Compound launched in 2017 and provides a protocol layer that runs lending pools, letting users earn interest with multiple cryptocurrencies. The system is managed automatically using smart contracts on the Ethereum network, making COMP an ERC-20 token.

What are Compound’s key features and how does it work?

Compound relies on Ethereum smart contracts to link lenders and borrowers, the platform’s main participants. Put simply, its pools let token holders provide assets to borrowers, who pay interest rates set by supply and demand.

Lenders contribute a cryptocurrency to Compound. They can transfer tokens to an Ethereum address managed by Compound to collect interest. In return for supplying funds to a pool, lenders receive a new cryptocurrency token. These tokens are cTokens, such as cETH and cDAI.

Borrowers use Compound by locking collateral on the platform, which is provided in cryptocurrency form. They can borrow from the cryptocurrencies supported by Compound, based on a portion of the collateral’s value.

Compound rewards lenders with COMP tokens according to how many cTokens they hold in their wallets. The reward size is also tied to interest rates, which change based on how much supply exists for a given asset. When a market has more liquidity, interest rates tend to be lower. 

Another detail is that users supplying assets can choose to open a loan denominated in any other cryptocurrency offered by Compound, limited to the collateral they posted. Separately, borrowers can face liquidation if the value of their borrowed asset rises and ends up exceeding the collateral they locked. 

Lastly, COMP token-holders can debate, submit proposals, and vote on protocol upgrades and changes.

By putting COMP in the hands of both users and applications, a growing ecosystem can help advance the protocol and stay motivated to manage it collectively through governance.