Compound

What is Compound?

Compound is a decentralized lending protocol that allows users to supply or borrow crypto assets. It pioneered the use of "autonomous interest rate" models driven entirely by smart contracts.

How does Compound work?

1. Users deposit assets into a liquidity pool and receive "cTokens" (e.g., cETH) in return.

2. These cTokens represent the user's balance plus interest earned over time.

3. Borrowers take loans from the pool by providing collateral and paying a variable interest rate.

4. The interest rate is set algorithmically based on utilization:

   rate = base rate + slope * utilization

5. If a borrower's collateral falls below a certain level, their position is automatically liquidated.

Why does Compound matter?

Compound was a foundational protocol for "DeFi Summer" and helped popularize decentralized lending. It introduced the COMP governance token, which started the trend of "liquidity mining" and community-led protocol management.

Key features of Compound

• Algorithmic, variable interest rates
• Permissionless lending and borrowing
• Tokenized positions (cTokens)
• Community-led governance via COMP
• Transparent, on-chain risk management

Examples of Compound

• Supplying USDC to Compound to earn a passive, variable yield.
• Borrowing WBTC against your ETH holdings to go "long" on Bitcoin.
• Voting on a protocol upgrade using COMP tokens held in your wallet.