What is Compound (COMP)?

Compound is a decentralized finance (DeFi) protocol that runs on the Ethereum blockchain. Founded in 2017 by Robert Leshner and Geoffrey Hayes, Compound offers users the ability to lend their crypto assets to earn interest or to borrow cryptocurrencies by providing collateral. Unlike traditional banks, this protocol, which works automatically through smart contracts without an intermediary institution in between, uses a completely collateral-oriented system regardless of values ​​such as credit scores. Thus, anyone can quickly and reliably borrow on the blockchain in return for appropriate collateral or earn interest by lending their assets. Compound's native cryptocurrency, COMP coin, is a token used in the management (governance) of the protocol, and thanks to this governance system, control of the platform is distributed to the user community. Let's take a closer look at this project, which has a very important place in the cryptocurrency field...

Definition and Origin of Compound

Compound is, in simple terms, a decentralized lending protocol. In other words, a digital market where users can lend their crypto assets and others can borrow these assets against collateral, without any intermediary institution. This protocol works with smart contracts on the Ethereum network and was launched as a developer-focused project. Developed by a company called Compound Labs, the protocol was first launched on Ethereum in 2018 and has since grown and developed, becoming an important part of the DeFi ecosystem. The Compound protocol stands out with its algorithmic interest rate model that detects supply-demand conditions in the market. Because thanks to this model, interest rates are automatically adjusted and balanced according to the liquidity in the pools with the Compound interest system.

 

Compound founders Robert Leshner and Geoffrey Hayes came together in 2017 to launch this project. Robert Leshner is a Chartered Financial Analyst (CFA), a former economist, and an experienced entrepreneur who previously founded two software companies. Geoffrey Hayes is an experienced name in the software world; he is one of the developers of the client software called Exthereum for Ethereum, and an engineer who founded two technology startups and managed the infrastructure teams at Postmates. The Compound protocol, founded by this duo, has taken its place among Ethereum DeFi projects since it works with Ethereum-based smart contracts and has brought the possibilities of blockchain technology to the financial world. One of the most striking aspects of the Compound protocol is the way it determines interest rates. Interest rates in the system are not imposed by any central authority; instead, a dynamic calculation is made based on supply and demand for each asset. The interest rate constantly changes depending on how much of that asset is available in the pool on Compound and how much it is in demand. For example, if an asset has a lot of liquidity in the pool, the interest rate will be low because there will be fewer borrowers of that asset; conversely, if there is a small amount of an asset left in the pool, the interest rate will increase, encouraging more users to invest (lend) that asset. This automatic interest rate balance algorithm allows Compound to adjust itself according to market conditions, allowing interest to be earned or paid at current rates at any time.

The emergence of the Compound protocol is seen as a solution to the need for cryptocurrency holders to generate passive income from their idle assets. When it first launched in 2018, it conceptually offered a “money market” application: Users could lock their assets in this protocol and earn interest in return, and anyone who wanted could borrow by providing collateral. Its reliance on smart contracts on Ethereum allowed transactions to be executed automatically and transparently, without the need for any authority. This innovative approach quickly made Compound a popular project in the DeFi space and inspired many similar decentralized finance applications.

Compound History: Major Milestones

As a result, Compound stands out as one of the pioneering projects that shaped the evolution of credit protocols in the world of decentralized finance (DeFi). So, what are the major milestones that stand out in Compound’s development process?

