Introduction to Compound (COMP)

By iTrustCapitalMay 31, 20223 minutes read

Understanding Compound (COMP)

Compound is a blockchain-based cryptocurrency platform that enables borrowing and lending of various digital currencies. COMP is the cryptocurrency at Compound’s core, and is used to pay interest to the network’s lenders. 

Here’s a closer look at what exactly Compound is and how Compound works. Keep reading to find out which cryptocurrencies are in the Compound ecosystem.

What is Compound (COMP)?

Compound is a blockchain protocol designed to enable cryptocurrency users to lend and borrow in an efficient, automated way. The Compound marketplace is powered by COMP, a cryptocurrency that’s compatible with the Ethereum blockchain network

Compound enables borrowing and lending by using Ethereum-based smart contracts. Smart contracts are electronic contracts that are sometimes described as digital vending machines—specified actions are performed only when certain conditions are met. 

COMP is a governance token, meaning that qualifying owners of COMP can submit proposals for governance changes to the community. The Compound community has received proposals focused on adding new currency markets, adjusting borrowing parameters, and implementing software updates. The minimum COMP balance to submit a proposal is 25,000, which is a significant hurdle that helps to ensure frivolous submissions don’t make it to the voting page.

The Compound protocol caps the COMP supply at 10 million tokens. More than six million COMP are already in circulation.

How does Compound (COMP) work?

Compound works using Ethereum-supported smart contracts. The processes of creating COMP tokens, charging and paying interest, and redeeming COMP for other currencies all use smart contracts.

Here’s how the Compound protocol works:

  1. Lenders stake cryptocurrency using Compound: Cryptocurrency holders wishing to lend their digital currencies can stake their assets with Compound. By staking—agreeing to not trade or sell—their crypto, lenders contribute to pools of liquid assets.

  2. Lenders are allocated COMP: When locking in their cryptocurrency tokens, lenders are issued COMP to indicate ownership of their staked digital assets.

  3. Borrowers receive cryptocurrency: The liquid pools of digital currencies are used to extend loans to borrowers. Borrowers do not need approval from a central bank authority like a bank to borrow crypto.

  4. Borrowers pay interest: Borrowers pay interest to the liquidity pools until the crypto loan is repaid. 

  5. Interest is distributed to lenders: The liquidity pools, automatically using blockchain technology, distribute the interest proportionally among Compound’s lenders.

Compound’s interest rates fluctuate based on supply and demand. Interest rates generally decline when there’s an excess of lendable assets in a liquidity pool, and may increase if the supply of assets is scarce relative to demand.

COMP holders manage the network by voting on future changes to the Compound protocol. Anyone with an internet connection can participate in the Compound ecosystem, whether by simply owning COMP or utilizing Compound to lend and borrow digital currencies.

Cryptocurrency markets on Compound

Compound’s liquidity pools are organized into markets for various cryptocurrencies. The Compound protocol is potentially compatible with any Ethereum-based token, but COMP holders need to vote before a new cryptocurrency market is added. 

COMP owners have already voted to support these specific crypto markets:

  • Ether (ETH)

  • USD Coin (USDC)

  • Dai (DAI)

  • Wrapped Bitcoin (WBTC)

  • Tether (USDT)

  • Basic Attention Token (BAT)

  • Uniswap (UNI)

  • Compound (COMP)

  • TrueUSD (TUSD)

  • 0x (ZRX)

  • ChainLink (LINK)

  • Maker (MKR)

  • Fei USD (FEI)

  • Sai (SAI)

  • (YFI)

  • Aave (AAVE)

  • Pax Dollar (USDP)

  • SushiSwap (SUSHI)

  • Augur v1 (REP)

A brief history of Compound

Compound was founded in 2017 by Robert Leshner and Geoffrey Hayes. The Compound network first went online in September of 2018.

The latest version of the Compound whitepaper was released in February 2019. The whitepaper was published to explain how the Compound protocol works and the specific technologies used to operate and secure the Compound network.

In April 2020, Compound transitioned to a community governance model that is decentralized. The change is what enabled qualifying owners of COMP to submit governance proposals for changes to Compound.


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