Compound is a DeFi project that enables users to take out loans or provide loans by locking their assets via smart contracts. It was built on the Ethereum blockchain and is governed by the COMP token. ^[17]

Overview

The two primary users of the Compound platform are lenders and borrowers. Lenders can send their cryptocurrency tokens to an Ethereum address controlled by Compound to earn interest, while borrowers can post collateral in the form of cryptocurrency to borrow supported cryptocurrencies at a percentage of the posted value. ^[9]

Lenders on the platform earn COMP tokens, based on the number of cTokens held in their wallet, which is proportional to the interest rate dependent on the available supply of that asset. If the market has more liquidity, the interest rate is lower. Users who lend assets to the protocol can take out a loan in any other cryptocurrency that Compound offers, up to the amount of collateral they have posted. ^[9]

Compound v2

Compound v2 is a decentralized interest rate protocol that aims to create a foundation for future financial markets and applications. Running on the Ethereum mainnet, Compound v2 provides a system for lending and borrowing various digital assets. The protocol supports a range of assets, such as ETH, 0x, Augur, BAT, DAI, and USDC, enabling users to participate in an environment with variable interest rates. ^[2]

Compound III

Compound III is the most recent version of the Compound protocol designed with a focus on enhancing security, capital efficiency, and user experience. To ensure complete transparency, each deployment of Compound III is dedicated to a single borrowable asset, allowing users to know in advance the asset they are borrowing. ^[3]

Users' collateral remains their property, safeguarded against withdrawal by other users, except in cases of liquidation. The first deployment of Compound III facilitates borrowing of USDC by offering ETH, WBTC, LINK, UNI, or COMP as collateral. Despite the lack of interest earned on collateral, users can access increased borrowing capacity with minimized risks of liquidation and reduced liquidation penalties. Additionally, users benefit from lowered gas fees. ^[3]

COMP Governance Proposal

The first proposal was for USDC on Ethereum, and it created supply caps for five collateral assets and transferred 500,000 USDC controlled by Compound Governance into the market as initial reserves. Compound III was audited by OpenZeppelin and ChainSecurity, and formally verified in partnership with Certora. ^[4]

Compound III introduced a new model where each deployment featured a single borrowable asset. The collateral supplied by users remained their property and could not be withdrawn by other users, except during liquidation. ^[5]

Compound Treasury

Compound Treasury, in collaboration with Fireblocks and Circle, developed a product and flow-of-funds that allows large holders of U.S. Dollars, such as neobanks and fintech startups, to access the interest rates available in the USDC market of the Compound protocol. ^[6]

Accredited institutions have the option to borrow USD or USDC from Compound Treasury, using Bitcoin, Ether, and supported ERC-20 assets as collateral, at fixed rates starting at 6% APR. The borrowing term is open-ended, and no repayment schedule is imposed, allowing clients the flexibility to draw liquidity and repay balances at their discretion, as long as they maintain overcollateralization. ^[7]

cToken

cTokens are ERC-20 tokens that represent the funds a user has deposited in Compound. When a user deposits ETH or another ERC-20 like USDC into the protocol, they get an equivalent amount of cTokens. For example, if a user locks up USDC in the protocol they will receive cUSD–tokens that automatically earn interest. At any time, cUSDC can be redeemed for normal USDC in addition to the interest paid in USDC. ^[10]

cTokens were created in two original types: CErc20 and CEther. CErc20 wraps an underlying ERC-20 asset, while CEther simply wraps Ether itself. ^[10]

The Comptroller is the risk management layer of the Compound protocol; it determines how much collateral a user is required to maintain, and whether (and by how much) a user can be liquidated. Each time a user interacts with a cToken, the Comptroller is asked to approve or deny the transaction.^[18]

Liquidity Mining

Liquidity mining refers to the mechanism by which a cryptocurrency exchange platform can incentivize users who contribute to the platform's liquidity pool. When a user deposits a particular cryptocurrency on Compound, they receive the cToken version of the same in return. These cTokens can be used as collateral for a loan, meaning that users can spend funds while they’re earning interest. ^[1]

COMP Token

On June 15th, 2020 Compound made their governance token called COMP available for distribution. Compound began distributing 1,116,310.81 COMP across ETH, DAI, USDC, USDT, BAT, REP, WBTC and ZRX markets, proportional to the interest being accrued in each market. The proposal, which was passed by the community on June 14th, states: ^[11]

"Within each market, half of the COMP is allocated to suppliers, and the other half to borrowers. Whenever an address interacts with a Compound market, it receives all COMP earned in that market, should it exceed a 0.001 COMP threshold"

