Compound III (codenamed Comet) is a redesigned lending protocol described in Compound Labs’ 2022 technical reference, representing a significant departure from Compound V2’s pooled multi-asset model. Where V2 allowed any supported asset to be borrowed or used as collateral in a single shared pool, Compound III isolates risk by creating single base asset markets: one borrowable asset per market deployment (e.g., a USDC market, an ETH market) with collateral assets that earn no interest.

The simplification was deliberate: after observing V2 exploits that relied on cross-asset price manipulation, Compound Labs concluded that the multi-asset pool design created systemic risk not present in isolated markets.

> Documentation: docs.compound.finance

> Source code: github.com/compound-finance/comet

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Publication and Context

Compound V2 (launched 2019) was a landmark DeFi primitive: cTokens, COMP governance distribution, and algorithmic interest rates. By 2022, V2’s design had some known weaknesses:

• Shared risk pool: All supplied assets in V2 were pooled; a hack or a sharp drop in one collateral could affect all borrowers
• Supplier-side yield on everything: Suppliers of WBTC, LINK, and other collateral earned interest — this was economically strange (why should passive collateral earn yield?)
• No market isolation: DAI, USDC, USDT, wBTC, ETH all in one market; an oracle attack on any one asset affected the whole protocol

Compound III’s response: strict market isolation (one borrowable asset per market) and explicit acknowledgment that collateral risk should be separate from lending risk.

The first Compound III market (USDC on Ethereum) launched November 2022. By 2024, Compound III had markets on Ethereum (USDC, ETH), Polygon (USDC), Arbitrum (USDC), Base (USDC), and others.

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Single Base Asset Market Design

In Compound III, each deployed Comet instance has:

• Exactly one base asset — the asset that can be borrowed (e.g., USDC)
• A list of approved collateral assets (e.g., wBTC, wETH, LINK)
• Each market is entirely independent — supplying USDC to the ETH Comet is separate from the USDC Comet

For Suppliers (Base Asset)

• Receive continuously accruing interest (the supply rate)
• Can withdraw at any time (subject to available liquidity)
• Are direct creditors to borrowers

For Collateral Suppliers

• Do NOT earn interest on collateral — wBTC collateral earns 0% yield
• Collateral enables them to borrow the base asset (USDC)
• Collateral can be seized for liquidation if their position becomes undercollateralized

This “no interest on collateral” design simplifies interest accounting significantly: the system only needs to compute interest for base asset supply/borrow, not for every collateral asset.

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Interest Rate Model

Compound III uses a two-slope (kinked) interest rate model for the base asset:

• Below the kink (e.g., 80% utilization): low borrow rate (e.g., 2%)
• Above the kink: steeply rising borrow rate (e.g., 20%+)
• Supply rate = borrow rate × utilization ratio (suppliers receive the interest paid by borrowers)

Utilization: totalBorrows / totalSupply — when utilization is high, interest rates increase to attract more supply and reduce borrow demand.

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Accounts and Delegation

Compound III introduces a flexible account management system:

Principal account: The base borrower/supplier account.

Manager delegates: Accounts can grant manager privileges to other addresses:

• A manager can supply, borrow, withdraw on behalf of the principal
• A manager can invoke any principal action
• Useful for: automated strategies, yield managers, protocol integrations

Asset delegate: A restricted version — only permissions to specific asset transfers.

This delegation system allows external protocol integrations (DeFi strategies, yield optimizers) to manage Compound positions programmatically.

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Liquidation

When a borrower’s position becomes undercollateralized (collateral value / borrow value falls below the liquidation threshold for their collateral):

1. Any liquidator can call absorb() on the Comet contract
2. The Comet absorbs the borrower’s position into its own balance sheet at a discount (buying the collateral below market price)
3. The Comet then sells the absorbed collateral back to the market via buyCollateral() — anyone can purchase the discounted collateral from the Comet

Rationale: By absorbing then reselling (rather than direct third-party liquidation), Compound III eliminates gas-war liquidation dynamics — the protocol always absorbs at a known price; external parties buy at a known discount without competing.

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Key Technical Properties

Property	Value
Market structure	One base asset per Comet instance
Collateral interest	None (collateral earns 0%)
Interest model	Two-slope kinked (utilization-based)
Liquidation	Protocol absorbs then resells at discount
Governance	COMP token (Compound DAO)
Oracle	Chainlink (primary)
Account delegation	Human-readable manager delegates

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COMP Rewards

Compound III continues distributing COMP tokens as yield subsidies to suppliers and sometimes borrowers:

• COMP is distributed per-market at a Governance-set rate
• Users claim accrued COMP rewards by calling the reward contract
• COMP rewards create additional APY beyond interest income

COMP distribution declines over time as the token becomes fully distributed; markets eventually depend solely on interest income for supplier yield.

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Reality Check

Compound III’s isolated market design is genuinely safer than V2’s pooled design:

• No cross-market contagion (a problem in V2 when LUNA-involved positions cascaded)
• Simpler risk modeling (one base asset to monitor per market)
• Protocol absorption of undercollateralized positions reduces liquidation gas competition

Practical challenges:

• Collateral earns nothing: Users who want to earn yield on WBTC while using it as collateral on Compound III receive 0%; they must choose between yield (supply WBTC elsewhere) and borrowing capacity (supply as Compound collateral). Aave V3 allows collateral to earn yield.
• Smaller ecosystem: Despite Compound’s pioneering role in DeFi, Aave V3 captured significantly more TVL by 2023–2024. COMP token underperformed.
• Governance participation: COMP governance has low participation rates; a small number of large delegates (a16z, Polychain) control most votes.

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Legacy

Compound V2 invented DeFi lending as we know it (cTokens, algorithmic interest rates, governance mining). Compound III’s isolated market design influenced later protocols including Euler v2 (market isolation), Morpho Blue (minimal isolated lending primitives), and Aave V3’s Isolation Mode. The “absorb then resell” liquidation design is a novel contribution to liquidation mechanism design.

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Related Terms

• Lending Protocol
• Utilization Rate
• Liquidation
• cToken
• Compound Whitepaper
• Aave V3 Whitepaper

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Research

• Compound Labs. (2022). Compound III (Comet) Technical Reference. docs.compound.finance.

— Primary specification; describes the single-base-asset architecture, interest rate model, collateral management, account delegation, and absorption-based liquidation.

• Leshner, R., & Myers, G. (2019). Compound: The Money Market Protocol. compound.finance.

— Compound V2 whitepaper; the predecessor; reading both illustrates the deliberate design simplification from V2 to V3.

• Gudgeon, L., Werner, S., Perez, D., & Knottenbelt, W.J. (2020). DeFi Protocols for Loanable Funds: Interest Rates, Liquidity and Market Efficiency. ACM AFT 2020.

— Academic analysis of compound-style lending interest rate models; kinked utilization curves studied in context of actual market data.