• 2017 - Founding: Robert Leshner and Geoffrey Hayes founded Compound Labs and began the development of the Compound protocol. The project’s goal was to create a money market with algorithmic interest rates on Ethereum.
• September 27, 2018 - Platform Launch: The Compound protocol was officially launched on the Ethereum mainnet. Initially working with a few Ethereum-based assets, the platform performed its first lending and borrowing transactions via smart contracts on this date.
• May 2019 - Compound V2 Update: The protocol was upgraded to version V2, making significant improvements. This update added support for more crypto assets, defining separate risk parameters and interest rate models for each asset. Separate smart contract gateways were also created for each asset market. The V1 version was deactivated after this date.
• 2020 - COMP Token Launch and Community Governance: In March 2020, Compound’s native token COMP was released on Ethereum. With the launch of the COMP token in June 2020, the Compound protocol transitioned to community governance. In other words, decisions regarding protocol settings and development began to be made by votes of COMP holders. The distribution of COMP tokens to incentivize users (Liquidity Mining/Yield Farming) also began during this period. As of June 15, 2020, a certain amount of COMP was distributed to lenders and borrowers in each Ethereum block to reward user participation, and this move brought a huge explosion of interest to Compound in the DeFi community. As a result, the total value locked on the platform (TVL) increased rapidly.
• July 2020 - Entering the Top 5 in DeFi: Compound rose to the top of the DeFi ecosystem, also driven by COMP distribution incentives. As of July 2020, the top 5 DeFi projects, including MakerDAO, Compound, Aave, Synthetix, and Curve, controlled 78% of the total value locked in the ecosystem.
• June 2021 - Introduction of Compound Treasury: In order for the DeFi world to serve players other than individual users, the institutional product called Compound Treasury was announced. Compound Treasury offered businesses and financial institutions that did not want to deal directly with crypto a simplified way to access the interest yields of the Compound protocol. As part of this product, companies could earn a fixed 4% annual interest yield by depositing US Dollars or USDC stablecoin directly through Compound Labs’ service. This service, which hides the daily liquidity opportunity and crypto-related complexities (such as private key management, crypto-fiat conversion, interest rate volatility), attracted attention.
• 2022 - Compound V3 and Multi-Network Support: In August 2022, the Compound III protocol update was launched on the Ethereum mainnet by community vote. Compound v3 simplified risk management by introducing a borrowing model based on a single underlying asset (such as USDC). Then in 2023, Compound began offering services outside of Ethereum; the Compound protocol was launched on the Polygon network in March 2023, on Arbitrum in May 2023, and on the Base network in August 2023. This has made it possible for users in different blockchain ecosystems to access Compound’s lending and borrowing services. At this point, Compound v2 has begun to be phased out.
• Today: Compound continues to exist as a protocol that has proven itself in the DeFi sector, locking billions of dollars of crypto assets. The protocol, which has been continuously developed after its rapid rise in 2020, is still one of the largest decentralized lending platforms as of 2025, when this article was written. Compound, which continues to develop with community governance, maintains its user base by adapting to DeFi innovations.

Why is Compound Valuable?

In this section, we will examine in detail the main factors that determine why Compound is considered so valuable; we will shed light on the prominent features of the platform, from interest mechanisms to governance model, from security measures to user experience. Here are all the details...

• Decentralized Interest Earning and Credit Opportunity: According to many, Compound is one of the reliable ways to earn passive income (interest income) with the cryptocurrencies you have. Instead of keeping your crypto assets in your wallet, such as idle savings in a bank account, you can automatically earn interest by depositing them into Compound. Moreover, since these interest rates are determined according to market conditions, they can be more competitive compared to the fixed and generally low interest rates in traditional banks. For example, while the annual deposit interest of banks is at very low levels such as 0.2%, the annual interest rates on Compound have periodically exceeded this. In this way, users can evaluate their financial assets by earning interest income directly from the protocol without any intermediaries.
• Automatic and Transparent Operation: Compound’s algorithmic interest rate model adjusts interest rates based on current market data without human intervention. This predictable mechanism is a great advantage for users. Everyone can control what interest rates are changing based on (because the smart contract code is open), which creates trust. Thanks to its decentralized structure, no person or institution can arbitrarily change interest rates; all rules are fixed in the protocol’s code and applied equally. In addition, since transactions take place on the blockchain, a transparent record is kept. Thus, all users can track deposited collateral, loan amounts and rates on the chain.
• Governance and Community Participation with COMP Token: The Compound protocol has gradually shifted to community governance since 2020. The COMP token is what makes this possible. So what is COMP coin? COMP acts as the platform’s governance token; that is, decisions regarding the future of the protocol (e.g. adding new assets, changing collateral rates, updating the interest model, etc.) are made by the votes of COMP holders. This adds great value to users because the platform’s development is in the hands of its users. Since each COMP coin represents a vote, everyone from large investors to small users can make their voices heard. This democratic governance model creates a sense of ownership and loyalty to the platform. In addition, Compound has encouraged its users to participate in the governance of the protocol by distributing extra COMP rewards to its users while using the platform (liquidity mining program).
• Reliability: Compound is a long-standing and proven protocol in the DeFi world. Despite experiencing various market cycles (including bull and bear markets) since 2018, its smart contracts have continued to work flawlessly, with no serious outages or vulnerabilities. The smart contracts behind the protocol have been audited by leading security firms and reviewed by developers worldwide because they are open source. Compound Labs has implemented bug bounty programs with an emphasis on security, offering white hat hackers up to $150,000 in rewards if they report potential vulnerabilities. Thanks to this, the protocol has been kept under constant observation and security vulnerabilities have been largely prevented. All these measures and reliable performance over the years have given Compound a respected position in the DeFi ecosystem. In fact, the Compound protocol is referred to as “one of the cornerstones of DeFi” and is seen as a stable platform that offers high yields and deep liquidity.

