What Are Lock Tokens on Compound?
Locking tokens on Compound refers to supplying cryptocurrency assets to Compound Finance’s decentralized lending protocol. When you lock tokens, you convert them into cTokens (like cETH or cDAI), which serve dual purposes: they accrue interest over time and can be used as collateral for borrowing other assets. This process “locks” your tokens within Compound’s smart contracts until you choose to withdraw them.
Why Lock Tokens on Compound?
Locking tokens unlocks powerful DeFi opportunities:
- Earn Passive Income: Supplied assets earn variable APY based on market demand.
- Borrowing Power: Locked tokens act as collateral for loans (up to 75% LTV ratio).
- Liquidity Mining: Some pools offer COMP token rewards for participation.
- Capital Efficiency: Use idle assets productively without selling them.
Step-by-Step Tutorial: Locking Tokens on Compound
Prerequisites: Web3 wallet (MetaMask), ETH for gas fees, and supported ERC-20 tokens.
- Connect Your Wallet: Visit app.compound.finance and link your wallet via the top-right corner.
- Navigate to ‘Supply’: Select the asset you wish to lock from the dashboard.
- Approve Token Access: Authorize Compound to interact with your tokens (one-time gas fee).
- Lock Your Tokens: Enter the amount to supply and confirm the transaction. You’ll receive equivalent cTokens.
- Track Earnings: Monitor accrued interest in your dashboard under ‘Supply Balance’.
Managing Locked Tokens
- Withdrawals: Convert cTokens back to original assets anytime (subject to liquidity).
- Collateralization: Toggle collateral status per asset for borrowing.
- Interest Rates: Rates adjust algorithmically based on supply/demand.
Key Benefits of Using Compound
Compound outperforms traditional options with:
- Real-time interest compounding (earned every Ethereum block)
- No minimum lockup periods or withdrawal penalties
- Transparent rates visible directly in-app
- Non-custodial control of assets
Risks and Security Considerations
- Smart Contract Risk: Audited but not immune to exploits
- Liquidation Risk: Collateral may be sold if loan value exceeds thresholds
- Impermanent Loss: Potential when supplying volatile assets
- Oracle Failures: Incorrect price feeds could trigger unwarranted liquidations
Frequently Asked Questions
Q: What tokens can I lock on Compound?
A: Supported assets include ETH, DAI, USDC, WBTC, UNI, and COMP. Check the app for updates.
Q: How often is interest paid?
A: Interest compounds every ~15 seconds (per Ethereum block) and is reflected in cToken balances.
Q: Can I lose my locked tokens?
A: Only through liquidation (if borrowing) or protocol failure. Proper collateral management minimizes risks.
Q: Are there fees for locking tokens?
A: Only Ethereum gas fees for transactions. Compound takes no commission from interest.
Q: How do I maximize earnings?
A: Supply high-demand assets during market volatility and monitor rate fluctuations in the app.
