How to Make a DeFi Lending Platform Using Compound?

Crypto borrowing platforms are reshaping financial access, and Compound is at the forefront of this transformation. As a leading decentralized finance (DeFi) protocol, Compound offers a robust infrastructure for developers looking to create seamless borrowing and lending platforms. With features like tokenized balances (cTokens), multi-asset support, and over-collateralized borrowing, Compound enables developers to build platforms that prioritize security, efficiency, and scalability.

By leveraging Compound, creators can design borrowing solutions that empower users with instant, decentralized liquidity, providing a secure and efficient alternative to traditional financial systems.

The digital lending market is growing fast! It’s projected to skyrocket from $29.05 billion in 2024 to $104.04 billion by 2031, with an impressive annual growth rate of 17.29%. As more people jump into the space, it’s creating a big opportunity for businesses and entrepreneurs in the fintech world. With so many factors fueling this growth, it’s no surprise that DeFi lending platforms are popping up in the US market. In this blog post, we’ll walk you through the key steps to build your own DeFi lending platform using Compound and share some important tips to help you make your platform a success!

Overview of the Compound Protocol

Compound is a DeFi platform built on the Ethereum blockchain that makes borrowing and lending cryptocurrencies easy and secure. It uses smart contracts to enable users to manage financial transactions directly without the need for middlemen. The platform’s native token, COMP, plays an important role in governance and rewards within the system.

How Does the Compound Protocol Work?

The Compound protocol is a DeFi platform that allows users to lend, borrow, and earn interest on cryptocurrencies without intermediaries. Here’s a detailed breakdown of how it works:

1. Supply and Borrow Markets

Compound operates through liquidity pools where users supply and borrow assets:

• Supply Assets: Users can deposit supported cryptocurrencies into the protocol, which are added to global liquidity pools.
• Borrow Assets: Borrowers can take loans from these pools, using their supplied assets as collateral.

2. Earning Interest

• Lenders (Suppliers): Earn interest on the assets they supply to the protocol. Borrowers pay the interest and is automatically compounded in real time.
• Dynamic Interest Rates: Rates are determined algorithmically based on supply and demand for each asset.

3. cTokens (Tokenized Balances)

When users supply assets, they receive cTokens (e.g., cETH, cUSDT) representing their deposit and accrued interest.

• cTokens as Proof of Deposit: Users can redeem their cTokens for the underlying assets and accumulated interest at any time.
• Transferability: cTokens can be transferred, traded, or used in other DeFi applications.

4. Over-Collateralized Borrowing

• Borrowing Limit: Borrowers must deposit assets as collateral, which are valued above the amount they borrow (over-collateralization).
• Collateral Factor: Each asset has a specific collateral factor (e.g., 75%), determining how much can be borrowed against it.
• Risk of Liquidation: If the value of the collateral drops below a safe threshold, the collateral can be liquidated to repay the debt.

5. Algorithmic Interest Rates

• Dynamic Adjustments: Interest rates for borrowing and lending are automatically adjusted by the protocol based on market supply and demand.
• Ensures Stability: This mechanism incentivizes behavior that maintains liquidity in the protocol.

6. Governance and Decentralization

• COMP Token: The compound is governed by COMP token holders, who vote on proposals to modify the protocol, such as adding new assets or adjusting parameters.
• Community Control: This decentralized governance ensures that the platform evolves according to its users’ needs.

7. Flash Loans

Although not its primary feature, Compound supports fast, permissionless loans without collateral, enabling advanced DeFi use cases like arbitrage and refinancing.

Key Market Takeaways for DeFi Lending Platforms

According to VerifiedMarketResearch, the digital lending market is booming! It’s expected to grow from $29.05 billion in 2024 to $104.04 billion by 2031, with a strong annual growth rate of 17.29%. This rapid expansion is partly due to the rise of DeFi lending platforms, which are transforming the way we borrow and lend money.

Source: VerifiedMarketResearch

DeFi platforms are gaining traction because they offer more competitive interest rates and make it easier to access capital compared to traditional banks. Traditional banks usually have strict credit checks and long approval processes, making it tough for smaller businesses or innovative startups to secure loans. However, DeFi lending platforms cut out the middlemen by using blockchain technology for peer-to-peer lending. This allows for faster loan approvals and creates a more inclusive financial system where borrowers and lenders from around the world can connect.

Leading DeFi platforms like Aave and Compound allow users to lend and borrow cryptocurrencies without the need for a central authority. They use smart contracts to automate lending, which makes the process more transparent and secure while also offering attractive returns for those who deposit funds. The amount of capital locked in DeFi platforms (known as Total Value Locked or TVL) has soared, showing increasing trust in these systems. For example, TVL jumped from under $1 billion to over $20 billion in just one year!

