The decentralized finance (DeFi) landscape is filled with innovative platforms, and Compound Finance stands as one of its foundational protocols. Launched several years ago, it remains one of the most widely used DeFi applications, offering users the ability to lend and borrow digital assets in a decentralized manner. This article explores what Compound Finance is, how it functions, and the key benefits it offers participants in the growing DeFi ecosystem.
Compound Finance was founded by Robert Leshner and Geoffrey Hayes, both graduates of the University of Pennsylvania. The founders also co-created Safe Shepherd, an identity protection service, prior to venturing into blockchain technology. Today, they lead Compound Labs—the development team behind the protocol—with Leshner serving as CEO and Hayes as CTO. Compound Labs oversees the ecosystem, including the flagship lending platform and initiatives aimed at helping traditional institutions access DeFi yield opportunities.
At its core, Compound Finance is a algorithmic liquidity protocol that enables users to lend and borrow cryptocurrencies without intermediaries. It operates in a permissionless manner, meaning no central authority controls user funds. Instead, the protocol relies on smart contracts to automate transactions and manage collateral. While initially launched on Ethereum, Compound has expanded to other blockchains including Polygon, Arbitrum, and Optimism.
To borrow assets, users must first supply collateral in a supported cryptocurrency. Borrowing capacity depends on the type and value of the collateral provided, as well as market demand. A major advantage of Compound is its transparency: all transactions and pool balances are publicly visible on the blockchain. Additionally, the use of audited smart contracts removes the need for traditional guarantors, reducing counterparty risk.
According to market data, Compound Finance currently holds a total value locked (TVL) of over $2.5 billion across its three versions. During bull markets, borrowing and lending activity on Compound and similar protocols tends to increase significantly.
How Compound Finance Works
Compound enables decentralized lending and borrowing through algorithmically managed liquidity pools. Lenders deposit assets to earn interest, while borrowers put up collateral to take out loans. The protocol currently offers three versions—v1, v2, and v3—each with unique features and supported assets.
Supplying Crypto Assets
When users supply assets to Compound, these are added to a shared liquidity pool. In return, lenders receive cTokens, which represent their share of the pool and accrue interest over time. These cTokens can also serve as collateral for borrowing other assets, with loan-to-value ratios reaching up to 85%, depending on the asset’s liquidity and risk profile.
Borrowing Crypto Assets
To borrow, users must first deposit collateral. They can then take out loans up to a certain percentage of their collateral's value. Borrowers pay interest on the loan amount and must maintain sufficient collateral levels to avoid liquidation, which occurs if the value of their collateral falls below a required threshold.
The COMP Token
COMP is the native governance token of the Compound ecosystem. It is distributed to users who supply or borrow assets and enables them to propose and vote on protocol changes. Token holders play a key role in deciding which assets are listed, how revenue is managed, and which upgrades are adopted. COMP is an ERC-20 token distributed every Ethereum block (approximately every 15 seconds) to active users.
Advantages of Using Compound Finance
Compound offers several benefits that have contributed to its popularity within the DeFi sector.
Diverse Supported Assets
The protocol supports a wide range of cryptocurrencies for lending and borrowing, including ETH, WBTC, DAI, and USDC. This allows users to access numerous digital assets quickly and efficiently.
Permissionless and Decentralized
As a fully decentralized protocol, Compound allows anyone to participate without requiring approval. There are no minimum or maximum limits on lending or borrowing, promoting broader financial inclusion.
Strong Security Record
Compound is regarded as one of the most secure DeFi protocols, having undergone multiple audits by firms like Trail of Bits and OpenZeppelin. It has not experienced any major security breaches, making it a trusted platform for crypto lending.
Frequently Asked Questions
What is the main purpose of Compound Finance?
Compound Finance is a decentralized lending protocol that allows users to earn interest on deposited crypto assets or borrow against collateral. It uses algorithmic interest rates and operates without intermediaries.
How do I start earning interest on Compound?
To earn interest, you simply need to supply a supported cryptocurrency to one of Compound’s liquidity pools. You will receive cTokens in return, which accumulate interest over time based on market demand.
What are the risks of borrowing on Compound?
The main risk is liquidation—if the value of your collateral drops significantly, your position may be partially liquidated to maintain solvency. It is important to monitor your collateral level and market conditions.
Can I participate in governing the Compound protocol?
Yes, if you hold or earn COMP tokens, you can participate in governance by voting on proposals or submitting new ideas for protocol upgrades or changes.
Is Compound Finance available on blockchains other than Ethereum?
Yes, Compound has expanded to multiple blockchains, including Polygon, Arbitrum, and Optimism, allowing users to access its services with lower transaction fees.
How are interest rates determined on Compound?
Interest rates are algorithmically set based on the supply and demand for each asset. When borrowing demand is high, rates increase, and when supply is abundant, rates decrease.
For those interested in exploring decentralized lending further, you can 👉 compare real-time lending rates across leading platforms. Whether you are looking to earn yield or obtain a loan, understanding how automated protocols work is essential in today’s digital economy.