Compound

Compound is one of the earliest decentralized lending protocols on Ethereum, and COMP is its governance token. The protocol allows users to supply assets into pooled markets to earn interest and to borrow against supplied collateral, with interest rates determined algorithmically by the utilisation of each market.

How Compound works

When a user supplies an asset, they receive a receipt token representing their share of the pool, which accrues interest over time. Borrowers post collateral and can borrow up to a limit set by the collateral factor of the assets they have deposited. If the value of collateral falls too far relative to the debt, the position becomes eligible for liquidation, where a third party repays part of the debt in exchange for discounted collateral. Rates rise as a larger share of a pool is borrowed, which pulls in new supply and discourages further borrowing.

COMP has a fixed maximum supply of 10 million tokens, all of which have been issued and are in circulation. The token confers governance rights: holders can delegate their voting power to any address, and anyone holding or receiving delegation of at least one percent of supply can submit a governance proposal. This means participation in governance does not require owning the token, only receiving delegation.

Role in the ecosystem

Compound's 2020 distribution of COMP to protocol users is widely credited with starting the yield farming period that reshaped DeFi, since it demonstrated that token incentives could rapidly attract capital. The protocol later launched Compound III, a redesign focused on single borrowable assets per market to reduce risk. It remains one of the reference implementations of pooled algorithmic lending, alongside Aave.