With this continued growth, DeFi lending is quickly reshaping the future of finance!

How Can a DeFi Lending Platform on Compound is a Strong Business Investment?

Developing a DeFi lending platform using Compound can be a highly profitable business opportunity. Compound’s protocol, known for its algorithmically adjusted interest rates and robust security, allows users to lend and borrow cryptocurrencies in a decentralized environment. With around $2.64 billion in TVL, Compound shows the huge potential of the DeFi market. 

By building on Compound, businesses can offer users high yields and easy access to liquidity without relying on traditional banks. The automated, real-time interest rate adjustments based on supply and demand can attract both retail and institutional investors.

From a business perspective, there are several ways to generate revenue. Entrepreneurs can charge transaction fees, earn a share of the interest rate spread, or offer premium services like enhanced security or analytics. Just like MakerDAO, which supports the DAI stablecoin and has a TVL of $4.25 billion, a Compound-based platform can create valuable services for users. 

Since Compound operates autonomously, it reduces overhead costs, making it a scalable and efficient business model. With DeFi continuing to grow, platforms built on Compound are well-positioned to capture a share of this booming, multi-billion-dollar industry.

Did you hear? 

Maple Finance, a DeFi platform that brings on-chain institutional credit to the table, just raised $5 million to expand into Asia! With clearer regulations around digital assets in places like Hong Kong and Singapore, Maple is stepping in to fill the gap left by crypto lending giants like BlockFi and Celsius. Since launching, Maple has issued over $2.2 billion in loans, and now it’s bringing its transparent, blockchain-powered lending model to the East. The funding round was led by BlockTower Capital and Tioga Capital, along with several other crypto-focused investors.

As the DeFi space keeps growing, building a Defi lending platform is a smart way to tap into this booming sector and offer a valuable service to users, making it a potentially exciting investment opportunity.

Key Features of Top DeFi Lending Platforms Using Compound Protocol

DeFi lending platforms powered by the Compound protocol bring innovative features to decentralized finance. These platforms utilize Compound’s capabilities to provide users with transparent, secure, and efficient lending and borrowing solutions. Here are the key features with examples of platforms leveraging the Compound protocol.

1. Decentralized Lending and Borrowing

Platforms such as Instadapp and DeFi Saver enable users to lend and borrow cryptocurrencies without intermediaries, powered by Compound’s protocol. Instadapp provides an easy-to-use dashboard that simplifies borrowing positions, while DeFi Saver offers advanced management features for users to optimize their lending and borrowing activities.

2. Algorithmic Interest Rates

Compound’s dynamic interest rate model is integrated into platforms like Zapper and Yearn Finance, which adjust interest rates based on supply and demand. Zapper simplifies tracking and managing variable interest rates for users, while Yearn Finance automates asset allocation to optimize returns from Compound and other protocols.

3. Collateralized Loans

Platforms such as Oasis Borrow and Sturdy Finance enable users to borrow assets by locking collateral. Oasis Borrow integrates Compound to provide collateralized loans with flexible repayment terms. Similarly, Sturdy Finance allows borrowers to earn interest on their collateral while using it to secure loans, maximizing asset utility.

4. Governance Participation

StakeDAO and Boardroom utilize Compound’s governance features, empowering users to participate in protocol decisions. StakeDAO enables token holders to vote on proposals and upgrades, while Boardroom aggregates governance participation across multiple protocols, including Compound, for streamlined user engagement.

5. Multi-Asset Support

Platforms like Idle Finance and Cream Finance expand asset offerings by integrating Compound’s support for various cryptocurrencies. Idle Finance diversifies user portfolios by allocating funds across multiple Compound-supported assets, while Cream Finance includes exotic assets alongside traditional cryptocurrencies for broader lending opportunities.

Developing a DeFi Lending Platform Using Compound Protocol

Developing a DeFi lending platform leveraging the Compound protocol involves integrating blockchain technology, smart contracts, and user-focused features. Here are the nine steps that outline the process:

1. Define Platform Objectives and Features

The first step is to define the purpose of the platform and outline its core features. Key functionalities may include lending pools, dynamic interest rates, collateral management, governance tokens, and user dashboards. 

2. Select the Blockchain Network

Choose a blockchain network that supports smart contracts and has proven stability. Ethereum is a popular choice for DeFi platforms like Compound due to its robust ecosystem and compatibility with ERC-20 tokens. Other options include BSC, Polygon, or Avalanche, depending on scalability and transaction costs.

3. Integrate the Compound Protocol

The Compound protocol provides a ready-to-use framework for decentralized lending. Integrate its smart contracts to manage lending, borrowing, and collateralization processes. Compound’s open-source architecture allows developers to customize and build on top of its protocol.

