The Compound Liquidity Pool is autonomous open source software deployed to the Ethereum blockchain. Digital assets (stablecoin, cryptocurrency) are supplied to and borrowed from the Compound Liquidity Pool. These assets have algorithmically derived interest rates, which are based on supply and demand.
How Compound Liquidity Pools Work
Linen Wallet members supply digital dollars (stablecoin USDC) to the Compound Liquidity Pool to earn yield. Members receive a record of their supplied balance in the form of a cUSDC digital asset from the Compound Liquidity Pool. A record is stored in your Linen Wallet and is your right to claim digital dollars (stablecoin USDC) back from the Compound Liquidity Pool. cUSDC accumulates interest through their exchange rate. Over time, each cUSDC becomes convertible into an increasing amount of USDC, even though the number of cUSDC in your wallet stays the same.
Borrowers supply collateral in the form of digital assets (cryptocurrency) to the Compound Liquidity Pool to borrow digital dollars (stablecoin USDC). The minimum collateral ratio to borrow varies from 115% to 150% of the loan amount and depends on the collateral type. Currently acceptable collateral by the Compound Liquidity Pool are digital assets: ETH, DAI, USDC, REP, SAI, WBTC, ZRX, and BAT. Interest rates in the Compound Liquidity Pool are set algorithmically based on the supply of digital assets (stablecoin USDC) to borrow from and the demand for USDC loans. Loans do not have a predetermined duration as long as the collateral ratio is maintained above the liquidation minimum.
Borrowers repay USDC loans back with interest to the Compound Liquidity Pool and have the right to withdraw their collateral.
3. Should collateral value drop below the minimum ratio, Liquidators have the ability to purchase collateral with a 5% discount and pay back USDC to the Compound Liquidity Pool. Liquidators are incentivized to bring the collateral ratio up to the minimum required threshold.
For more detailed information on how Compound Liquidity Pool works, please see Compound’s white paper.