How does Compound work?

Compound is a decentralized, open-source protocol that enables users to lend and borrow digital assets.

It works by allowing users to deposit their digital assets into a pool of funds, which are then lent out to other users who need them. The protocol is powered by smart contracts on the Ethereum blockchain, which allow for automated lending and borrowing of digital assets. When a user deposits their digital asset into the Compound pool, they receive a token called cTokens in return.

These cTokens represent the user’s share of the total pool of funds and can be used to borrow or lend other digital assets. The interest rate for borrowing or lending is determined by an algorithm that takes into account the supply and demand for each asset in the pool. The Compound protocol also allows users to earn interest on their deposits by staking their cTokens in the Compound pool.

This staking process helps ensure that there is always enough liquidity in the system for borrowers and lenders alike. As more users stake their cTokens, the interest rate increases, incentivizing more people to join the network and further increasing liquidity. In addition to providing a platform for lending and borrowing digital assets, Compound also offers tools for developers to build applications on top of its protocol.

These applications can be used to create new financial products such as derivatives or synthetic assets, as well as providing access to traditional financial services like loans or savings accounts.