What is Compound (COMP)?

Deep Dive

1. Protocol Function: Automated Lending and Borrowing

Compound is a non-custodial protocol that creates pooled liquidity markets, known as money markets, for various cryptocurrencies. Users who deposit assets, such as ETH or USDC, become lenders and earn interest. In return, they receive cTokens (e.g., cETH), which represent their share in the pool and automatically accrue interest as the exchange rate between the cToken and the underlying asset increases.

Borrowers can take out loans by depositing other crypto assets as collateral. The protocol uses an algorithmic model to set interest rates for each asset, which adjust in real-time based on the pool's utilization. This entire process is automated by Ethereum smart contracts, eliminating the need for traditional financial intermediaries like banks (Compound).

2. The COMP Token: Community Governance

The COMP token's primary utility is governance. Holders can delegate their voting weight to participate in the decentralized autonomous organization (DAO) that governs the Compound protocol. Decisions include modifying interest rate models, adding new supported assets, and managing the daily distribution of COMP rewards to users.

This model was pioneering in DeFi, incentivizing active participation by directly distributing governance power to the protocol's users. Approximately 1,576 COMP are distributed daily across different markets, rewarding those who supply or borrow assets (Compound).

Conclusion

Fundamentally, Compound is a decentralized infrastructure for permissionless lending and borrowing, governed by its community through the COMP token. How will its steadfast focus on secure, algorithmic money markets influence the next evolution of open finance?