Compound

Compound is DeFi Lending for Suppliers and Collateralized Borrowers

Compound is a lending protocol where suppliers deposit a market’s main token for yield, while borrowers pledge other assets as backing to access it. Its current architecture, Compound III or Comet, gives each market one base asset, such as USDC or WETH, and a defined collateral set. Interest rates move with base-asset utilization. Borrowing remains overcollateralized, and collateral can be absorbed once its oracle-adjusted value no longer supports the debt.

Two Collateral Thresholds Create the Liquidation Buffer

Two collateral thresholds separate new borrowing capacity from liquidation eligibility in every Compound III market. The lower borrow factor caps new debt, while the higher liquidation factor governs absorption.

Compound III values every supplied collateral asset through its configured price feed, multiplies each value by the relevant factor, and totals the adjusted amounts against the base debt. A declining collateral price reduces that total; accrued borrow interest increases the other side. Because collateral factors are asset-specific, two tokens with equal market value need not provide equal capacity. A supply cap also limits how much of each collateral asset the market accepts. Those parameters belong to the particular Comet deployment, so an Ethereum USDC market and a Base USDC market can present different limits.

At contract level, factors use a 10^18 scale, while packed collateral factors preserve four decimal places. Compound III separates the borrow collateral factor from the liquidation collateral factor, and requires the latter to be higher. Once debt exceeds the liquidation-factor value of collateral, the absorb function moves the debt to protocol reserves and the collateral to the protocol.

Borrowing at the maximum leaves little room for price changes and every second of interest accrual. A lower debt-to-collateral ratio creates more distance from absorption, which is the relevant decision after selecting collateral.

Three Actions Cover Supply and Collateralized Borrowing

Three on-chain actions cover a first-time Compound borrowing path: approve, supply collateral, and withdraw the base asset. A base-asset supplier stops after approval and supply. The selected Comet deployment fixes the network, base asset, collateral set, and limits.

Choosing the Market and Account

Market selection comes before token selection because each deployment is independent. Ethereum uses chain ID 1, while Base uses chain ID 8453; sending the same ticker to the wrong network does not create a Compound balance. The wallet must hold the chosen asset and the native gas token for that chain. Token precision also shapes the entered integer: USDC uses 6 decimals, WETH uses 18, and WBTC uses 8. Interfaces handle these conversions, but the signed transaction should still identify the intended network, asset, amount, and Comet proxy, as explained in Compound walkthrough.

Supplying or Borrowing

An ERC-20 allowance is required before Comet can transfer the token. With no prior allowance, approval and supply are two separate transactions. Supplying the market’s base asset creates a positive interest-bearing balance; supplying an approved collateral asset adds borrowing capacity without base interest.

Borrowing uses the withdraw action after collateral is present. The resulting negative base balance must meet baseBorrowMin and the market’s borrow-factor check. Users seeking only yield stop with a positive base balance. A collateral withdrawal remains available only while the account passes that same borrowing check. The Comet proxy is the interaction point, while gas cost follows the chosen EVM network and transaction.

One Base Asset Separates Yield From Collateral

One base asset organizes each Comet market and determines which balance accrues interest. The signed base balance has three states: positive supplies, negative borrows, and zero closes the position.

That signed balance separates supplying USDC for yield from depositing WETH as collateral in a USDC Comet market. In Compound III, collateral assets do not earn or pay interest; only a positive base-asset balance earns the supply rate. Repaying USDC first moves a negative balance toward zero, then any excess supplied amount becomes positive and starts accruing interest. A positive balance remains exposed to available protocol liquidity for withdrawals. This netting model makes the primary uses explicit: base-asset liquidity earns, while collateral unlocks borrowing capacity.

Two Rate Curves Turn Utilization Into Cost and Yield

Two independent Compound III rate curves price supply and borrowing from one base-asset utilization ratio. Each curve has two slopes separated by one utilization kink.

