How Compound Protocol is Disrupting the Banking System?

• Compound protocol is designed to be composable, allowing users to utilize their assets.
• It offers decentralized and peer-to-peer transactions

On the Ethereum blockchain, the Compound protocol is a decentralized platform for borrowing and lending money. Users can earn interest or pay interest on borrowed money while lending and borrowing different cryptocurrencies. The algorithmic interest rate theory under which the protocol runs states that interest rates are dynamically determined based on the supply and demand for each asset within the protocol.

Key features of Compound protocol

Users can use the Compound protocol to serve as lenders by transferring their cryptocurrency holdings there. Lenders receive interest on their deposited assets in exchange for providing assets to the protocol. Based on the rate at which each asset is being used, the interest rates are calculated algorithmically.

Users who require access to money can borrow against their collateral to do so. Up to a predetermined borrowing limit, borrowers can borrow another cryptocurrency by pledging their cryptocurrency assets as security. The worth of the offered collateral establishes the borrowing capacity. Borrowers are required to pay interest on the money they borrow, and the interest rates are also calculated algorithmically based on the demand for borrowing.

Users must submit collateral in the form of supported cryptocurrencies in order to borrow money. In the event that borrowers are unable to repay their loans, the collateral serves as security. Real-time monitoring of the collateral’s value means that if it drops below a predetermined level, borrowers may be asked to provide additional security or run the danger of having their collateral sold to recoup the loan.

In order to be readily connected with other decentralized finance (DeFi) platforms and apps, Compound Protocol is designed to be composable. This enables users to utilize their assets in many ways within the larger DeFi ecosystem and provides for the seamless movement of assets between various protocols.

Compound Protocol COMP And  financial system disruption

• Decentralization

The blockchain technology upon which Compound protocol is based permits decentralized and peer-to-peer transactions. Compound protocol, in contrast to conventional banks, does away with the need for middlemen by connecting lenders and borrowers directly. By eliminating the dependency on centralized institutions, its decentralized nature allows people to directly manage their financial activities.

• Open and Permissionless Access

Compound protocol offers financial services with open and permissionless access. The protocol is accessible to everyone with an internet connection and a suitable wallet. This inclusivity makes it possible for people from all over the world, even those who are underbanked or unbanked, to engage in lending and borrowing activities devoid of restrictions or prejudice.

• Earn Interest

By contributing assets to the Compound protocol, users can earn interest. They start lending money and provide the lending pool liquidity. Based on the dynamics of supply and demand for each asset in the protocol, an algorithm is used to calculate the interest earned. This creates possibilities for people to earn income on their idle assets and passively develop their wealth without depending on conventional banking institutions.

• Borrowing and Collateralization

They are also made possible via Compound Protocol, which enables users to borrow money while pledging their crypto holdings as security. Funds are available to borrowers without substantial documentation or credit checks. The borrowing procedure is quick and easy, allowing people to use their crypto assets for a variety of things like trading, investments, or short-term liquidity needs.

• Algorithmic Interest Rates

Compound Protocol makes use of algorithmic interest rates, which are dynamically adjusted based on the state of the market and the supply-demand dynamics of each asset. As a result, an effective and market-driven interest rate mechanism is created, enabling real-time interest rate fluctuations. Algorithmic interest rates guarantee that borrowing and lending rates are in line with the market, encouraging effective capital allocation.

Conclusion

Compound Protocol is upending the banking industry and redefining the future of finance by allowing open access to financial services, allowing users to earn interest and borrow assets without middlemen, and embracing decentralized governance. It gives people more freedom over their funds and opens up chances for financial inclusion and progress on a global scale.