Real answers about how Compound Finance works — collateral, rates, governance, and everything in between. You can also visit the Compound Finance company page or go back home.
Compound Finance is a decentralized lending protocol built on Ethereum. It lets users supply crypto assets to earn interest, or post collateral to borrow against it — all without a bank, broker, or intermediary of any kind.
Traditional finance locks capital. If you hold ETH or WBTC, those assets sit idle unless you sell them. Compound Finance changes that. You keep ownership of your collateral while unlocking USDC liquidity — a meaningful shift for long-term holders who do not want to trigger a taxable event by selling.
Rates in Compound Finance are determined algorithmically, not by a committee. The core input is utilization — the ratio of borrowed assets to total supplied assets in a given market.
When utilization is low, borrow rates stay cheap to attract borrowers. As utilization climbs past a target threshold (the "kink"), rates rise steeply. This mechanism keeps liquidity available for withdrawals. Supply APR is always lower than borrow APR; the spread goes to protocol reserves. Both rates update every Ethereum block, roughly every 12 seconds.
The Compound III (Comet) architecture uses a single base asset per deployment — currently USDC on Ethereum mainnet. Accepted collateral includes ETH, WBTC, cbBTC, LINK, UNI, wstETH, weETH, rsETH, and a handful of others.
Not every token qualifies. Each asset must pass a governance vote, and factors like oracle reliability, liquidity depth, and price volatility are weighed carefully. A token with thin liquidity or a manipulable price feed could put the entire market at risk. That is why the list stays selective.
These are two separate thresholds that define how much you can borrow and when you get liquidated.
The Collateral Factor is the maximum fraction of your collateral value you can borrow against. ETH, for example, carries an 83% collateral factor on the USDC mainnet market. If you supply $10,000 of ETH, you can borrow up to $8,300 USDC.
The Liquidation Factor is higher — 88% for ETH. Your position only becomes eligible for liquidation when your borrow balance exceeds 88% of your collateral value. The gap between the two factors is your safety buffer. Prices move fast in crypto; that buffer matters.
When a position becomes undercollateralized — meaning the borrow balance exceeds the liquidation threshold — anyone can liquidate it and earn a fee. The liquidator repays part or all of the borrowed amount and receives the corresponding collateral at a discount.
You cannot lose more than your deposited collateral. Compound Finance does not use margin or naked short positions. The worst outcome is that your collateral gets sold, your debt is cleared, and you end up with nothing — but no residual debt follows you. Protocol reserves back any gaps that appear in extreme scenarios.
The Compound Finance protocol has been audited by multiple independent security firms since its first deployment in 2019. Compound III — the version powering the current dashboard — received dedicated audits before its 2022 launch. Audit reports are publicly available in the protocol's GitHub repository.
That said, no smart contract audit eliminates all risk. Oracle failures, governance attacks, and undiscovered bugs remain theoretical threats. The protocol maintains reserves and has a bug bounty program. Users supplying or borrowing large amounts should understand that on-chain risk is always present, regardless of audit history.
COMP is the governance token of Compound Finance. Holding COMP gives you voting power over protocol upgrades, parameter changes, and treasury decisions. One COMP equals one vote.
Users who supply or borrow in active Compound Finance markets receive COMP as a reward, distributed on top of the regular interest rate. The current reward rates appear on the dashboard — look for the COMP icon next to the APR figures. Rewards accumulate in real time and can be claimed at any point. The reward distribution schedule is set by governance and can be adjusted through proposals.
Governance happens on-chain. Any wallet holding at least 25,000 COMP (or receiving that amount of delegated votes) can submit a proposal. Voting is open for roughly 3 days. A proposal passes if it receives a majority of yes votes and meets the quorum threshold of 400,000 COMP.
If you hold less than 25,000 COMP, you can still participate by delegating your votes to an active delegate, or by casting votes directly on proposals once they go live. Tally at tally.xyz/gov/compound is the primary interface for browsing and voting on active proposals. The Compound Finance forum is where ideas get debated before becoming formal proposals.
Technically yes, but Ethereum gas fees make small positions expensive to manage. Supplying $50 of USDC to earn 3% APR makes little sense if each transaction costs $5–$15 in gas.
Compound Finance has deployed on multiple networks beyond Ethereum mainnet, including Polygon, Base, Arbitrum, and Optimism. Gas on those networks is a fraction of mainnet costs, which makes smaller positions viable. Check the market selector on the dashboard to see which deployments are live. The same wallet connects to all of them — no separate setup required.
The Compound Finance dashboard supports MetaMask, Coinbase Wallet, WalletConnect-compatible wallets, Ledger hardware wallets, and the Ronin wallet. Any browser-based wallet that injects a Web3 provider will generally work.
Hardware wallets like Ledger add a meaningful layer of security for large positions. The transaction must be signed on the device itself, so even if your browser is compromised, funds stay protected. WalletConnect extends compatibility to dozens of mobile apps — scan the QR code and the session bridges your phone wallet to the desktop interface.
The Net Borrow APR shown on the dashboard factors in COMP rewards you receive for borrowing. If the base borrow interest rate is 4.00% but you earn 0.17% worth of COMP back, your net cost is approximately 3.83%.
This can flip counterintuitively — in periods of high COMP rewards relative to borrow rates, the net borrow APR can briefly go negative. That does not mean the protocol pays you to borrow indefinitely; COMP price fluctuates, and governance can adjust reward rates at any time. Treat the COMP component as variable income, not guaranteed income.
Compound V2 used a pooled model where each asset had its own cToken market, and users could supply any listed asset and borrow any other listed asset. That created complex cross-collateral risk across many tokens simultaneously.
Compound Finance III (Comet) uses isolated markets with a single base asset per deployment. You borrow only the base asset — USDC in most deployments — against a defined set of approved collaterals. This simplifies risk modeling, makes liquidations more predictable, and allows the protocol to be deployed on new networks more safely. Gas efficiency also improved significantly in the redesign.
Extensions are third-party integrations that connect to Compound Finance through the official dashboard. Think of them as approved plugins — tools like DeFi Saver, the Bulker contract, and the Collateral Swap extension that add functionality without requiring you to leave the Compound Finance interface.
Each Extension must be enabled explicitly per market — you grant a limited allowance to the Extension's contract. You can revoke access at any time. The Extensions tab on the dashboard lists what is available for each network and market. Not all extensions are available on all chains.
Yes. The Comet Migrator extension exists precisely for this purpose. It lets you move a collateral and borrow position from V2 to a Compound III market in a single transaction using a flash loan to handle the intermediate steps.
The migrator is available through the Extensions section of the dashboard. Note that the supported collateral assets differ between V2 and Compound III, so not every V2 position maps cleanly. If a collateral you hold in V2 is not accepted in the target Compound III market, you will need to swap or withdraw it separately before migrating the rest.
Supplying USDC to Compound Finance earns a variable yield without giving up custody to a centralized company. You retain the ability to withdraw at any time, subject only to available liquidity in the market.
Centralized alternatives — exchange savings products, fintech apps — typically involve counterparty risk: the company holding your funds could fail or restrict withdrawals. Compound Finance's smart contracts hold funds directly; no company acts as custodian. The tradeoff is smart contract risk, which is real but transparent and verifiable on-chain. You can also read more about the team and protocol history on the Compound Finance company page.