What is Compound (COMP)?
Compound (COMP) is a decentralized, intermediary-free lending protocol that operates primarily on Ethereum and has expanded to multiple other chains. COMP itself is not just a passive asset but the instrument of on-chain governance, giving holders a direct vote on every parameter and upgrade of the protocol.
What role does COMP play in governance?
Holding COMP makes you a stakeholder in the protocol's direction. Governance proposals on Compound are not simple polls; they are blocks of executable code. Once a proposal garners enough votes, the agreed-upon changes are deployed to the blockchain automatically. This allows the community to adjust interest rate models, add new collateral types, or deploy to a new chain without any central authority. You can also delegate your voting power to any trusted address, making the system accessible even if you prefer a hands-off approach.
How lending and borrowing work on Compound
The protocol organizes liquidity into pools. Unlike peer-to-peer lending, users deposit crypto into a common pool and earn interest that compounds with every block. Anyone can borrow from this pool, but they must lock up a greater value of another crypto asset as collateral — a safety mechanism known as over-collateralization.
Interest rates are not set by human decision. They are governed entirely by the pool’s utilization rate. If a particular asset sits idle, rates stay low. When demand for borrowing that asset spikes and the pool nears empty, the algorithmic model pushes rates higher to attract new deposits and discourage excessive borrowing. Your deposit is represented by a cToken, which accrues value automatically. If you provided ETH, you receive cETH; when you want your original deposit back with the yield earned, you own a claim that has been continuously growing in the background.
