Compound
COMP to USD
Project history
Compound, launched in September 2018, is a decentralised finance (DeFi) platform built on the Ethereum blockchain that allows users to lend and borrow digital assets in a fully automated way and without intermediaries. It is one of the first projects to create a liquid money market for cryptocurrencies using a decentralised and permissionless framework.
Technology
The Compound protocol operates on a dynamic model where interest rates for lending and borrowing cryptocurrencies are automatically adjusted based on supply and demand. Users looking to lend their cryptocurrencies to the protocol are issued cTokens in return. These are ERC-20 tokens representing the lender’s stake in the liquidity pool that accrue interest over time.
Compound employs an overcollateralisation strategy to secure loans, requiring borrowers to supply collateral of greater value than the loan. This ensures the system’s stability and mitigates the risk of default. Borrowers supply one type of cryptocurrency, such as BTC or ETH, to receive another one, for example, DAI. This allows users to access liquidity without having to sell their digital assets.
The protocol incentivises participation and liquidity through yield farming (also known as liquidity mining), where users earn Compound’s governance token, COMP, by lending and borrowing different cryptocurrencies. COMP tokens serve both as a reward mechanism and grant holders governance rights, allowing them to propose and vote on changes to the protocol.
Token supply model
COMP has a maximum supply of 10 million tokens, but the distribution of new COMP tokens is designed to incentivise participation in the Compound protocol. New COMP tokens are distributed to users that interact with the protocol’s market (50 percent to lenders and 50 percent to borrowers), with an adjustable issuance rate based on the relative borrowing demand in each market.
Key value drivers
Compound aligns with the broader DeFi trend by providing users with a decentralised platform to directly participate in lending and borrowing markets outside the traditional banking system.
Furthermore, Compound contributes to the liquidity of the crypto markets, encouraging the lending of idle assets to generate returns for the lender, while providing essential liquidity to borrowers.
Compound’s ability to provide alternative access to credit and improve DeFi market liquidity, could potentially drive demand and value for COMP tokenholders.
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