Overview
Compound is a decentralized finance (DeFi) protocol that provides algorithmic money markets where users can supply assets to earn interest and borrow assets by posting collateral. Originally built on Ethereum, Compound has expanded across multiple networks and markets, enabling capital efficiency and composability within the broader DeFi ecosystem. The protocol is open-source and designed to be permissionless, allowing integrations by wallets, custodians, and third-party interfaces.
Core Capabilities
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Supply and Earn Interest: Users can deposit supported tokens into Compound markets and receive cTokens in return, which represent their supplied assets plus accrued interest. cTokens are interest-bearing and can be used within other DeFi protocols for composability.
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Borrowing Against Collateral: Borrowers can lock supported tokens as collateral and draw loans in other supported assets up to a collateral-dependent borrowing limit. Collateral ratios and liquidation rules protect lenders by automatically liquidating positions that fall below protocol thresholds.
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Algorithmic Interest Rate Model: Each market uses an automated interest rate model that adjusts supply and borrow rates based on utilization to balance incentives for lenders and borrowers in real time.
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Cross-Chain and Multi-Market Support: Compound operates across Ethereum and multiple layer-2 and alternative chains (for example Arbitrum, Optimism, Polygon, Base, Mantle and others), providing a broad array of markets for different tokens and user needs.
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Governance and Token Incentives: The protocol is governed by COMP token holders who vote on parameters, upgrades, and additions of new markets. Governance enables decentralized decision-making and protocol evolution.
Security and Risk Management
Compound emphasizes safety through several layers: external security audits, formal verification, and an active bug bounty program. Markets include risk parameters—collateral factors, borrow caps, and liquidation incentives—set via governance and periodic market risk assessments. Despite these measures, users should be aware of smart contract risk, oracle failures, and market volatility that can lead to liquidations.
Integrations and Ecosystem
The protocol supports broad ecosystem integration: hardware wallets (for example Ledger), custodians (Coinbase Custody, Anchorage, BitGo), exchanges and wallets (Binance, OKX, Argent, Crypto.com), and analytics or portfolio tools (Zapper, Zerion). Numerous community-built dashboards, automated management services, and middleware projects extend Compound’s accessibility and functionality, making it practical for retail, power users, and institutions.
How It Works (Practical Flow)
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A user supplies a supported asset to a Compound market via the app or an integrated interface and receives cTokens representing the deposit plus accrued interest.
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The supplied collateral increases the user’s borrowing capacity according to the market’s collateral factor. The user can then borrow any supported asset up to their allowed limit.
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Interest rates for supplying and borrowing adjust automatically with market utilization, encouraging deposits when liquidity is low and increasing borrowing costs when utilization is high.
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If a borrower’s health factor falls below the safe threshold, the position becomes eligible for liquidation; liquidators can repay part of the debt in exchange for a discounted portion of the collateral.
Why Use Compound
Compound offers permissionless access to on-chain lending and borrowing with a proven protocol design, broad market coverage, and strong ecosystem integrations. It is attractive for users seeking to earn yield on idle assets, access leverage, or borrow stablecoins without KYC, while institutions can leverage custody integrations and governance participation. The combination of automated rate algorithms, multi-chain reach, and transparent governance makes Compound a foundational DeFi primitive for capital markets on-chain.
Considerations and Best Practices
While Compound is well-audited and widely used, users should diversify risk, monitor health factors, and understand that on-chain lending carries smart contract, oracle, and liquidation risks. Active governance means parameters can change; reviewing market configurations and protocol proposals is recommended for users with large positions.
