Understanding Compound Finance: A Comprehensive Guide to Its Functionality
The decentralized finance landscape is vastly diverse, with innovative DeFi protocols; Compound Finance falls under one of those. One of the earliest and most utilized DeFi protocols, Compound Finance, has gained considerable attention and mainstream use in the past years. In the post below, we break down what Compound Finance is, how it works, and what benefits it brings to this increasingly evolving world in the ecosystem of the DeFi.
Compound Finance was co-founded by, a University of Pennsylvania alumnus. This cofounder also founded the identity protection service provider, Safe Shepherd, where he and his co-founder served as heads of the firm before selling it in 2015.
Both are founders and now serve in executive roles for Compound Labs, the developer organization behind Compound Finance. Compound Labs oversees the Compound ecosystem: Compound Finance and Treasury, a protocol that lends DeFi interest rates to traditional financial technology and institutions.
What is Compound Finance? Compound Finance is a lending protocol in DeFi through which users can lend or borrow various digital assets. It is built off the 'trustless' ethos in a permissionless setting where no central authority intercedes between individuals and funds. Smart Contracts are one of the backbone elements that comprise Compound, allowing for automated executions while crypto assets are transferred back and forth between users and the protocol. Originally launched on Ethereum, Compound Finance is now live on many blockchains including Arbitrum, Optimism, Polygon, and many more.
Users would need to provide collateral in supported crypto assets to be able to borrow assets from Compound. The number of assets that one can borrow varies on the basis of the collateral supplied and its market demand. One major advantage of Compound Finance is greater transparency and security. Since the protocol is on blockchain, all transactions and the crypto assets available in the protocol are observable to everyone. Moreover, smart contracts do not require a guarantor, and the code eventually governs execution in a fool-proof manner.
According to, Compound Finance stands at an all-time current level of TVL that has reached $2.53 billion with its all three variants that peaked above $12 billion in November 2022. More borrowing and lending occurs at the hands of DeFi protocols like Compound when the crypto market is a bullish one.
How Does Compound Finance Work? The core functionality of Compound Finance is decentralized lending and borrowing through its liquidity markets. In these markets, lenders can provide the assets and earn interest on it, collected from the utility of the asset. Similarly, borrowers must pay the interest to the protocol while borrowing against the provided collateral. Compound Finance has three variants-so far with which all propose different features, functionalities, and support for assets.
Lending Crypto Assets If users lend their assets to Compound, this will only be deposited into the protocol's liquidity pool. For doing so, lenders will receive synthetic cTokens representing the individual's collateral as well as generate interest based on whenever supplied assets are utilized from the liquidity pool. Lenders can also borrow various assets with a factor of up to 85% in their collateral asset, which will be determined by the utility as well as liquidity of the supplied asset.
Borrowing Crypto Assets Borrowing assets on Compound requires adding collateral first. One can borrow against his collateral while paying interest on his borrowing amount. However, the borrower has to keep his collateral because he can get liquidated if all the factors of liquidation are met.
COMP Token COMP is the native cryptocurrency token for Compound Finance. It gets rewarded to users who lend out assets or borrow assets. The primary role of COMP is to manage the protocol through which its holders can make proposals and vote on them. The governing members determine compound's future by adding or removing support for assets and also the revenues management. COMP is an ERC-20 token deployed on Ethereum, and it will be distributed every 15 seconds, or the Ethereum mining period, to eligible users.
Advantages of Compound Finance Compound Finance is one of the most popular protocols in the DeFi landscape. Here are some of the benefits of using Compound Finance:
Large Asset Variety Compound offers a large number of assets within its liquidity pool that can be borrowed or lent by using it. Liquidity providers can take advantage of it by making available all those assets with borrowed capacity within minutes. It currently offers a number of cryptocurrencies like ETH, WBTC, DAI, and others.
Decentralized & permissionless As the decentralized and permissionless nature of Compound Finance makes it a preferred financing platform among crypto traders and investors, it permits users to borrow or lend any amount that they desire at zero minimum or maximum requirements. This kind of openness allows an even wider range of audiences to participate in DeFi.
Safe Compound Finance ranks among the most secure of the DeFi protocols. It has had multiple security audits by reputable firms including Trail of Bits and Open Zeppelin. It has also maintained a clean record, that is, no severe security breaches, as it gradually became one of the most popular spots for borrowing crypto assets.