cWBTC overview

The Compound protocol

The Compound protocol is an algorithmic, autonomous interest rate protocol built for developers to unlock a universe of open financial applications. It allows users to supply cryptocurrencies as collateral to earn interest or borrow against their holdings. The protocol is governed by a decentralized community of COMP token holders.

How the Compound protocol works

The Compound protocol functions by creating money markets for various cryptocurrencies, including Ethereum-based tokens and wrapped tokens like cWBTC. Users can supply assets to these money markets, which are then available for other users to borrow. The interest rates are dynamically adjusted based on supply and demand within each market.

When users supply their tokens to the Compound protocol, they receive cTokens in return, such as cWBTC for Wrapped BTC. These cTokens represent the user's stake in the protocol and accrue interest over time.

Wrapped Bitcoin (WBTC)

Wrapped Bitcoin (WBTC) is an ERC-20 token that represents Bitcoin on the Ethereum blockchain. It allows for Bitcoin to be used in Ethereum-based DeFi applications, providing liquidity and interoperability between the two blockchains.

The mechanism behind WBTC

WBTC is created through a process that involves custodians and merchants. Bitcoin holders can swap their BTC for WBTC through approved merchants, who coordinate with custodians to mint the equivalent amount of WBTC on the Ethereum network. This process ensures that each WBTC token is backed 1:1 by Bitcoin reserves held by the custodians.

Compound Wrapped BTC (cWBTC)

Compound Wrapped BTC (cWBTC) is a token within the Compound protocol that represents a user's share of WBTC supplied to the protocol. By holding cWBTC, users earn interest on their WBTC deposits, which are lent out to other users on the platform.

Benefits of using cWBTC

• Interest Accumulation: Users can earn interest on their Bitcoin holdings by supplying WBTC to the Compound protocol and receiving cWBTC in return.
• Liquidity: cWBTC provides liquidity to the Compound market, allowing other users to borrow against it.
• Interoperability: By using WBTC, Bitcoin holders can participate in Ethereum-based DeFi applications, expanding the use cases for their Bitcoin assets.

Use cases for cWBTC

• Lending and Borrowing: Users can lend their WBTC to earn interest or use it as collateral to borrow other cryptocurrencies.
• Yield Farming: cWBTC can be used in various DeFi strategies to maximize returns, such as yield farming and liquidity mining.
• Portfolio Diversification: By participating in the Compound market, users can diversify their cryptocurrency portfolio and gain exposure to different assets.

Role of COMP tokens

COMP tokens are used to participate in the governance of the Compound protocol. Holders can delegate their tokens to vote on proposals, ensuring that the protocol evolves in a way that benefits the community as a whole. This decentralized approach to governance is a key feature of the Compound platform, aligning with the broader principles of decentralized finance.