Compound

Compound is an open-source decentralized lending protocol on Ethereum, launched in 2018. It allows users to supply supported ERC-20 tokens to protocol-managed money markets and earn interest, or to borrow tokens by posting over-collateralized positions against approved collateral assets. Interest rates on Compound are determined algorithmically based on the utilization rate of each market — the ratio of borrowed assets to total supplied assets — adjusting continuously without requiring manual price setting or counterparty negotiation

Compound has gone through multiple protocol generations. The initial deployment used a multi-asset pooling model where suppliers received cTokens — interest-bearing ERC-20 wrappers representing a share of the supplied pool. Compound III, also referred to as Comet, is the current protocol generation and uses a simplified single-base-asset structure per deployment, with one base token available for borrowing and separate approved assets serving as collateral for over-collateralization

The primary actions on Compound are supply and borrow. Suppliers deposit a supported ERC-20 asset into a Compound market and accrue interest as the market is utilized by borrowers. As borrowing demand increases relative to total supply, the utilization rate of the market rises and the interest rate adjusts upward — rewarding suppliers for providing liquidity at periods of high demand while creating a market-based signal for borrowers to reduce their positions when rates become elevated

Borrowers interact with Compound by posting approved collateral assets and drawing a loan against that collateral within the allowed borrowing limit, which is determined by the collateral factor assigned to each supported asset. Each collateral type carries a specific collateral factor — set through on-chain governance — representing the fraction of its deposited value that may be borrowed against. Accounts where the borrowed value approaches or exceeds the allowable threshold become eligible for liquidation by external actors through a defined on-chain liquidation mechanism

Compound's interest rate model calculates supply and borrow rates for each money market based on current utilization — the proportion of the total supplied pool that has been borrowed at a given point in time. When utilization is low, rates are reduced to attract borrowers and increase market activity. When utilization is high, rates rise to incentivize new suppliers and encourage existing borrowers to reduce their exposure. This continuous algorithmic adjustment operates entirely on-chain without any centralized administrator setting or updating rates manually

Compound III (Comet) redesigns the protocol structure relative to the original multi-asset pool model by organizing each deployment around a single base asset — the token available for borrowing — alongside a separate set of approved collateral tokens. Borrowers supply whitelisted ERC-20 assets as collateral to borrow the base token, but cannot borrow collateral tokens themselves. This structure provides cleaner risk isolation between deployments and allows each Comet market to be governed and parameterized independently

The COMP governance token gives holders the ability to propose and vote on changes to protocol parameters, including interest rate models, collateral factors, collateral asset listings, and protocol contract upgrades. Proposals are submitted on-chain and pass through a defined voting period and timelock before implementation. This on-chain governance structure ensures that parameter changes are publicly auditable and require token-weighted majority approval before taking effect — no single administrative key controls protocol-level configuration

All Compound smart contracts — including the Compound III Comet contracts — are open-source and publicly available on GitHub under the compound-finance organization. The open codebase enables third-party developers to inspect protocol logic directly, integrate against the contract ABI, and build on top of Compound's lending infrastructure. The Compound III repository at github.com/compound-finance/comet is the canonical reference for the current protocol generation's on-chain implementation

Compound supports a range of DeFi use cases across its money markets: ERC-20 token holders supply idle assets to Compound markets to earn algorithmically determined interest without surrendering custody permanently; traders and protocol integrators seeking liquidity borrow against collateral they intend to hold — for example, borrowing USDC against WETH to access stablecoin liquidity while maintaining ETH price exposure; DeFi protocols integrate Compound contracts into their own products to offer lending and borrowing features without building independent money market infrastructure; developers and data analysts query Compound's open-source contracts and public RPC interfaces to monitor supply rates, borrow rates, and utilization metrics across active markets; and COMP token holders participate in on-chain governance to influence risk parameters and future protocol direction

Compound provides open-source smart contracts and developer documentation at docs.compound.finance for protocol integration. Developers can interact with Compound III's Comet contracts directly on-chain using the publicly available ABI from the GitHub repository at github.com/compound-finance/comet, which contains the complete contract source code and deployment references. The contract interface allows external applications to supply assets, borrow against collateral, query market state, and monitor account health programmatically. Because Compound's governance is fully on-chain, all parameter changes are visible in protocol state and can be tracked by integrated applications without any off-chain API dependency

Compound maintains security documentation at compound.finance/docs/security covering the protocol's approach to smart contract security and listing relevant audit work. An active bug bounty program is operated through Immunefi, providing a structured and incentivized channel for responsible vulnerability disclosure by external researchers. All Compound smart contracts are open-source, enabling continuous independent review by the security community alongside formal audit processes. Users and integrators should consult the security documentation, review available audit summaries, and apply risk management appropriate to their level of DeFi lending protocol exposure

Compound is one of the longest-established DeFi lending protocols, with an open-source architecture, algorithmic money markets, and on-chain COMP governance operating on Ethereum since 2018. Compound III introduces a single-base-asset structure that addresses risk isolation limitations of the original multi-asset pool design and provides a cleaner framework for independent market deployments. Developers and users evaluating Compound should review the open-source Comet contracts, developer documentation, and security resources to assess protocol fit for their specific lending, borrowing, or integration requirements