What Do You Need to Borrow Crypto With Compound?

Borrowing in Compound involves depositing some crypto to act as collateral. In other words, you will be taking a loan against your crypto deposit.

Traditionally, when you borrow money from any financial institution, it conducts a personal financial background check to establish your credit worthiness. But since DeFi is anonymous and can’t conduct such checks, Compound provides over-collateralized loans to avoid debt and bankruptcy.

How Do Interest Rates Work When You Borrow Cryptocurrency with Compound?

Compound Finance connects lenders and borrowers through smart contracts built on the Ethereum network and rewards paid in crypto.

• A Compound lender is anyone willing to lend their crypto assets by depositing them on a Compound wallet to generate rewards.
• A Compound borrower is anyone who locks crypto in the Compound protocol. They are permitted to borrow digital currencies offered by Compound at a percentage of the locked value.

Compound calculates the interest rates based on the supply and demand of each cryptocurrency. Besides earning interest on your cryptocurrency, Compound enables you to borrow more assets through the cTokens you receive every time you lock assets in its protocol. Furthermore, you can trade these assets in other decentralized applications (DApps).

Currently, Compound supports BAT, DAI, ETH, REP, USDC, WBTC, and ZRX borrowing. Whenever you lock crypto in the Compound protocol, new cTokens are minted. If you want to borrow assets using ETH as collateral, you will be issued with cETH equivalent to your locked ETH. Remember, you can get liquidated if the cryptocurrency you borrow gains value and exceeds your deposited collateral.

On the other hand, Compound rewards lenders with COMP tokens based on the amount of cTokens available in their wallets.

Is Borrowing Crypto on Compound Safe?

Compound borrowing and lending involve depositing some funds to act as collateral. For this reason, Compound users often ask this question:

Is borrowing crypto on Compound safe, and why borrow crypto via Compound?

Since its launch in 2018, Compound hasn’t experienced any security breaches. It has proven its authenticity by allowing public access to its smart contract to third-party auditors and consultants who put significant efforts into establishing a safe and reliable protocol.

For instance, OpenZeppelin and Trail of Bits have done several security audits of Compound and obtained official certification from Certora. Therefore, we can technically conclude that borrowing crypto on Compound is safe.