4. Develop Smart Contracts

Customize and deploy smart contracts to handle core operations such as lending, borrowing, interest calculation, and collateral management. Ensure these contracts are secure and audited to prevent vulnerabilities. Use programming languages like Solidity for Ethereum-based platforms.

5. Build the User Interface

Design a user-friendly interface that enables seamless interaction with the platform. Features should include real-time asset data, loan requests, and portfolio management. Ensure compatibility across devices and browsers for maximum accessibility.

6. Establish a Token Economy

Introduce a token model to enhance platform functionality. Governance tokens allow users to vote on platform decisions, while utility tokens can incentivize participation. Define the tokenomics, including total supply, distribution, and reward mechanisms.

7. Implement Wallet Integration

Integrate cryptocurrency wallets such as MetaMask, Trust Wallet, or Coinbase Wallet to enable users to deposit, withdraw, and manage digital assets. Ensure multi-wallet compatibility and a seamless user experience.

8. Conduct Security Audits

Security is critical in DeFi platforms. Perform comprehensive smart contract audits to identify and fix potential vulnerabilities. Partner with trusted auditing firms and implement robust security measures, including multi-signature authentication and data encryption.

9. Launch and Iterate

Deploy the platform on the selected blockchain and conduct rigorous testing to ensure its functionality. Launch the platform with a marketing strategy to attract users. Collect feedback and continuously improve the platform by adding new features and optimizing performance.

Cost of Developing a DeFi Lending Platform Using Compound Protocol

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Development Stage	Details	Adjusted Cost Range (USD)
1. Research and Development	– Conduct market analysis and competitor reviews.- Explore the Compound’s protocol and technical requirements.- Develop a simple economic model.	$3,000 – $8,000
2. Smart Contract Development	– Build foundational smart contracts for lending, borrowing, and collateral management.- Integrate governance mechanisms if needed.- Conduct basic security reviews.	$5,000 – $15,000
3. Frontend Development	– Create a minimal yet intuitive UI using frameworks like React or Angular.- Integrate wallet support for MetaMask and WalletConnect.- Optimize for responsiveness.	$4,000 – $12,000
4. Backend Development	– Develop APIs for interaction with smart contracts and data services.- Design lightweight server infrastructure and basic data handling solutions.	$4,000 – $12,000
5. Core Features Implementation	– Enable lending and borrowing functionality with straightforward interfaces.- Add a basic dashboard for user portfolio and analytics.- Implement collateralization logic.	$5,000 – $20,000
6. Security and Testing	– Perform essential unit and integration testing.- Conduct security checks on smart contracts and interactions.- Refine features based on UAT feedback.	$2,000 – $8,000
7. Deployment and Maintenance	– Deploy to a testnet or mainnet like Ethereum.- Provide basic ongoing maintenance, including updates and minor fixes.- Host and monitor server infrastructure.	$3,000 – $10,000

Total Estimated Cost: $10,000 – $100,000

Factors Affecting the Cost of Developing a DeFi Lending Platform Using Compound

Several variable factors can significantly impact the overall development cost of a DeFi lending platform using Compound Protocol. These factors, often unique to the DeFi space, can influence the project’s timeline, resource allocation, and, ultimately, its total cost.

• Smart Contract Complexity: The sophistication of smart contracts, including their logic, security mechanisms, and integration with other protocols, can influence development time and costs. More complex contracts may require additional security audits and testing.
• Token Economics Design: The design of the platform’s token, its distribution mechanism, and its role in the platform’s governance can impact development efforts. Complex tokenomics models may require specialized expertise and careful consideration.
• Regulatory Landscape: The evolving regulatory environment for DeFi can introduce uncertainty and compliance costs. Businesses must stay updated on regulatory developments and ensure their platform adheres to applicable laws and regulations.
• Security Audits and Insurance: Given the high-value nature of digital assets, robust security measures are essential. Regular security audits and insurance coverage can add to the overall cost.

Top 5 DeFi Lending Platforms Built Using Compound Protocol

Here are the five defi lending platforms built using Compound protocols,

1. Compound Finance

Compound Finance is the most prominent DeFi lending platform built directly on the Compound protocol. It allows users to lend assets and earn interest or borrow assets by using other cryptocurrencies as collateral. The platform uses algorithmic interest rates based on supply and demand, enabling efficient market dynamics for both borrowers and lenders.

• Total Value Locked: Approximately $2.274 billion across various blockchains, with the majority on Ethereum at $2.145 billion.
• Annualized Revenue: As of recent data, Compound generates around $75 million annually from interest paid by borrowers.