Anything left over is addressed in Compound why rewards matter in practice. Utilization equals total base borrows divided by total base supply. More borrowing against the same supply pushes utilization upward, raising both quoted rates under their configured curves. The supply curve is separate from the borrow curve, unlike the reserve-factor derivation used by Compound v2. The gap between what borrowers pay and suppliers earn contributes to base reserves.

In most cases, Compound III accrues interest every second and annualizes rates with 31,536,000 seconds per 365-day year. Per-second rate values use a 10^18 scale, and balances update through supply or borrow indices rather than a daily payment event. A displayed annual percentage rate therefore changes when utilization changes. Network gas is separate: Ethereum and Base charge transaction fees in their native gas asset, while the borrow index determines Compound’s interest cost.

One Worked Position Shows the Value of a Borrowing Buffer

One worked position turns collateral value, two thresholds, and a chosen buffer into borrowing capacity. Every changing input is hypothetical: a $10,000 oracle value, a 75% borrow factor, an 82% liquidation factor, a $5,000 debt balance, and a same-block snapshot before interest accrues.

The opening borrow limit is $10,000 × 75%, which equals $7,500. With $5,000 borrowed, unused starting capacity is $2,500. The liquidation boundary is lower: $5,000 ÷ 82% equals $6,097.56 of collateral value. Relative to $10,000, that boundary sits 39.02% below the starting oracle value. The concrete output is therefore a $7,500 maximum initial borrow, a $2,500 capacity buffer, and liquidation eligibility below $6,097.56 at that unchanged debt.

Interest makes the debt balance rise, so the boundary moves upward over time even if the collateral price is flat. Additional collateral moves it downward; repayment does the same. The useful decision is the debt amount to carry below maximum capacity, not the largest amount the interface accepts.

Fifteen Asset Slots Explain Comet’s Compact Architecture

Fifteen collateral slots define standard Comet, while its extended asset-list implementation raises the ceiling to 24. Those limits shape deployment design, not a user quota across markets.

Implementation Boundaries

Packed State and Price Precision

Standard Comet supports base tokens with no more than 18 decimals, requires price feeds with 8 decimals, and stores price values on a 10^8 scale. Its original collateral membership bitmap uses 16 bits, while the extended version reuses 8 reserved bits for positions 16 through 23. Asset supply caps and collateral factors remain deployment-specific governance settings.

Five Pausable Operations

Five independent flags cover supply, transfer, withdraw, absorb, and collateral purchase. The Governor or Pause Guardian sets them, allowing a specific operation to stop without treating the entire market as one switch. This control sits beside price feeds, supply caps, borrow minimums, and rate parameters.

Proxy Upgrades and Cross-Chain Governance

One stable Comet proxy is the address applications use. OpenZeppelin’s TransparentUpgradeableProxy pattern separates that proxy from the market logic implementation, and the Configurator prepares parameter updates. When governance changes an immutable parameter, the Comet Factory deploys a new implementation and the proxy points to it after execution. Existing user balances remain associated with the proxy.

Typically, Compound governance originates on Ethereum through COMP delegation, Governor Bravo, and the Timelock. A deployment on another EVM network adds a Bridge Receiver and Local Timelock so an executed governance message reaches that chain. This structure explains why identical tickers do not imply identical parameters across networks: each Comet instance has its own base asset, collateral list, caps, factors, rates, and oracle configuration. The next technical question is therefore the exact market instance, not merely the asset symbol.

Aave V3 and Morpho Blue Change the Market Boundary

Three lending designs frame the choice: Compound III’s single-base markets, Aave V3 pools, and Morpho Blue markets. Aave V3 groups multiple reserves under one pool and adds isolation mode and E-Mode. Morpho Blue isolates each market through five parameters: loan token, collateral token, oracle, interest-rate model, and loan-to-value limit. Compound centers a base-asset position on governance-selected collateral; the alternatives support broader pooled borrowing or finer isolated-market selection.

Compound: reader questions