What is Compound (COMP)?

Deep Dive

1. Purpose & Value Proposition

Compound is a foundational DeFi protocol that replaces traditional banks with code. Users supply crypto (e.g., ETH, USDC) to liquidity pools to earn interest, while borrowers take loans by overcollateralizing assets. Interest rates are set algorithmically, balancing real-time market conditions (Compound Docs).

This system eliminates intermediaries, allowing global access to financial services like savings accounts or secured loans. Its core innovation lies in creating self-sustaining money markets where capital flows efficiently without centralized control.

2. Technology & Architecture

The protocol uses cTokens – ERC-20 tokens representing a user’s share in a liquidity pool. For example, depositing ETH mints cETH, which accrues interest as the cETH/ETH exchange rate increases over time. Borrowers receive assets directly from these pools and must maintain collateral ratios to avoid liquidation.

Compound operates across multiple blockchains (Ethereum, Polygon, Base) and uses decentralized price oracles to ensure collateral valuations are accurate. Upgrades like Compound V3 introduced isolated risk markets, letting users optimize capital efficiency.

3. Tokenomics & Governance

COMP is an ERC-20 governance token with a fixed supply of 10 million. Holders propose and vote on changes like adjusting interest rate models or adding new assets. A portion of COMP is distributed daily to users who supply or borrow, incentivizing protocol participation (CoinMarketCap).

This model decentralizes decision-making, ensuring stakeholders collectively steer the protocol’s evolution. However, early allocations to venture firms like a16z have raised debates about governance centralization.

Conclusion

Compound reimagines financial infrastructure by automating lending markets and empowering users through governance. While its cToken model remains influential, can COMP maintain relevance as DeFi evolves toward more capital-efficient designs?