Compound is one of the original decentralized finance (DeFi) protocols, allowing anyone to lend or borrow cryptocurrencies without intermediaries. Founded in 2018 by Robert Leshner, Compound pioneered the algorithmic interest rate model: supply and demand for each asset determines rates automatically. The protocol’s COMP governance token, launched in June 2020, ignited “DeFi Summer” — a period of explosive growth in DeFi protocols and yield farming. Compound remains a foundational DeFi protocol even as newer competitors have emerged.
How It Works
Supplying (Lending)
A user deposits an asset (e.g., USDC, ETH, DAI) into Compound’s smart contract. In return, they receive cTokens — interest-bearing receipt tokens. For example, depositing ETH gives you cETH. cTokens continuously accrue value as interest accumulates. When you redeem your cTokens, you receive the original deposit plus earned interest.
Borrowing
To borrow, users first supply collateral. Compound then allows borrowing up to a collateral factor of the supplied value (e.g., ETH has a 75% collateral factor — $1,000 ETH lets you borrow up to $750 in other assets). Borrowed assets accrue interest continuously.
Liquidation
If the value of borrowed assets rises relative to collateral (or collateral value falls), the account becomes under-collateralized. Anyone can liquidate the position: they repay some of the borrowed amount and receive collateral at a discount (liquidation incentive, typically 8%).
Algorithmic Interest Rates
Each market (asset) has its own interest rate model, typically based on utilization ratio (borrows / total supply). Low utilization = low rates; high utilization = high rates, incentivizing more suppliers to join and restoring equilibrium.
COMP Governance
COMP holders vote on: adding new markets, changing collateral factors, updating interest rate models, and spending from the Compound treasury.
Key Features
| Feature | Description |
|---|---|
| cTokens | Interest-bearing receipts (cUSDC, cETH, cDAI) |
| Algorithmic rates | Rates auto-adjust with supply/demand |
| No KYC | Permissionless; only wallet needed |
| Liquidation bot ecosystem | Automated bots enforce collateral ratios |
| Multi-chain | Ethereum (v2), Arbitrum, Base (v3) |
| Compound III (Comet) | Redesigned single-collateral base asset model |
Compound v2 vs. v3 (Comet)
Compound v2: Multi-asset market where any listed asset can be borrowed or used as collateral. COMP rewards distributed based on supply/borrow.
Compound III (Comet, 2022): Redesign to reduce complexity and risk. Each Comet has a single borrowable base asset (e.g., USDC). Users can supply multiple collateral assets but only borrow the base asset. Simplifies risk modeling and reduces attack surface.
History
| Year | Event |
|---|---|
| Sep 2018 | Compound v1 launches |
| May 2019 | Compound v2 launches; cToken model introduced |
| May 2020 | COMP governance token created |
| Jun 2020 | COMP distribution begins; yields approach 100% APY on some assets; DeFi Summer ignites |
| Sep 2021 | Bug in COMP distribution code causes $90M in COMP to be accidentally claimable; Leshner publicly asks recipients to return tokens |
| Aug 2022 | Compound III (Comet) launches |
| 2022–2023 | Various governance proposals and yield wars; TVL declines with bear market |
| 2023–2024 | Expansion to Arbitrum and Base; Compound DAO actively governs |
Common Misconceptions
“You need COMP to use Compound.” COMP is for governance only. Anyone can supply or borrow on Compound without holding COMP.
“Compound is completely risk-free.” Smart contract risk, oracle manipulation risk, and collateral devaluation risk all apply. The 2021 $90M COMP distribution bug demonstrated that even audited code can have critical flaws.
Criticisms
- The 2021 COMP distribution bug ($90M sent to wrong addresses) severely damaged confidence in the protocol’s code quality
- COMP governance has suffered from low participation and plutocratic concentration (whales dominate votes)
- Newer protocols (Aave, Euler, Morpho) have captured significant market share
- Interest rates sometimes fall to near-zero, reducing appeal for suppliers
Social Media Sentiment
Compound is respected as a DeFi pioneer but less exciting in the community than newer protocols. COMP governance discussions are active in the Compound Forum. The 2021 bug generated intense negative coverage. Compound’s steady, measured development is viewed positively by traditionalists and negatively by “degen” users seeking higher APYs elsewhere.
Last updated: 2026-04
How to Use
- Visit compound.finance and connect your wallet (MetaMask, Ledger)
- To supply: select an asset, approve and deposit, receive cTokens
- To borrow: supply collateral first, then borrow a supported asset within your limit
- Monitor your health ratio to avoid liquidation
- Purchase COMP on a DEX or centralized exchange to participate in governance
Related Terms
Sources
Leshner, R., & Hayes, G. (2019). Compound: The Money Market Protocol. Compound Whitepaper.
Perez, D., Werner, S. M., Xu, J., & Livshits, B. (2021). Liquidations: DeFi on a Knife’s Edge. Financial Cryptography Conference.
Qin, K., et al. (2021). An Empirical Study of DeFi Liquidations. ACM CCS.
Werner, S. M., et al. (2022). SoK: Decentralized Finance (DeFi). 4th ACM Conference on Advances in Financial Technologies.
Gudgeon, L., et al. (2020). DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency. SSRN.