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What Is cETH: The Currency of Compound’s Ethereum Lending Pool

Compound (COMP) protocol is one of the leading decentralized finance (DeFi) projects focused on lending and borrowing. The platform allows users to lend their crypto funds to earn interest.

The protocol’s overall functionality is enabled via a multi-token model whereby the main token, COMP, acts as a governance and incentive token, while a number of “cTokens” are used to denote investment ownership rights. One of these cTokens is cETH, the token used to enable lending via the Ether-based pool on Compound. cETH has a total supply of nearly 90 million tokens at the price of $66 per token, with a market cap of nearly $6 billion.

ceth

What Is cETH?

When users lend crypto to the Compound protocol, they can choose one of several lending pools depending on the coin/token they want to lend their funds to. The largest pool is based on lending in Ether. When you deposit your funds in Ether, you are given a certain amount of cETH (the token of the Ether-based pool).

While your original investment is still held in Ether, it is secured via cETH and you earn interest in cETH. Your cETH funds can be freely traded, although it is perhaps wise not to use the token for active trading, since it represents your stake in the protocol.

Your original Ether funds cannot be traded or transferred while your funds are held on the protocol and earn you interest. When you decide to redeem your investment and exit the protocol, cETH you own is converted to Ether and your funds are paid back to you in the original currency — Ether coins.

cETH is not pegged to ETH by smart contract rules, but the cETH/ETH exchange rate has stayed very stable since the token was introduced in mid-2020. During the entire time cETH has been on the market, it traded at a rate of around 1/0.02 cETH/ETH.

cETH ETH rate
cETH/ETH rate from September 2020 to September 2021 (Source: CoinGecko.com)

cETH is based on the ERC20 token standard. ERC20 tokens are the standard fungible tokens on the Ethereum blockchain.

cETH is not the only cToken on Compound. Lending and borrowing is possible in several pools. At the moment, the second largest pool after Ethereum is based on DAI, the Maker protocol’s stablecoin. When you lend crypto in DAI to this pool, you get cDAI tokens and accumulate interest in this cToken. Likewise, lending in other coins earns you tokens with a naming convention cCurrencyOfThePool, e.g. cLNK, cUSDT, etc.

How Does cETH Differ From the COMP Token?

COMP is the platform-wide main token on Compound. It is used as a governance token, i.e. it allows the token holders to vote on important issues with regard to the platform’s operations and future direction.

COMP is also used as a marketing tool to incentivize more active participation on the platform. For example, users who borrow funds on Compound are rewarded with some amount of COMP.

On the other hand, cETH acts as a token representing your investment held in the lending pool. Your interest also accrues in cETH.

While COMP, as most cryptocurrencies, has a clearly set maximum supply and relatively stable circulating supply, both at 10 million tokens, cETH has a dynamically changing supply based on lending activity in the Ether pool of Compound. As funds are lent to and withdrawn from this pool, cETH tokens are created and destroyed.

Should I Trade With My cETH?

Compound’s cTokens, including cETH, can be freely traded by their owners. There is nothing in the protocol’s smart contract that prevents you from selling your cETH on exchanges.

However, it is not recommended to use your cETH for active crypto trading. The nature of the token makes it most suitable to hold it as a guarantee of your lending funds, and to accrue interest from your investment.

Since cETH is not a widely traded crypto asset, gas/transaction fees for cETH transfers can also be higher than for the more commonly traded cryptos, such as ETH or COMP.

Is cETH Worth Acquiring?

Interest rates for lending to Compound’s cToken-based pools fluctuate constantly and differ between each pool. These interest rates will be an important factor in determining if it is worth (for you) to lend your ETH to Compound, and acquire cETH in the process.

Currently, the cETH pool offers an uninspiring annual interest rate of 0.13%. The highest rates are currently offered by the USDC pool (3.13%) and the DAI pool (2.81%), but these rates are constantly changing in line with the lending and borrowing activity.

