Compound is a decentralized, open-sourced, blockchain-based protocol that facilitates the borrowing and lending of crypto.
The system is built on the Ethereum network and is one of the largest decentralized lending protocols in the world with assets exceeding $10 billion in total value locked (TVL).
COMP is the ERC-20 token used for governing the Compound protocol.
Compound allows users to borrow against their assets and/or lend them to earn income. The platform is completely permissionless, meaning anyone in the world regardless of their wealth or credit score can use it.
Compound pools depositors’ assets together which borrowers can draw from. This evenly distributes risk and rewards among depositors looking to earn interest on idle assets.
An algorithm on Compound sets interest rates. And it automatically adjusts them to reflect the market demand.
For instance, when borrowing demand rises, rates increase to attract more lenders. And when borrowing demand drops, rates decrease to attract more borrowers.
Unlike centralized institutions, Compound uses smart contracts to ensure optimal security and allow users to retain control over their assets.
A smart contract is a self-executing contract with the terms of the agreement between parties directly written into lines of code.
A depositor can withdraw their assets from the lending pool at any time of the day, 365 days a year.
And since Compound runs on the Ethereum network, it doesn’t need to hire thousands of employees or rent physical office space.
This allows it to operate at a fraction of the price, passing on more profits to depositors and more favorable rates to borrowers.