Compound (COMP) is an Ethereum token that enables community governance of the Compound protocol. The protocol is a series of decentralized interest rate markets that allow users to supply and borrow Ethereum tokens at variable interest rates. COMP token holders and their delegates can also debate, propose, and vote on changes to the protocol.
How it works
When you supply an asset to Compound, you immediately begin receiving interest on that deposit. A borrowing limit is then determined, based on the value of the collateral you’ve supplied.
When you deposit funds into Compound, you receive a special cToken in return. For example, if you deposit USD Coin into Compound, you’ll find cUSDC in your wallet — and when you withdraw your USDC, the cUSDC will disappear from your wallet. (cUSDC can also be held, transferred, and traded just like any other token.)
The yield on the crypto you deposit into Compound currently comes in two forms: interest in the form of cTokens and rewards in native COMP token. The interest rate for each Compound market is dynamic and based purely on supply and demand.
Keep in mind
In traditional finance, the model of supplying one asset to borrow another is called “over-collateralized lending.” It can help investors to gain exposure to more markets and enable advanced trading strategies like leveraging borrowed crypto to invest in other assets (but keep in mind that there are risks associated with collateralized lending, including potentially losing your collateral).