What Is Compound (COMP)?
Also known as: Compound Finance, COMP
In short
Compound is an Ethereum-based decentralized lending protocol in which users earn interest by depositing their cryptocurrencies into pools and borrow by posting collateral; interest rates are set algorithmically and governance runs through the COMP token.
In Compound, a separate money market operates for each asset. Interest rates change automatically according to the utilization rate, which shows how much of the asset in the pool is being borrowed: as demand rises, borrowing and deposit rates increase. In the protocol's second version, depositors receive cTokens whose value grows as interest accrues; in the later version known as Compound III, each market has a single borrowable asset such as USDC.
Borrowing is overcollateralized; a user can borrow less than the value of the collateral they deposit. If the collateral value falls below the set threshold, the position is liquidated. Compound's start of distributing the COMP token to protocol users in 2020 is regarded as one of the developments that kicked off the yield farming trend in DeFi.
The protocol's risks include smart contract bugs, manipulation of price oracles, liquidations during sudden price drops, and the possibility that governance decisions may be determined by a small portion of token holders.
Last updated: · This content is for information purposes only and is not investment advice.