Hello, dear sirs and madams who read this post. Compound and Aave were treated as similar protocols. But today I am going to prove the opposite.

Terminology

MM- Money market or lending/borrowing protocol.

Introduction

WOOF! had an opportunity to work and contribute to the Compound Finance protocol. Such experience gave us an unmeasurable understanding of how LB protocols work under the hood, which allowed us to write this post.

What is Money Market protocol?

In our world, where the financial system has existed for a hundred years everything seems relatively clear. You come into the bank, provide your personal data, and obtain a loan you would use for your purposes. In this case, the government guarantees banks to find you and seize all your property. Meanwhile, you are “relatively anonymous” in web3.

I used the term "relatively anonymous" since RPC providers could track your location when you send transactions or you could use services that require login with your wallet and then use cookies and other information.

In the crypto world, you have assets like ETH that have a specific price. Cryptocurrency is similar to your assets in real life. Instead of coming to the bank, you use MM protocol to provide or borrow liquidity (liquidity is a smart synonym for crypto assets)

MM headliners

In the real world, we have 2 headliners in fiat transfering - Visa and Mastercard. The same in crypto - Compound and Aave are bosses in MM.

Difference between Compound and Aave

Compound operates by allowing users to deposit assets as collateral, securing their ability to borrow base assets like USDC, ETH, and soon USDT. However, it's important to clarify what collateral means in this context. Collateral refers to assets provided by users to secure their borrowings; it acts as a form of security for lenders. While collaterals themselves do not earn interest, they are vital for accessing liquidity within the protocol.

Aave has a different but similar to the Compound concept. In Compound, you bring collateral to take a loan, collateral goes in a separate “safe place”(pool) which allows the protocol to liquidate if the collateral price significantly drops. As for Aave, collaterals are not going to a separate “safe place” but can be borrowed by other users for other collateral. This means that even if you borrow, you still can earn fees because your collateral will be borrowed by someone else.

Overall, while both Compound and Aave serve as cornerstones of DeFi MMs, their differing approaches to collateralization and asset availability highlight the nuances within the decentralized finance landscape.

Extra rewarding

Compound always looking for involving new users with high APRs. The protocol has a Reward contract which encourages users to provide and borrow with a COMP token.

Governance

Compound has COMP governance token whereas Aave has Aave as a governance token. Both of them have a similar utility - access to the DAO to define the direction of the growth. Governance provides a proposal pipeline where new initiatives could be deployed fully on-chain.

How to become a part of the protocol?

Both protocols are open source. However, it is not that easy to just have a brilliant idea and implement it using PR. Here is the plan for how to make the process better:

• Come up with the cool idea.
• Create a forum post and ask for community feedback.
• Receive the community's positive feedback.
• Implement features and share PR.
• Pass security audit.
• Run the governance proposal.
• Reach voting success.

Summary

Both of the protocols have pros and cons. AAVE is preferable for users, who want to earn rewards for providing collaterals, but is a bad choice for those, who want to borrow, as 1. it has a higher borrow APR than Compound and 2. The fee is charged in collaterals, which is more valuable than stables. In contrast, Compound finance does not have fee rewards for collaterals but suggests better conditions for borrowers. Also, the Compound provides extra rewards in the COMP token, which decreases the borrow APR and increases the supply APR.