stable and is sought after not only as it is globally acceptable, but its inflation rate is far lower than many other fiat currencies.
That being said, the US dollar is still fiat and as such, it is issued centrally by the Federal Reserve, which has complete control over its supply. The COVID relief funds launched by the current Biden and former Trump administrations have injected trillions of dollars into the economy in less than a year and have lowered interest rates, showing how easy it is to increase supply and manipulate the greenbacks.
Compound, on the other hand, has a limited supply and issuance. With the lending platform offering far higher interest rates than the US dollar, it is easy to understand why people started investing in it. The tokenomics, good rates and increasing demand have led to a higher price overall. Furthermore, as a governance token, it gives power to holders to decide their own fate rather than depend on the policies of centralised governments.
Compare Compound with Gold
Even with the removal of the gold standard in the 1960s, bullion is still in demand as a safe haven against inflation. During the extreme lockdown periods of the coronavirus pandemic when people were laid off and businesses shut down, Gold not only retained its importance but increased in value as more people scrambled to hedge their decreasing wealth.
Although the price of gold has appreciated, Compound’s rise has far outstripped it. At the same time, Gold investors are only able to capitalise on the rising price while Compound offers a passive income stream through trustless lending.
Compare Compound with Industrial Metals
In recent times, metals such as copper and aluminium have risen sharply in value, mostly thanks to economies opening up and the Chinese flexing their industrial might. Increased adoption of electric vehicles has also increased demand for battery materials such as cobalt. However, the rise is very recent. There has been a steady increase in price in the last few years, and despite a dip when COVID-19 almost shut everything down, industrial metals are coming back as strong as ever. A good example is copper, which was considerably low in price during the latter half of 2019 but rose 36% from the start of 2021 to $4.80 per pound on 11 May.
Even then, Compound has outshined it. Incidentally, the COMP token saw its all-time high on that very date, hitting roughly $854. Compared with copper, the Compound token was touching a 489% increase since 1 January this year.
Compare Compound with Bitcoin
Bitcoin is the first cryptocurrency and as such holds a special place in the hearts of crypto enthusiasts, investors and traders. A flurry of interest in the king of crypto during the final days of 2020 saw its price gradually rise only to explode later as Bitcoin broke new grounds and eventually set a new all-time high of roughly $63,500.
While Bitcoin did rise a whopping 360% from November 2020 to its peak in April 2021, this is overshadowed by comparison with COMP’s price increase from a mere $93.50 to $485 representing a higher return of 419%.
The ever-growing popularity of Compound’s smart contract-based trustless lending and earning model is increasingly affecting people’s decision to invest in new money markets, rather than relying on centralised fiat ones that offer little in return, but ask too much when borrowing. However, the boost COMP token received is not only due to the alternative investment vehicles, but also the pandemic-related financial meltdown the world saw. COMP users continue to enjoy higher benefits, and with national economies still feeling the effects of the virus, Compound-generated interest rates could still be a better option for some time.
As more global populations get vaccinated and the spread of coronavirus is controlled, economies all over the world are opening up. Even then, it will be some time before global economies return to their pre-COVID levels. The Federal Reserve has also recently published a report that shows an improving situation, but still says that it will take time for the US dollar to recover as inflation is growing this year.
Considering this, the rest of the world’s situation and greater stability in recent crypto prices, it is expected that Compound users will keep on earning a higher profit throughout the year. This will have a large impact on COMP coin price. Another thing factoring into all this is the supply and demand of COMP. Limited tokens in totality, slow issuance and increasing demand could hike up the price down the road.
As global businesses continue to open up in the next year, there might be a slump in crypto investments, including Compound price. The decreased interest will probably not last long as the DeFi market has already cemented its place in the financial world and with the Compound team releasing new products, there will be a renewed interest in COMP tokens. Since Compound is governed by its users who have staked their money in COMP coins and pools, they will certainly vote for changes in the Compound protocol that will offer better options than fiat in order to protect the values of their assets.
Analysts believe the COMP token will still see positive annual growth of 89% overall, a much higher profit than traditional fiat, bonds or bullion investment.
As we go further ahead in time, it becomes more difficult to make accurate predictions, but it can be said with some degree of certainty that as the market matures and more regulations come into play, there will be decreased volatility and COMP could see a period of growth as more Compound users get on board.
The passage of time will see the Compound protocol and its users settling in and selecting products that have developed a history of higher profits. The community governance will also mean that there will be an addition of new services and retained ones will have changes made to reflect higher revenue generation.
Thirdly, the effects of the limited supply will start to amplify as more and more users join the Compound protocol while the issuance falls, potentially leading to higher demand and, consequently, higher COMP coin prices.
While COMP token is primarily designed to act as a governance token, as one of the leading DeFi platforms, Compound Protocol will most likely continue to offer better investment options than fiat or bullion. The ease with which COMP can be transferred might also play a role in it being used as a means of value transfer and perhaps even become a method of accepting payment.
Cryptos have been seeing greater acceptance globally and COMP could ride this wave to become a good option for institutional investors. El Salvador might have only selected Bitcoin as its currency, but this will open up doors for all other cryptos in the future, including COMP, to be accepted in the mainstream financial system.
The current outlook for Compound would appear to reflect that it is a good investment option. Apart from the rise in value, the COMP token can be lent or staked, increasing the quantity of held assets. The price has dramatically increased since COMP was launched. However, it is subject to the high volatility for which cryptocurrencies are infamous. This doesn’t necessarily mean that you should worry too much about it. Apart from the May crash which the whole crypto world witnessed, the long-term outlook has nearly always resulted in a price increase. The volatility can be your friend too if you are a regular trader, riding the ups and buying the dips to increase your portfolio size.
Yes, there will be ups and downs, but the long-term outlook for Compound still appears to be positive, and it is an excellent option to look into.