How does Compound work?

So how exactly does Compound work? To understand how Compound works, it is first necessary to understand the basic operating logic of the system: Compound offers cryptocurrency holders the opportunity to lend their assets in return for interest or to receive loans in return for collateral through a decentralized protocol. This process takes place entirely through smart contracts and without the need for any intermediaries. When users deposit supported crypto assets into Compound, these assets are added to the protocol's liquidity pools and receive representative tokens called cTokens in return. These cTokens represent investors' earnings by reflecting the interest accumulated over time.

Interest rates are automatically determined according to supply and demand in the protocol. For example, if there is too much money in the liquidity pool for an asset, the borrowing interest for that asset decreases; when demand increases, the interest rate increases, both encouraging new investments and pushing borrowers to repay. This dynamic interest structure is one of the most important mechanisms that automatically balances imbalances in the market and makes the protocol sustainable. While those who invest their assets in the protocol earn passive income, those who want to borrow money can access the loan by presenting another asset they have as collateral.

The most critical issue that users should pay attention to during the borrowing process is the collateral ratio. Compound works on the principle of “over-collateralization”; that is, the value of the loan received must be lower than the collateral deposited. This system allows the protocol to protect itself by selling the collateral in the event that the debt is not repaid. However, if the price of the cryptocurrencies deposited as collateral falls or the value of the borrowed asset increases, the user faces the risk of liquidation. In this case, the protocol automatically closes the debt by selling a portion of the collateral. Therefore, borrowers need to constantly monitor their positions and keep their collateral ratios at healthy levels. Another notable aspect of Compound is its governance model with COMP tokens. COMP holders can vote on decisions made regarding the future of the platform. For example, issues such as interest rate models, the addition of new collateral types, or the updating of existing parameters are determined by community voting. In this way, Compound operates in accordance with the principle of decentralization not only technically but also administratively. COMP tokens are also distributed to users as rewards through liquidity mining, encouraging community participation.

Who is the Founder of Compound?

So, who is the founder of Compound? At this point, Robert Leshner stands out. Who is Robert Leshner? Robert Leshner is known as the person who founded Compound Labs in 2017 and brought the Compound protocol to life. Leshner is an experienced name at the intersection of finance and technology: Having the title of Chartered Financial Analyst (CFA) and having worked as an economist for a while shows that he has a deep knowledge of financial markets. On the technology side, Leshner gained experience as an entrepreneur who founded two different software startups before Compound. After founding the San Francisco-based Compound Labs company, Leshner turned his vision of creating a decentralized credit market using Ethereum's smart contract capabilities into reality with his team. Robert Leshner, one of the pioneers in the DeFi field, has become a well-known and respected figure in the industry with the success of the Compound protocol. In fact, Leshner is considered one of the early leaders of the DeFi movement and is referred to as one of the "creators of DeFi" in some circles.

What is Geoffrey Hayes’ role? Geoffrey Hayes is the other co-founder and technical architect of Compound. Hayes served as CTO (Chief Technology Officer) at Compound Labs and led the technical development of the protocol. Geoffrey Hayes, who comes from a software engineering background, is also a well-known developer in the Ethereum world; he is one of the main contributors to Exthereum, an alternative client software for Ethereum. Hayes also had entrepreneurial experience as a technical co-founder of two startups before founding Compound, and gained experience building scalable systems by managing infrastructure teams at large technology companies such as Postmates. The smart contract infrastructure, security mechanisms, and scalability solutions of the Compound protocol were created by the team led by Hayes. Thanks to this, Compound has been built on a solid technical foundation from day one. Founded by Robert Leshner and Geoffrey Hayes, Compound Labs’ role in the DeFi and cryptocurrency space is actually quite large. Because this platform not only developed the Compound protocol, but also contributed to the growth of the DeFi ecosystem. The Compound Labs team made the transition to a fully decentralized management possible by handing over the protocol to the community in 2020. In fact, one of the biggest reasons why 2020 is called “DeFi Summer” is the Compound revolution. In addition, Compound Labs tried to increase institutional adoption of DeFi services with innovative products such as Compound Treasury, which it announced in 2021. As a result, the vision of this duo is to move the concepts of lending (lending) and borrowing in cryptocurrencies from the monopoly of traditional finance to the blockchain.

