What Compound Is
Compound describes itself as "the global market for capital", connecting suppliers and borrowers through secure and transparent lending markets. It is a money market built on smart contracts: users who supply assets earn interest, and users who borrow pay it. Interest rates are not negotiated; they are set algorithmically and move with supply and demand in each market.
Where It Came From
Compound Labs, the company behind the protocol, was founded in 2018 by Robert Leshner and Geoffrey Hayes. In June 2020 the project introduced its COMP governance token, which was distributed to users of the protocol as a reward for participation.
How It Works
Suppliers deposit assets into a market and earn interest on them. Borrowers draw from the same market by posting collateral first, so every loan is backed by collateral worth more than the amount borrowed. Compound's site refers to more than one generation of the protocol, including Compound II and a newer Compound Institutional Market, so the exact markets and features available today depend on which version you use.
COMP and Governance
COMP is an ERC-20 token that lets holders propose and vote on changes such as adding collateral types or adjusting market parameters. Governance is not risk-free: in 2024 a proposal pushed through by a single large holder over objections from other participants drew attention to how concentrated voting power can be, a risk that applies to many token-governed protocols.
What to Weigh Before Using It
Borrowing against volatile collateral can lead to liquidation if prices fall, and you can lose part of your position when that happens. Smart contract risk applies to every lending protocol, even long-running ones, and governance decisions can change the rules markets operate under. Start small, read the project's current documentation for the exact product you plan to use, and only commit money you can afford to lose. This summary is educational and not financial advice.