2. Aavegotchi (GHST Lending)

Aavegotchi combines DeFi lending with gaming, utilizing the Compound protocol to allow users to stake assets and earn rewards. Participants can earn GHST tokens while accessing innovative gaming features, blending traditional DeFi functionalities with gamified user experiences.

• Market Capitalization: Approximately $64.62 million, indicating its growing relevance in the crypto space.
• Total Value Locked: Approximately $1.01 million, reflecting the liquidity available for lending and staking activities.

3. dYdX

dYdX is a decentralized exchange that also offers margin trading, lending, and borrowing. Built on Ethereum and utilizing the Compound protocol, dYdX allows users to trade and borrow various crypto assets while earning interest on their deposits. The platform focuses on providing advanced trading features alongside lending options.

• Daily Trading Volume: Often exceeds $500 million, highlighting its popularity among traders.
• Market Capitalization: Approximately $1.2 billion, making it one of the larger platforms in the DeFi ecosystem.

4. Fulcrum

Fulcrum is a decentralized lending and borrowing platform that uses the Compound protocol for lending and borrowing functionalities. By leveraging Compound’s liquidity, Fulcrum enables users to access crypto-backed loans while also allowing them to earn interest on assets they lend to the platform. Fulcrum targets both retail and institutional users looking for decentralized finance solutions.

• Total Value Locked: Approximately $100 million, indicating the amount of collateral users have deposited for lending and borrowing.
• User Engagement: Fulcrum has seen steady growth in user participation, particularly among those seeking decentralized finance solutions.

5. MakerDAO

MakerDAO, while primarily known for its DAI stablecoin, utilizes the Compound protocol in its ecosystem to offer decentralized lending services. Users can collateralize assets to generate DAI, and the platform integrates Compound to allow users to earn interest on their collateral. MakerDAO helps extend the capabilities of Compound’s protocol, particularly in stablecoin-based lending.

• DAI Supply Metrics: Over $5 billion worth of DAI in circulation, showcasing its extensive use in the DeFi ecosystem.
• Market Capitalization of MKR Token: Approximately $1 billion, reflecting MakerDAO’s influence in decentralized finance.

Conclusion

What I think about a DeFi Lending Platform powered by Compound is that it offers a wide range of benefits for both individuals and businesses. For individuals, it’s a game changer because it provides a decentralized and transparent way to lend and borrow cryptocurrencies. I can earn interest on idle assets or access flexible loans, all without relying on traditional financial intermediaries.

For businesses, I see an incredible opportunity to capitalize on this growing market. By developing similar platforms, companies can offer innovative financial services that attract new customers. They can also generate revenue through fees and interest, positioning themselves as leaders in the evolving DeFi space.

Looking to Develop a DeFi Lending Platform Using Compound?

With Compound Protocol, you can harness the power of decentralized finance and build a seamless borrowing and lending experience for users. At Idea Usher, we specialize in DeFi development and have over 500,000 hours of coding experience under our belt. Our expert team is here to guide you through every step—whether it’s designing user-friendly interfaces, developing smart contracts, or ensuring your platform is secure and efficient. Let’s work together to create a secure, cutting-edge platform that transforms the world of crypto lending!

FAQs

Q1: How to Develop a DeFi Lending Platform?

A1: Developing a DeFi lending platform involves several crucial steps. Start by choosing a reliable decentralized protocol like Aave or Compound to build on. Next, design and develop secure smart contracts that will manage lending, borrowing, and collateral. The user interface should be simple and intuitive, ensuring a seamless experience for non-technical users. The backend needs to be robust, scalable, and secure, while integrating with popular crypto wallets is essential for easy transactions.

Q2: How DeFi Lending Platforms Make Money?

A2: DeFi lending platforms typically make money through the interest borrowers pay on the loans they take out. A portion of this interest is given to liquidity providers as a reward for supplying funds to the platform. In addition, the platform might charge small fees for each transaction or take a percentage of the interest earned by lenders. Some platforms also issue governance tokens, which can appreciate in value over time, creating another potential revenue stream.

Q3: What Are the Features of a DeFi Lending Platform?

A3: A DeFi lending platform generally offers several key features, including decentralized governance, which gives users a voice in decisions about the platform’s development. Smart contracts automate lending, borrowing, and collateral management without the need for intermediaries. Liquidity pools allow users to deposit funds and earn interest. The platform often includes tools to manage risk and protect both lenders and borrowers. 

Q4: What is the Cost of Developing a DeFi Lending Platform?

A4: The cost of developing a DeFi lending platform can vary significantly depending on the complexity of the platform, the number of features you want, and the expertise of the development team. The main costs typically involve smart contract development, frontend and backend design, security audits, and legal compliance. Additionally, testing and ongoing maintenance will add to the overall cost. Marketing efforts to promote the platform after its launch can also be a significant expense.