Frequently Asked Questions (FAQ)

Below are some frequently asked questions and answers about Compound:

• What is Compound and how does it work?: Compound is a decentralized finance (DeFi) lending protocol that runs on Ethereum. It allows users to earn interest by depositing their cryptocurrencies into the platform or to receive cryptocurrency loans by providing collateral. Since there is no intermediary such as a bank, transactions are carried out automatically by smart contracts. In Compound's operating logic, deposited assets are collected in common pools and distributed to those who want to take out loans from there. Interest rates are determined in real time according to supply and demand in the system - if liquidity is high, interest decreases, if demand is high, interest increases. Thus, Compound creates a market in constant balance, where users can borrow and lend safely.
• What does COMP token do?: COMP token is a cryptocurrency used to manage the Compound protocol. COMP holders have the authority to vote on proposals related to the platform and change the protocol rules. For example, decisions such as supporting a new asset or updating collateral rates are made by the votes of the COMP community. Each COMP token represents one vote. In addition, as part of Compound’s first community incentive program, COMP tokens were distributed as a reward to those who used the platform. In other words, those who borrowed and lent on Compound were encouraged to participate in governance by earning extra COMP for a period of time. In short, COMP is a governance and reward token that connects users to the platform.
• How to earn interest on Compound?: To earn interest on Compound, you must first deposit one of the supported crypto assets into the platform. When you do this, the protocol gives you cTokens representing the amount you deposited and you start earning interest immediately. The interest you earn is calculated according to the currency of the asset you deposited and the current annual interest rate; the yield is added to your balance in a compounded manner with each block. For example, if you deposit 1000 USDC and the annual interest is 2%, you will have reached a value of approximately 1020 USDC at the end of the year (if the interest rate remains constant throughout the year). Since interest rates can constantly change according to market conditions, the APY (annual yield) value also fluctuates, but all the interest you earn will be added to your principal until you withdraw your assets. Compound is one of the popular ways to earn passive income with crypto, and offers the flexibility to withdraw the principal and accumulated interest whenever you want.
• Is it safe to get a loan on Compound?: Compound is a DeFi protocol that is considered highly reliable in the industry. Its smart contracts have been audited many times and the platform has been operating for years without any major deficits. In this respect, it can be said to be technically safe. The Compound loan process is also systemically safe; because each loan transaction is backed by excess collateral and an automatic liquidation mechanism is activated when necessary, thus protecting the money of the lenders. However, for the individual user, the concept of “safe” depends on whether you manage your collateral well. If the value of the asset you deposited as collateral suddenly drops and your debt exceeds the collateral, your position may be liquidated and you may lose your collateral. Therefore, you should be careful about liquidation risk when getting a loan on Compound.
• How does Compound’s governance system work?: Compound’s governance system is entirely run by COMP token holders. When a proposal for a change or update to the platform (proposal) is introduced, it is first put to a formal vote if it receives sufficient COMP support. The vote takes place on smart contracts and usually lasts 3 days. During this period, COMP token holders vote “yes” or “no”. If the specified majority threshold is exceeded and the “yes” votes prevail, the proposal is accepted. Since the content of the proposal is a piece of code that changes the protocol parameters, the smart contract automatically updates the protocol at the end of the vote (usually there is a 2-day waiting period for the implementation of accepted proposals, except in emergencies). The Compound development team or founders are not directly involved in this process; all decisions are made and implemented by the community. Of course, users discuss the proposals on forums and social media, evaluating their pros and cons. The goal of the governance system is to ensure that Compound remains decentralized and neutral, creating a collective governance model that considers the interests of all stakeholders of the protocol. In short, governance in Compound operates with the voting power of COMP tokens, which puts the future of the platform in the hands of the users.

To understand how passive income and decentralized finance work in the DeFi world, check out our JR Kripto Guide series.