After one day of trading, the COMP token became the largest DeFi token by market capitalization overtaking MakerDAO's MKR token after rallying over 60%. On June 16th, 2020 Compound’s market cap hit nearly $740 million.^[12]

Utility

Compound protocol rewards its users with COMP tokens to distribute its operations. Anyone who owns COMP tokens can participate in decisions affecting the protocol, voting on proposals for the rules that govern the platform’s use. A COMP holder can also assign their voting rights to someone else to vote on their behalf. This means that someone who is not a COMP holder could be asked to vote on behalf of COMP holders when a particular issue arises. ^[13]

COMP Distribution

When community governance first went live, the team explained how the total supply of COMP tokens would be allocated. Out of 10,000,000 total COMP, they reserved 775,000 tokens “for the community to advance governance through other means — which will be announced at a future date.” In September 2020, the team explained how those tokens are being distributed to the community: ^[14]

• In June, the team designated up to 500,000 COMP for distribution through Coinbase Earn. COMP tokens were available through Coinbase Earn until November 2021, at which point Coinbase transferred all remaining tokens to the Compound protocol’s Reservoir contract.
• In September, they sent the remaining 275,000 COMP directly to the Reservoir contract.

In total, 5,004,949 COMP are to be distributed to the community and this is over half of the total supply.

In September 2020, the Compound team released the list of actions that were taken since the distribution of COMP began in June:

• 15 governance proposals were created; 12 were implemented
• A new interest rate model was developed by Dharma.io, and deployed for the DAI and USDT markets
• The Augur team spearheaded risk management changes for REP, during the upgrade to REPv2
• COMP token-holders voted to change the protocol’s price oracle to the Open Price Feed, an open-source project where a set of reporters sign price data that can be posted on-chain by any Ethereum address - and which doesn’t rely on the team
• The community built an entirely new feature, market-level Borrowing Caps, to limit risk to the protocol
• Autonomous Proposals were created, which allow anybody with 100 COMP to gather support for a Governance proposal

Coinbase Pro

Coinbase Pro announced that they would be listing the COMP token on June 25th, 2020. Over 10% of the total supply of USDC, the stablecoin created by Circle and Coinbase, was locked on Compound. The announcement caused the market cap of Compound to spike around $2 billion dollars. After the announcement, but before the listing, the token price reached an all-time high of $371. ^[15]

Team

• Robert Leshner (CEO): Chartered Financial Analyst, former economist, and founder of two software startups.
• Geoffrey Hayes (CTO): Maintainer of Exthereum, technology founder of two startups, led Core Services at Postmates.
• Torrey Atcitty (Application Lead): Led mobile development at Postmates, Kahuna, and Aha Mobile.
• Calvin Liu (Strategy Lead): Previously analytics at Gusto, advisor to digital currency startups at Promontory, and long-time crypto investor.
• Coburn Berry (Senior Engineer): Experienced web stack engineer from The RealReal; previously an attorney.
• Jared Flatow (Senior Engineer): Diverse background in distributed systems; previously Nokia Research, AdRoll, Caffeine, et al.
• Jayson Hobby (Head of Design): Led product design for Coinbase Pro and Coinbase Custody; previously Otto / Uber Freight, agencies.
• Jake Chervinsky (General Counsel): Lawyer. Twitter pro. Former litigator and compliance counsel at Kobre & Kim and Baker McKenzie.
• Max Wolff (Software Engineer): Open finance enthusiast. Former co-founder of Marble Protocol. Economics at Stanford.
• Mykel Pereira (Software Engineer): Full-stack engineer. Former co-founder of Marble Protocol and Haywheel (YC S16).
• Kway Ohene (Head of Talent): Experienced team-builder and recruiting lead.
• Adam Bavosa (Developer Relations Lead): Previously led developer relations at PubNub. Software engineer. Growth hacker.
• Nick Martitsch (Business Development): Previously led business development and fundraising initiatives at Pantera Capital. Economics at UCSB.
• Wayne Nilsen (Senior Engineer): Backend engineer. Previously at Poloniex. Quantitative finance derivatives pricing background.
• Antonina Norair (Senior Engineer): Blockchain & Backend engineering, formerly at ConsenSys, OTCXN.

Funding

Compound has a total of four funding rounds with a total amount of $70.8 million. The project raised $8.2 million in a seed round, where lead investors included Andreessen Horowitz, Bain Capital Ventures, and Polychain. They raised a $25 million Series A funding round, which was led by Andreessen Horowitz. They also received $1 million in USDC from Coinbase’s “USDC Bootstrap Fund.” In 2020, a Venture Round took place, and in 2022, a total of $37.6 million was raised through a Debt Financing round. ^[8]