# What is Compound Finance? DeFi Protocol Guide

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**Publisher:** Decentralized Finance Publication (https://decentralized-finance.io)
**Author:** Marcus Reid
**Category:** Top DeFi Protocols
**Updated:** June 2026
**Trust:** Independent, ad-free editorial research. No display advertisements, no paid protocol coverage, no affiliate-driven rankings.

## Summary

Compound is a pioneering DeFi lending protocol on Ethereum. Users supply assets to earn interest (represented as cTokens) or borrow against deposited collateral. Compound V3 (Comet) uses single-base-asset markets for simpler risk management. The COMP token governs the protocol.

Compound Finance is a decentralised lending protocol built on Ethereum that allows users to supply cryptocurrency assets into pooled markets to earn interest, or borrow against deposited collateral at algorithmically determined rates. Founded by Robert Leshner and Geoffrey Hayes in 2017 and launched on mainnet in 2018, Compound was one of the earliest and most influential money market protocols in DeFi, pioneering the interest-bearing token model and later launching one of the most consequential governance token distributions in cryptocurrency history.

Compound's core mechanism is straightforward: suppliers deposit assets (ETH, USDC, WBTC, DAI, and others) into protocol-managed pools. Each deposited asset is represented as a cToken — for example, USDC deposited becomes cUSDC. cTokens accrue interest automatically over time, with their exchange rate against the underlying asset increasing as interest accumulates. This means a cToken balance grows in value relative to the underlying asset without requiring the holder to take any action.

## Algorithmic Interest Rates

Interest rates on Compound are determined algorithmically based on the utilisation ratio of each asset pool — the percentage of supplied assets currently borrowed. When utilisation is low (many available assets, few borrowers), rates are low to attract borrowers. When utilisation is high (most assets borrowed, little available), rates increase to incentivise suppliers to deposit more and discourage further borrowing. This dynamic mechanism ensures that rates always reflect real supply and demand for credit in each asset market.

Borrowers must maintain overcollateralised positions — the value of their collateral must remain above a defined threshold relative to their loan. If a borrower's collateral value falls below the required ratio (due to price movements in the collateral asset), their position becomes eligible for liquidation: third-party liquidators repay a portion of the loan and claim the collateral at a discount, restoring the pool's solvency.

## The COMP Token and DeFi Summer

In June 2020, Compound launched the COMP governance token distribution — allocating COMP to users who supplied or borrowed on the protocol. The distribution mechanism — earning governance tokens simply by using the protocol — triggered what became known as 'yield farming' or 'liquidity mining': users discovered that by borrowing assets and re-supplying them (recursive borrowing), they could dramatically increase their COMP earnings relative to the value of assets at risk.

The COMP distribution triggered a frenzy of activity that sparked 'DeFi Summer' — a period of explosive growth in DeFi TVL, user activity, and token prices from June through September 2020. Compound's TVL increased by over 1,000% in a matter of days following the COMP launch. Virtually every major DeFi protocol subsequently launched a governance token with a liquidity mining component, making Compound's COMP distribution one of the most consequential events in DeFi history.

## Compound III (Comet) and Evolution

Compound III, also known as Comet, was launched in 2022 as a redesigned money market architecture. Unlike Compound V2's pooled collateral model, Comet introduced a single-base-asset market: each deployment supports one borrowable asset (initially USDC) against a variety of accepted collateral types. This simplified design reduces the complexity of risk management — rather than managing cross-collateral dynamics across all asset pairs, each Comet market has a defined base asset and a clear collateral structure.

Compound has maintained its position as one of the most trusted and widely integrated DeFi protocols. Its cTokens and COMP governance token are accepted across dozens of DeFi platforms as collateral and yield assets, making Compound deeply embedded in the DeFi composability stack. Robert Leshner departed as CEO to found a new company — Superstate — focused on tokenised real-world assets, with Compound Labs continuing to develop the protocol under new leadership.

## Sources

- [Compound.finance](https://compound.finance)
- [Wikipedia: Compound Finance](https://en.wikipedia.org/wiki/Compound_Finance)

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