Getting started with Compound Finance inside of Exodus wallet
“ If you don't find a way to make money while you sleep, you will work until you die.” - Warren Buffet.
In this article, we go into detail on what Compound Finance is as well as some other frequently asked questions such as if Compound Finance is safe and how to start using it.
In this article:
- What is Compound Finance?
- How does Compound Finance work?
- How does Compound Finance work in Exodus?
- Is Compound Finance safe?
- How much Ethereum do I need to use Compound Finance?
- How do I start using Compound Finance?
- What is APY?
What is Compound Finance?
Compound Finance is a protocol built on the Ethereum blockchain that allows a user to lend their Ethereum assets to a pool of assets, instead of lending assets directly to other users. Exodus only allows you to supply and lend your DAI coin.
Once you have lent your asset to the Compound Finance protocol, you accrue interest every time an Ethereum block is mined. You are also free to withdraw your assets whenever you choose, giving you the freedom to lend and withdraw earnings as you wish.
If you would like to read more here is the Official Compound Finance white paper.
How does Compound Finance work?
Compound Finance works on the basic premise that some users “deposit” their ERC20 token for a special “interest-earning” version of that token.
The exchange rate between the ERC20 token and the Interest-Earning token slowly changes over time, always leaning in the advantage of the Interest Earning token. This is the Interest you accrue.
Since you have lent your ERC20 token to a market, other users of the Compound Finance protocol are then allowed to “borrow” from the market, whoever borrows must pay interest, this is how the lenders generate their interest.
When you want to withdraw, you exchange the Interest-Earning tokens back for the original ERC20 tokens you lent. Because the exchange rate changed slowly in your advantage, you get back more of the ERC20 token than you started with.
How does Compound Finance work in Exodus?
Exodus only allows users to lend (deposit) DAI into Compound Finance. This will mean that you lend your DAI to the Compound Finance protocol and you will receive the Interest-Earning version of DAI which is called cDAI. The cDAI can even be sent to other wallets that support cDAI.
The exchange rate between your DAI and cDAI will slowly change over time, and lean in the advantage of cDAI. This is the 'interest’ you will accrue after every Ethereum block that is minded.
You will be able to withdraw at any time, when this happens your cDAI tokens will be swapped back to DAI tokens, and because the exchange rate slowly changed in your advantage, you will receive more DAI tokens than you originally deposited.
Is Compound Finance safe?
Compound Finance is a protocol that runs on the Ethereum network by the use of smart contracts, and since it is a relatively new bit of technology there are potential risks and bugs that come with this.
The biggest risk with Compound Finance is loss of funds caused by unforeseen bugs or vulnerabilities in the contract code. In an effort to combat this risk, the code for Compound Finance smart contracts have all been audited. The two groups who have audited the Compound Finance smart contracts are: Trail of Bits and Open Zeppelin.
This does not guarantee security but it is the best thing that can be done right now to try to prevent any potential risk.
You can read more about the security of the Compound Finance protocol here.
How much Ethereum do I need to use Compound Finance?
To start using Compound Finance inside of Exodus, you will need some Ethereum to pay the network fees. This is because DAI is an ERC20 token. The minimum ETH balance for compound finance is not a fixed amount and it will dynamically change according to Ethereum network conditions.
If you ever need to check how much Ethereum you will need to use Compound Finance there are a couple of different ways to see. If you have any DAI already deposited into Compound Finance, the minimum Ethereum balance is shown to you after you click either Deposit or Withdraw. Otherwise, if you don't have any DAI in Compound Finance, open up the Compound Finance app and click on Start Earning to see the minimum ETH balance required.
Please note: This image is only an example and is not a fixed amount of Ethereum needed, the minimum balance required will constantly be changing over time.
How do I start using Compound Finance?
Depositing into Compound Finance
In order to start using Compound Finance inside of your Exodus wallet, you will need to have some DAI and Ethereum inside of your Exodus wallet. Please ensure you have enough Ethereum in your Exodus wallet to start using Compound Finance.
Make sure you have enabled the new Exodus navigation layout.
Once you have some DAI you can follow these steps to start using Compound Finance:
- Open your Exodus wallet.
- You will also need at least the minimum balance of ETH in your wallet as well as some DAI to deposit. This is because DAI is an ERC20 token.
- Click on the Compound Finance symbol at the top of the application (the new navigation layout will need to be enabled to see this button).
- You will see this screen, just click Start Earning:
Please note: The 8.08% Variable APY is not a fixed rate and will constantly be changing over time. If you would like to read more please click Here.
- Now you can choose an amount of DAI to deposit. If you want to deposit all of your DAI then just click All.
- Once you have chosen how much DAI to deposit, click Deposit.
- The wallet will now automatically lend your DAI to the Compound Finance protocol and you will receive cDAI in return.
Now you have successfully lent your DAI to Compound Finance so you can watch your balance rise!
Withdrawing from Compound Finance
To Withdraw your DAI, all you need to do is:
- Open your Exodus wallet and click on the Compound Finance symbol in the top right.
- You will now see the Overview window.
- Now click Withdraw.
- Choose the amount of DAI you wish to withdraw.
- Again click Withdraw.
- Your Exodus wallet will then automatically withdraw your DAI for you and return the cDAI back to the Compound Finance protocol.
That’s it. You now have complete control over your DAI again with a little added bonus!
What is APY?
APY stands for Annual Percentage Yield and is the projected rate of annual return after taking compounding interest into account.
In order to understand how APY is calculated, it is important to understand compound interest. In essence, compound interest is interest earned on previously earned interest. For example, let's say you deposit $5000 USD into a CD savings account at your bank with an APR (annual percentage rate - interest) of 1%. Let's also assume that you are receiving dividends for this account on a monthly basis. Here is how the monthly dividends will be paid into your account:
||$4.167||You are paid 1/12th of your annual 1% APR on the $5000 in your account|
|February||$4.170||You are paid 1/12th of your annual 1% APR on the $5004.16 in your account|
|March||$4.174||You are paid 1/12th of your annual 1% APY on the $5008.34 in your account|
As you can see, each month you are paid interest on the interest you accrued in the previous months. By the end of the year, you will have accrued more than the APR 1% and your actual yield is closer to 1.005% due to the compounding interest. This 1.005% value is the APY in this example.
Now, let's talk about how APY works with compound finance. The APY for compound finance is variable and fluctuates based on supply and demand in the Compound Finance protocol. This is determined by the amount of DAI being borrowed or lent at any given moment. Unlike the above example which calculates interest and compounded interest on a monthly basis, the per-period interest rate for Compound Finance is 1 Ethereum block. This means that each time an Ethereum block is mined, you are paid dividends on your lending position - meaning each new block will have the interest paid on a bigger balance.