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How Does Compound Finance Work?

Compound Finance is a very simple and user-friendly platform for cryptocurrency investors who want to earn interest in their investments. Compound Finance is one of the most well-known DeFi protocols, with a strong user base.

Launched in 2017 and headquartered in San Francisco, Compound Finance is a decentralized lending and borrowing mechanism that runs on the Ethereum blockchain. Borrowers can get access to loans in exchange for depositing collateral, while lenders can deposit cash in exchange for a return on their investment on compound crypto.

In comparison to contemporary DeFi protocols, Compound Finance crypto has been fully field-tested and has a good platform reputation. Compound Finance connects people who want to lend Ethereum-based ERC-20 assets to interested borrowers, providing customers interest rates higher than the current global average when compared to traditional institutions.

Connecting Your Compound Finance Account To ZenLedger

  • To import your transactions, log in to Compound and copy your receiving address.
  • Paste the receiving address you copied from Compound into the wallet address field in ZenLedger.
  • Select the proper coin from the dropdown list.
  • Select if the wallet is based in the USA or not.
  • Then hit add coin.

How To Generate Compound Finance Crypto Tax Forms

After you’ve connected your Compound account, completed your import, and confirmed that your transaction information and tax liabilities are correct, simply click to download your forms!

Compound: How Does Compound Crypto Protocol’s DeFi Lending Platform Work?

Compound works in the same way as a bank does. You may deposit a variety of cryptocurrencies and earn yearly interest on your deposits, just like you would if you deposited money in a bank. However, what sets Compound from traditional crypto is that it does not keep your Bitcoin deposits in its possession.

Instead of transferring crypto to another firm or user, you're sending coins to and interacting with a smart contract. This characteristic is crucial since it ensures that no one or authority may access or manage your cash.

How To Use Compound Finance?

Follow the below-mentioned steps to use Compound:

  1. Connect your wallet: Users can connect their wallets to the Compound Finance application using wallets such as MetaMask
  2. Enable the collateral and use ETH as your collateral: Click “use ETH as Collateral” and then approve the transaction to give permission
  3. Supply ETH collateral: You will be able to supply the required amount of collateral since the collateral supply has been enabled. Just click on “supply” after entering the amount on the app
  4. Borrow DAI: Select “DAI” as the token you wish to borrow from and type the amount you'd like to borrow as a token
  5. Enable Repay: Enable the “repay” option and approve the transaction by clicking “enable”
  6. Repay: Click “repay” and authorize the transaction
  7. Withdraw: To complete the transaction, click “withdraw” and confirm. Note that you can withdraw the collateral only if you have repaid all of the borrowed cryptocurrencies

What Are The Benefits Of Compound Finance?

Compound Finance can be used by anyone using a Web 3.0 digital wallet, such as MetaMask. In contrast to traditional borrowing and lending businesses, Compound Finance is a platform that requires no permission and anybody can access it. 

Mentioned below are some benefits of Compound Finance:

  • Deposit returns might be significantly greater when compared to typical financial institutions like banks.
  • Even while lending, users have complete ownership over their digital assets.
  • Assets can be lent or borrowed for an unlimited period of time.
  • For both borrowing and lending, the protocol is permissionless, which means neither KYC nor income declarations are necessary.
  • It has been tried and proven. The protocol was launched in 2018 and is one of the older DeFi technologies.

Closing Thoughts

Compound Finance is a very simple and user-friendly platform for cryptocurrency investors who want to earn interest in their investments. Not only does it provide the opportunity to earn a return on investment, but interest payments can be substantially greater than typical financial models. Compound Finance is one of the most well-known DeFi protocols, with a strong user base. Despite its excellent reputation, Compound Finance still uses smart contract technology and is still part of the wider DeFi ecosystem.

Compound Finance FAQs

1. Who controls the Compound Finance security?

A decentralized community of COMP token holders and their delegates controls Compound, proposing and voting on protocol improvements.

2. What are cTokens on Compound Finance?

Your balance is represented as a cToken when you contribute assets to the Compound protocol, which can be transferred, exchanged, or programmed by developers to build new experiences.
The Compound protocol uses cTokens as a back-end form of currency. If a user sends cryptocurrency to the protocol, cTokens are applied to keep track of the money they've loaned and any interest they've earned. When a user contributes money to the lending pool, they are given a cToken balance in return.

3. Is Compound Finance safe?

Compound Finance is one of the most secure and well-known blockchain initiatives. It has crypto worth hundreds of millions of dollars locked up inside its smart contracts. The development team of Compound Finance has put in a lot of time and effort, working with third-party auditors and experts, to design a protocol that Compound thinks is safe and reliable.


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