Compound is one of DeFi's original algorithmic money markets, letting users supply crypto assets to earn interest and borrow against collateral without a bank or credit check, and COMP is its governance token.
What Compound does
Suppliers deposit assets into Compound's pooled markets and receive cTokens (or, in Compound III, base-asset balances) that accrue interest automatically, while borrowers post collateral and draw loans at variable rates set algorithmically by each market's supply-and-demand utilisation curve — the tighter the available liquidity, the higher the borrow rate. Compound III, branded Comet, redesigned the protocol around single-borrowable-asset markets with a wider range of collateral types, aiming for better capital efficiency and risk isolation than the original multi-asset pooled design.
COMP holders govern the Compound DAO, voting on interest rate models, which assets get listed as collateral, collateral factors, and protocol upgrades. When COMP launched in June 2020 with a liquidity-mining programme distributing tokens to active borrowers and lenders, it effectively kicked off the yield-farming craze that defined 'DeFi Summer,' with rival protocols quickly copying the model to bootstrap their own liquidity.
Risks worth knowing
Compound pioneered the space, but Aave has since overtaken it on total value locked and feature velocity, and newer, more capital-efficient lending designs from protocols like Morpho have added further competitive pressure. Being first doesn't guarantee staying largest.
Compound has also had real security incidents: a 2021 bug in a governance-approved upgrade mistakenly over-distributed roughly $90 million worth of COMP to users before it could be patched, a reminder that even a mature, heavily audited protocol isn't immune to costly mistakes. Governance power is also concentrated among a relatively small number of large COMP holders, which raises the usual DAO concern about whether votes reflect broad user interest or a few whales' preferences, and — as with any lending protocol — cascading liquidations during sharp market moves and dependence on accurate oracle pricing remain permanent structural risks.