What is Compound (COMP)?

Deep Dive

1. Core Lending Protocol Mechanics

Compound creates algorithmic money markets—pools where interest rates for each asset are set automatically based on supply and demand (CoinMarketCap). Users who deposit assets like ETH or USDC receive cTokens (e.g., cETH, cUSDC) in return. These tokens represent their share in the pool and automatically accrue interest as the exchange rate between the cToken and the underlying asset increases over time. Borrowers must over-collateralize their loans, and positions can be liquidated automatically if the collateral value falls below a required threshold.

2. COMP Token: Governance and Distribution

COMP is an ERC-20 token that empowers decentralized governance. Holders debate, propose, and vote on all changes to the protocol, from adding new assets to adjusting risk parameters (Compound). To align incentives, the protocol distributes COMP daily to users who supply or borrow assets. This distribution is allocated across different markets and is itself controlled by governance votes, creating a flywheel where active participants help steer the protocol's future.

3. Evolution and Multi-Chain Strategy

The protocol has evolved significantly with Compound III (Comet), which introduces isolated, single-asset lending pools for improved capital efficiency and risk management. This design focuses on high-quality, liquid assets. Compound has expanded beyond Ethereum, deploying these markets on Layer 2 networks like Arbitrum, Base, and Optimism, reducing fees and making decentralized lending accessible across the multi-chain ecosystem.

Conclusion

Fundamentally, Compound is both critical DeFi infrastructure for permissionless lending/borrowing and an experiment in community-led governance. How will its governance model evolve as the protocol continues its multi-chain expansion?