What is cETH? Currency from the Ethereum lending pool of Compound

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

The overall function of the protocol is activated through a multi-token model, where the main token, COMP, acts as a governance and incentive token, while some ‘cTokens’ are used to represent investment ownership rights. One of these cTokens is cETH, a token used for borrowing through the Ether-based pool on Compound.

What is cETH?

When users lend digital money to the Compound protocol, they can choose one of the lending pools depending on the type of currency or token they want to lend. The largest pool is based on lending with Ether. When you deposit your funds in Ether, you will receive a certain amount of cETH (the pool’s token based on Ether).

While your initial investment is still held in Ether, it is secured through cETH and you will earn interest in cETH. Your cETH balance can be freely traded, although it may not be advisable to use this token for active trading as it represents your stake in the protocol.

Your initial Ether fund cannot be traded or transferred while your fund is held on the protocol and earning interest. When you decide to withdraw your investment and leave the protocol, the cETH you own will be converted back to Ether, and your fund will be returned in the original currency - Ether.

cETH is not pegged to ETH according to smart contract rules, but the cETH/ETH exchange rate has remained very stable since the token was introduced in mid-2020. Throughout its presence in the market, it has been traded at a ratio of about 1/0.02 cETH/ETH.

cETH is based on the ERC20 token standard. ERC20 tokens are tokens that can replace the standard on the Ethereum blockchain.

cETH is not the only cToken on Compound. Borrowing and lending can be done in several different pools. Currently, the second largest pool after Ethereum is the pool based on DAI, the stablecoin of the Maker protocol. When you lend crypto using DAI to this pool, you will receive cDAI tokens and accumulate interest in this cToken. Similarly, lending other coins will yield tokens with the naming convention cCurrencyOfThePool, for example: cLINK, cUSDT, and so on.

How is cETH different from COMP token?

COMP is the primary token across the entire Compound platform. It is used as a governance token, allowing holders to vote on important issues related to the operation and future direction of the platform.

COMP is also used as a marketing tool to encourage more active participation on the platform. For example, users borrowing funds on Compound will be rewarded with a certain amount of COMP.

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

While COMP, like most cryptocurrencies, has a clearly defined maximum supply and a relatively stable circulating supply, both at 10 million tokens, cETH has a flexible supply that depends on lending activity in Compound’s Ether pool. As the pool is lent and withdrawn from, cETH tokens are created and destroyed.

Should I trade with my cETH?

Compound’s cTokens, including cETH, can be freely traded by their holders. Nothing in the protocol’s smart contract prevents you from selling your cETH on exchanges.

However, you should not use your cETH to trade cryptocurrencies. The nature of this token makes it best suited to hold as collateral for your lending funds and to accumulate interest from your investments.

Because cETH is not a widely traded digital asset, the gas/transaction fee for cETH transactions may be higher than for more popular cryptocurrencies such as ETH or COMP.

Is cETH worth buying?

The interest rates for borrowing into the pools based on Compound’s cTokens are always fluctuating and vary between pools. These interest rates will be an important factor in determining whether it is worth it for you to borrow your ETH into Compound and receive cETH in the process or not.

Currently, the cETH pool offers an annual interest rate of 0.13%, which is not very attractive. The highest interest rates are currently offered by the USDC pool (3.13%) and the DAI pool (2.81%), but these rates are always subject to change based on borrowing and lending activities.

Despite the low interest rate, the cETH pool is currently the largest pool on Compound in terms of lending supply. A total of nearly $6 billion is currently being lent to this pool. The fact that Ether is the fundamental currency of the Ethereum platform and holds a large market share in the cryptocurrency world is perhaps the main reason for the popularity of lending to the cETH pool.

The specific cToken/pool interest rate on Compound largely depends on the total amount borrowed and the total amount lent in that coin. Currencies with low supply from lenders and high demand from borrowers will provide better interest rates.

ETH is the most borrowed cryptocurrency on this platform. However, it is not among the top 3 most borrowed cryptocurrencies. Despite nearly 6 billion dollars of ETH being borrowed on Compound, only about 330 million dollars are borrowed. In other words, the demand for borrowing ETH is relatively low compared to the supply. The three most borrowed currencies currently are USDC, DAI, and USDT. All three are stablecoins.

High supply and low demand for ETH are the main reasons why the interest rate of the cETH pool is only 0.13%. Due to the huge supply of ETH in the market, this situation is unlikely to change significantly in the near future.

Furthermore, unlike the most borrowed currencies on Compound, ETH is not a stablecoin, so it is not the most popular type of cryptocurrency borrowed on the platform.

These factors ensure that the interest rates provided by the cETH pool are difficult to compare with stablecoin pools. However, the total supply of cETH will still remain strong due to the number of investors willing to borrow in ETH.

Conclusion

cETH is an ERC20 token used to represent your borrowing share on the Compound platform. Although not limited within the platform environment, meaning you can withdraw cETH from Compound and trade freely, it is primarily used to secure your borrowing amount and accumulate interest from it.

While COMP is a governance and incentive token on the entire Compound platform, the function of cETH is limited to the ETH lending pool of the protocol. Along with cETH, there are nearly 20 other cTokens on Compound, each allowing lending in its corresponding pool.

Due to the designed functionalities of cETH, active trading with this token outside of Compound is very limited.

The price movement of cETH largely reflects the price changes of ETH, although cETH is not officially linked to ETH. The cETH/ETH ratio never deviates too much from a very narrow range of about 1/0.02. This ratio is likely to continue in the future.

Unless there are significant changes to the business model at Compound, or a very large market development that affects the protocol, cETH will be actively used on Compound for borrowing ETH but will have few applications outside of the platform.