cDai is like an instant Dai savings account
Lending is one of the most popular ways in DeFi to earn interest. But did you know it just got easier than ever? As you may know, Compound, a money market protocol, allows you to earn a variable interest rate in return for supplying tokens that other users can borrow. The protocol recently upgraded to v2, which includes a big development that everyone’s talking about: the addition of Compound tokens, or cTokens, including cDai, cETH, and more.
Previously, Compound used a single smart contract for all assets. With the upgrade, each token on Compound has its own contract, called an asset gateway. That’s a big deal, because now when you deposit tokens into Compound, you get cTokens – ERC20 tokens that represent your lending or supply balance and the interest it has accrued.
So how does that work exactly?
Let’s look at an example
Previously, in Compound v1, the interest you earned was simply added to your account balance, and it remained in Compound. However, now when you supply Dai to Compound in v2, you’ll receive cDai in exchange. The exchange rate began at 50 cDai for every one 1 Dai, and as interest accrues in the market, each cDai will be worth more Dai. The idea is that as your interest accrues, you’ll need less cTokens to redeem your underlying assets. In other words, the exchange rate between Dai and cDai grows proportionally with the interest rate.
What makes cDai so awesome?
The simple answer is that by designing cTokens as ERC20 tokens, Compound has opened up a whole new world of functionality and liquidity. All the assets that used to stay locked away in Compound are now free to move about the ecosystem, ready to be utilized for other purposes.
You can transfer, trade, or send cTokens to cold storage, just like any other token on Ethereum. In fact, you can even integrate them into other protocols. That is, any protocol where you can lock tokens could choose to accept any cToken. This would allow you to earn interest on top of the benefits the protocol already gives you.
Showcasing DeFi’s composability
The perfect example of this new interoperability is the Uniswap Dai-to-cDai liquidity pool. Users (and smart contracts) can swap their Dai or any token for that matter into cTokens to take advantage of Compound’s interest-based exchange rate. And compared to simply holding Dai, pooling cDai earns you interest while also exposing you to trading fees on Uniswap.
You can try it right now: start earning interest by swapping any token for cDai in seconds with cDAI.io.
We’re excited to see what other unique and creative ways the community will take advantage of cTokens. Tell us what you think about cDai – or any other DeFi stuff – on Twitter or in the Concourse Discord.