Compound's COMP token appears to have driven a surge in decentralized finance activity. Users locked $2 billion in DeFi protocols during the second quarter of 2020, more than double the prior quarter
Compound's COMP token appears to have driven a surge in decentralized finance activity. Users locked $2 billion in DeFi protocols during the second quarter of 2020, more than double the prior quarter and a new record.
Growth began the moment Compound distributed COMP governance tokens. Jack Purdy, tracking crypto markets, said: "Currently there's around $25 million of tokens being distributed every month through yield farming opportunities on DeFi. It's proven to be an incredibly effective mechanism for building liquidity."
Compound designed COMP to mobilize idle capital. Users who deposit funds into the platform receive token rewards. The approach worked. Participation in DeFi platforms accelerated after the token launch.
Decentralized finance removes traditional intermediaries from lending and borrowing. Smart contracts on blockchains replace banks and brokers. No central authority regulates the system. Users pay less because they bypass the middlemen that conventional finance requires.
The sector attracts substantial capital. As interest in DeFi grows, more platforms and services will emerge to meet demand.
Significant risks accompany this expansion. Borrowers who cannot repay their loans face losses if the assets they borrowed have risen in price. If they lack sufficient funds when prices peak, they cannot meet their obligations. Investors must examine these hazards carefully.
Wallet security poses another concern. Cryptocurrency wallets are controlled by private keys. An attacker who steals a private key can drain the entire wallet, bypassing the security mechanisms of the blockchain. This vulnerability exists in all decentralized systems, not just DeFi.
Despite these dangers, demand for DeFi products grows.
