Clear answers about how Compound Finance functions — collateral, rates, governance, and much more. 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 in order to earn interest, or to post collateral and borrow against it — all without involving a bank, broker, or any other intermediary.
Conventional finance leaves capital idle. If you hold ETH or WBTC, those assets generate nothing unless you sell them. Compound Finance changes that dynamic. You retain ownership of your collateral while accessing USDC liquidity — a significant advantage for long-term holders who would rather not trigger a taxable event by selling.
Rates in Compound Finance are set algorithmically, not by a committee. The primary input is utilization — the proportion of borrowed assets relative 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 keeps liquidity available 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 select few others.
Not every token qualifies. Each asset must pass a governance vote, with factors such as oracle reliability, liquidity depth, and price volatility all carefully evaluated. A token with thin liquidity or a price feed susceptible to manipulation could jeopardize the entire market. That is why the list remains deliberately selective.
These are two distinct thresholds that define how much you may borrow and when liquidation becomes eligible.
The Collateral Factor is the maximum share of your collateral value you can borrow against. ETH, for instance, 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 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 these two figures is your safety buffer. Crypto prices can move rapidly; that buffer matters.
When a position becomes undercollateralized — meaning the borrow balance exceeds the liquidation threshold — any participant 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 employ margin or naked short positions. The worst outcome is that your collateral is sold, your debt is cleared, and you are left with nothing — but no lingering debt follows you. Protocol reserves cover any shortfalls that arise in extreme scenarios.
The Compound Finance protocol has been reviewed by multiple 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 available 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 maintains reserves and operates a bug bounty program. Users supplying or borrowing significant amounts should understand that on-chain risk is always present, regardless of audit history.
COMP is the governance token of Compound Finance. Holding 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 standard interest rates. Current reward rates are displayed on the dashboard — look for the COMP icon alongside the APR figures. Rewards accumulate in real time and may be claimed at any point. The reward distribution schedule is determined by governance and can be modified through proposals.
Governance takes place entirely on-chain. Any wallet holding at least 25,000 COMP (or receiving that amount through delegated votes) may submit a proposal. Voting remains open for approximately 3 days. A proposal passes when it secures a majority of yes votes and satisfies the quorum requirement of 400,000 COMP.
If you hold fewer than 25,000 COMP, you can still engage by delegating your votes to an active delegate, or by casting votes directly on live proposals. 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 being formalized as proposals.
Technically yes, but Ethereum gas fees make small positions costly to manage. Supplying $50 of USDC to earn 3% APR makes little sense when each transaction costs $5–$15 in gas.
Compound Finance has expanded to multiple networks beyond Ethereum mainnet, including Polygon, Base, Arbitrum, and Optimism. Gas costs on those networks are a fraction of mainnet fees, 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 separate configuration is needed.
The Compound Finance dashboard is compatible with 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 such as Ledger provide a meaningful security layer for larger positions. Every transaction must be signed directly on the device, so even if your browser is compromised, your funds remain protected. WalletConnect extends compatibility to dozens of mobile apps — scan the QR code and your phone wallet is bridged to the desktop interface.
The Net Borrow APR shown on the dashboard accounts for the COMP rewards you earn for borrowing. If the base borrow rate is 4.00% but you receive 0.17% worth of COMP in return, your net cost is approximately 3.83%.
This can produce a counterintuitive result — during periods of elevated COMP rewards relative to borrow rates, the net borrow APR can briefly turn negative. That does not mean the protocol pays you to borrow indefinitely; COMP price fluctuates, and governance can revise 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. This created complex cross-collateral risk spanning many tokens at once.
Compound Finance III (Comet) employs 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 enables safer deployment on new networks. Gas efficiency was also substantially improved 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 activated 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 available on every chain.
Yes. The Comet Migrator extension exists precisely for 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 supported collateral assets differ between V2 and Compound III, so not every V2 position maps directly. 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 entity. 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 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 verifiable on-chain. You can also learn more about the team and protocol history on the Compound Finance company page.