Straightforward 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 enables users to supply crypto assets to earn yield, or post collateral to borrow against it — all without a bank, broker, or any middleman involved.
Traditional finance keeps capital idle. If you hold ETH or WBTC, those assets do nothing unless you sell them. Compound Finance changes that dynamic. You retain ownership of your collateral while unlocking USDC liquidity — a significant advantage for long-term holders who prefer not to trigger a taxable event by selling.
Rates in Compound Finance are set algorithmically, not by a committee. The primary input is utilization — the ratio of borrowed assets to total supplied assets within a given market.
When utilization is low, borrow rates remain inexpensive to draw in borrowers. As utilization rises past a target threshold (the "kink"), rates increase sharply. This mechanism preserves liquidity for withdrawals. The supply APR is always below the borrow APR; the difference flows to protocol reserves. Both rates refresh every Ethereum block, approximately 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 small number of others.
Not every token is eligible. Each asset must clear a governance vote, and criteria such as oracle reliability, liquidity depth, and price volatility are evaluated carefully. A token with shallow liquidity or a manipulable price feed could expose the entire market to harm. That is why the approved list remains deliberately narrow.
These are two distinct thresholds that determine how much you may borrow and when liquidation becomes possible.
The Collateral Factor is the maximum share of your collateral value you are permitted to borrow against. ETH, for instance, carries an 83% collateral factor on the USDC mainnet market. If you supply $10,000 of ETH, you may borrow up to $8,300 USDC.
The Liquidation Factor is set higher — 88% for ETH. Your position only becomes eligible for liquidation once your borrow balance surpasses 88% of your collateral value. The gap between the two factors serves as your safety buffer. Crypto prices move quickly; that buffer is important.
When a position becomes undercollateralized — meaning the borrow balance surpasses the liquidation threshold — any party can liquidate it and collect a fee. The liquidator repays some 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 case is that your collateral gets sold, your debt is settled, and you are left with nothing — but no lingering debt follows you. Protocol reserves cover any shortfalls that arise under extreme conditions.
The Compound Finance protocol has been reviewed by several independent security firms since its initial deployment in 2019. Compound III — the version powering the current dashboard — received dedicated audits prior to its 2022 launch. Audit reports are publicly accessible in the protocol's GitHub repository.
That said, no smart contract audit eliminates all risk. Oracle failures, governance attacks, and undiscovered vulnerabilities remain theoretical threats. The protocol holds reserves and operates a bug bounty program. Users supplying or borrowing significant amounts should recognize that on-chain risk is always present, regardless of audit history.
COMP is the governance token of Compound Finance. Owning COMP grants you voting power over protocol upgrades, parameter adjustments, 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 standard interest rate. Current reward rates are displayed on the dashboard — look for the COMP icon beside the APR figures. Rewards accrue continuously and may be claimed at any time. The reward distribution schedule is governed on-chain and can be modified through proposals.
Governance takes place on-chain. Any wallet holding at least 25,000 COMP (or receiving that amount via delegated votes) may submit a proposal. Voting remains open for approximately 3 days. A proposal passes when it receives a majority of yes votes and meets the quorum requirement of 400,000 COMP.
If you hold fewer than 25,000 COMP, you can still take part by delegating your votes to an active delegate, or by voting 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 are debated before becoming formal proposals.
Technically yes, but Ethereum gas fees make small positions costly to manage. Supplying $50 of USDC to earn 3% APR hardly makes sense if each transaction costs $5–$15 in gas.
Compound Finance has deployed across multiple networks beyond Ethereum mainnet, including Polygon, Base, Arbitrum, and Optimism. Gas on those networks is a fraction of mainnet costs, making smaller positions practical. Check the market selector on the dashboard to see which deployments are currently live. The same wallet connects to all of them — no additional setup needed.
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 be compatible.
Hardware wallets like Ledger provide a meaningful layer of security for larger positions. Every transaction must be confirmed on the device itself, so even if your browser is compromised, your funds remain protected. WalletConnect extends compatibility to dozens of mobile apps — scan the QR code and the session links your phone wallet to the desktop interface.
The Net Borrow APR shown on the dashboard accounts for the COMP rewards you receive for borrowing. If the base borrow rate is 4.00% but you earn back 0.17% in COMP, your net cost is roughly 3.83%.
This can produce counterintuitive results — during periods of elevated COMP rewards relative to borrow rates, the net borrow APR may briefly turn negative. That does not mean the protocol will pay you to borrow indefinitely; COMP price fluctuates, and governance can revise reward rates at any moment. Treat the COMP component as variable income, not guaranteed income.
Compound V2 used a pooled model in which each asset had its own cToken market, and users could supply any listed asset and borrow any other listed asset. This created complex cross-collateral risk spanning many tokens at once.
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 safer deployment on new networks. Gas efficiency also improved considerably in the redesign.
Extensions are third-party integrations connected 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 individually per market — you grant a limited allowance to the Extension's contract. Access can be revoked at any time. The Extensions tab on the dashboard lists what is available for each network and market. Not all extensions are supported on every chain.
Yes. The Comet Migrator extension was built for exactly this purpose. It allows you to 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 accessible through the Extensions section of the dashboard. Keep in mind that the supported collateral assets differ between V2 and Compound III, so not every V2 position transfers 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 remainder.
Supplying USDC to Compound Finance earns a variable yield without surrendering 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 — generally carry counterparty risk: the company holding your funds could fail or freeze 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 fully verifiable on-chain. You can also learn more about the team and protocol history on the Compound Finance company page.