Despite the low interest rate, the cETH pool is currently the largest one on Compound as measured by funds lent. A total of nearly $6 billion is currently lent to the pool. The fact that Ether is the underlying currency of the Ethereum platform and holds a massive market share in the world of cryptocurrency is likely the key reason for the popularity of cETH pool lending.

The specific cToken/pool interest rate on Compound largely depends on the total amount lent and total amount borrowed in that currency. Currencies with lower supply from lenders and higher demand from borrowers offer better rates.

Top 3 Lending and Borrowing Cryptocurrencies on Compound
Top 3 Lending and Borrowing Cryptocurrencies on Compound as of September 11 2021 (Source: Compound.finance)

ETH is the top crypto being lent on the platform. At the same time, it is not even in the top 3 of the borrowed cryptos. While nearly $6 billion of ETH is lent on Compound, only around $330 million is borrowed. In other words, the demand for borrowing in ETH is relatively very low compared to the supply. The top 3 borrowed currencies are currently USDC, DAI, and USDT. All three are stablecoins.

The higher supply and the lower borrower demand for ETH are the main reasons for the cETH pool’s measly interest rate of 0.13%. Given ETH’s gigantic supply numbers on the market, this situation is unlikely to drastically change in the foreseeable future.

Moreover, unlike the top borrowed currencies on Compound, ETH is not a stablecoin, and therefore, is not the most desired cryptocurrency by the platform’s borrowers.

These factors ensure that the interest rates offered by the cETH pool are unlikely to match those offered by the stablecoin pools. Yet, the overall supply of cETH will remain strong given the number of investors willing to lend in ETH.

cETH Price History

Since cETH is linked to ETH by the algorithm of Compound, cETH’s price trajectory largely mirrored that of ETH. Given that 2021 has been positive for ETH, cETH also enjoyed consistent growth this year.

Price of cETH
Price of cETH from September 2020 to September 2021 (Source: CoinMarketCap.com)

First launched in mid-2020, cETH traded within the tight range of $6 to $8 until the end of the year. In early 2021, it increased sharply to over $30. It steadily gained ground throughout the year and now trades at $66.

What Is the Future of cETH?

cETH’s future price will be directly tied to ETH’s performance. While the token is not officially pegged to ETH, the nature of the algorithm on Compound ensures that the cETH/ETH rate is unlikely to deviate by any more than a tiny amount.

Independent trading with cETH away from Compound is also likely to stay very low. The token’s purpose of securing lending funds on the protocol makes it a poor candidate for active crypto swapping.

cETH is likely to stay as the cToken with the highest supply on Compound simply because there are a lot of individual and institutional investors willing to lend all that ETH on their hands. Unless there is a major market change leading to a sharp increased demand for ETH borrowing, the cETH lending pool at Compound will offer lower interest rates compared to some other pools on the platform.

Unless there is a complete overhaul of the lending and borrowing system at Compound, cETH will remain on the market to underpin Compound’s largest lending pool.

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Conclusion

cETH is an ERC20 token used to represent your lending stake on the Compound platform. While it is not restricted to the platform’s environment, i.e. you can transfer your cETH away from Compound and freely trade it, it is largely used to secure your lending amount and to accrue interest from it.

While COMP is the platform-wide governance and incentive token on Compound, cETH’s function is restricted to the ETH lending pool of the protocol. Along with cETH, there are close to 20 other cTokens on Compound, each enabling lending within its respective pool.

Due to the intended functionality of cETH, active trading with this token away from Compound is very limited.

Price movements of cETH largely mirror ETH price changes, although cETH is not officially pegged to ETH. The cETH/ETH rate never deviated much from a very tight range around 1/0.02. This rate is likely to continue in the future.

Unless there is a substantial business model change at Compound, or a very drastic market development affecting the protocol, cETH will be actively used on Compound for ETH lending but will have limited use outside of the platform.


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