Compound Finance is one of the oldest and most influential DeFi lending protocols, having pioneered the algorithmic money market model in 2018. While its total value locked has been surpassed by newer competitors, Compound remains a cornerstone of DeFi infrastructure and is widely regarded as the protocol that launched the "yield farming" era of crypto in summer 2020 when it began distributing COMP tokens to users.
The Compound v3 Architecture (Comet)
Compound v3, deployed under the codename "Comet," represents a radical simplification of the original model. Each Comet deployment is a single-asset borrowing market: users supply collateral assets but can only borrow one specific base asset (currently USDC or ETH depending on the deployment). This architecture eliminates cascading liquidation risks that plagued v2, where borrowing one illiquid asset could create systemic bad debt.
In Comet, collateral assets earn no interest — they exist solely as security for borrowers. Only the base asset earns supply APY. This tradeoff simplifies risk management significantly and has allowed Compound to list more collateral types with confidence.
Interest Rate Model
Compound uses a kinked interest rate model. Below the target utilization (typically 80%), rates rise gradually. Above it, rates increase steeply to incentivize supply. The supply APY is always lower than the borrow APY, with the spread (reserve factor) going to the protocol treasury.
Compound v2 used cTokens — interest-bearing tokens similar to Aave's aTokens — where exchange rates appreciate over time. Compound v3 tracks balances internally without issuing new tokens, simplifying accounting.
COMP Token and Governance
COMP was the first major DeFi governance token distributed directly to protocol users, setting a template followed by dozens of protocols. Holders vote on protocol upgrades, new market deployments, risk parameter changes, and treasury allocations. The Compound DAO has funded numerous ecosystem grants and deployed capital across multiple chains.
COMP's distribution schedule has wound down significantly from its 2020 peak, reducing inflationary pressure on the token. However, the protocol still uses COMP rewards to attract liquidity to newer deployments like Base and Scroll.
Security History
Compound has suffered two notable incidents. In 2021, a governance proposal upgrade accidentally made $80M in COMP claimable by mistake, with Robert Leshner (the founder) publicly asking users to voluntarily return funds — many did. In 2022, a price oracle manipulation on Compound's NEAR market resulted in approximately $10M in bad debt. These incidents shaped the v3 architecture's emphasis on isolated markets and oracle diversity.
Comparison with Aave
Compound's single-base-asset model makes it safer but less flexible than Aave. USDC borrowers who want to use diverse collateral can use Comet's broad collateral support (WBTC, ETH, LINK, UNI, etc.), but cannot borrow ETH against USDC collateral in the same deployment. Aave allows full cross-collateral borrowing. For institutional users prioritizing simplicity and auditability, Compound's cleaner architecture is often preferred.