What Is Compound? A Beginner’s Guide to the DeFi Lending Protocol

By Alex Assoune Dec 13, 2025

Decentralized finance (DeFi) has transformed how people lend, borrow, and earn interest on cryptocurrency. Among the pioneering platforms in this space is Compound, a protocol that allows users to lend crypto to earn interest and borrow assets against their holdings, all in a decentralized, automated way.

If you’re new to DeFi or want to understand why Compound is widely used, this guide explains what Compound is, how it works, its key features, and the benefits and risks of using it.

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What Is Compound?

Compound is a decentralized lending and borrowing protocol built primarily on Ethereum. It was launched in 2018 by Robert Leshner and Geoffrey Hayes and quickly became one of the most trusted platforms for earning interest on crypto assets without intermediaries.

The platform is non-custodial, meaning users maintain control of their funds at all times. Compound uses smart contracts to automate interest accrual, lending, and borrowing, making the process transparent and efficient.

How Compound Works

Compound operates through a simple supply-and-borrow model:

1. Supplying (Lending) Assets

Users deposit supported cryptocurrencies into the protocol.
In return, they receive cTokens (e.g., cUSDC, cDAI), which represent your share of the pool and accrue interest automatically.
Interest is earned continuously and reflected in the increasing value of cTokens.

2. Borrowing Assets

Users can borrow crypto by collateralizing deposited assets.
Compound requires over-collateralization to protect the protocol from defaults.
Borrowers can choose to repay immediately or maintain an open position, paying interest on the loan.

3. Algorithmic Interest Rates

Interest rates are dynamic and algorithmically determined based on supply and demand for each asset.
When borrowing demand rises, interest rates increase, rewarding lenders with higher yield.

Key Features of Compound

1. cTokens

cTokens are interest-bearing tokens received when you supply assets.
They accrue interest automatically, which compounds over time.
cTokens can also be used as collateral in other DeFi protocols.

2. Wide Asset Support

Compound supports major cryptocurrencies like ETH, USDC, DAI, USDT, WBTC, and more.
Users can supply or borrow a wide variety of assets, depending on market demand.

3. Decentralized Governance

Compound has a governance token, COMP, allowing holders to propose and vote on protocol changes.
Governance decisions include adding new assets, changing interest rate models, and adjusting collateral factors.

4. Transparency and Security

Compound is fully auditable on-chain, meaning all transactions, interest rates, and protocol changes are visible.
Smart contracts are open-source and regularly audited to minimize risk.

5. Layer 2 and Cross-Chain Expansion

Compound has begun exploring layer 2 scalability solutions, reducing gas costs for users and making lending/borrowing more accessible.

Benefits of Using Compound

Earn Passive Income
- Lenders can earn continuous interest on crypto assets without selling them.
Access Liquidity
- Borrowers can unlock funds without selling holdings, useful for trading, leverage, or liquidity needs.
Non-Custodial
- Users retain control of their private keys, reducing counterparty risk.
Automated Yield
- Smart contracts handle interest accrual and distribution, removing manual processes.
Governance Participation
- COMP token holders can vote on upgrades, ensuring the protocol evolves according to community decisions.

Risks of Using Compound

Smart Contract Risk
- Bugs or exploits could lead to loss of funds.
Liquidation Risk
- Borrowers may be liquidated if collateral value drops below protocol thresholds.
Asset Volatility
- Lending or borrowing volatile tokens increases the risk of losses.
Protocol Risk
- Changes in governance or interest models could impact returns.
Regulatory Risk
- DeFi platforms, including Compound, face evolving regulatory scrutiny that could affect operations.

Who Should Use Compound?

Crypto holders looking to earn passive income on idle assets.
Traders who want to borrow crypto for leverage or liquidity without selling holdings.
DeFi participants interested in governance and earning COMP tokens.
Beginners seeking a relatively low-risk entry point into DeFi, especially with stablecoins.

For beginners, starting with stablecoins like USDC or DAI can provide steady, predictable returns with lower risk.

Compound vs. Other DeFi Lending Protocols

Feature	Compound	Aave	MakerDAO
Lending & Borrowing	Yes	Yes	Partial (borrow via DAI)
Collateral Type	ETH, BTC, Stablecoins	ETH, BTC, Stablecoins, More	ETH and other vaultable assets
Governance Token	COMP	AAVE	MKR
Interest Rates	Algorithmic, variable	Variable & stable	Collateralized debt positions
Auto-Compounding	cTokens accrue interest	aTokens accrue interest	No
Security	Audited smart contracts	Audited smart contracts	Audited smart contracts

Compound is often chosen for simplicity, strong security, and its governance model, making it ideal for users who prioritize transparency and passive income.

Conclusion

Compound is a foundational DeFi protocol that allows users to lend, borrow, and earn interest on cryptocurrency in a fully decentralized way. Its cToken system, algorithmic interest rates, and governance token (COMP) provide a secure and transparent platform for passive income, liquidity, and participation in the evolving DeFi ecosystem.

While risks exist—smart contract vulnerabilities, liquidation, and market volatility—Compound remains one of the safest and most widely adopted platforms for DeFi lending and borrowing.

For anyone looking to enter DeFi, understanding Compound’s mechanics and strategies is a crucial step toward building a secure and profitable crypto portfolio.

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Disclaimer: The above content is for informational and educational purposes only and does not constitute financial or investment advice. Always do your own research and consider consulting with a licensed financial advisor or accountant before making any financial decisions. Panaprium does not guarantee, vouch for or necessarily endorse any of the above content, nor is responsible for it in any manner whatsoever. Any opinions expressed here are based on personal experiences and should not be viewed as an endorsement or guarantee of specific outcomes. Investing and financial decisions carry risks, and you should be aware of these before proceeding.

About the Author: Alex Assoune

Alex Assoune (MS) is a global health and environmental advocate. He founded Panaprium to inspire others with conscious living, ethical, and sustainable fashion. Alex has worked in many countries to address social and environmental issues. He speaks three languages and holds two Master of Science degrees in Engineering from SIGMA and IFPEN schools.

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