Compound (COMP) is a protocol built on Ethereum that establishes algorithmically derived interest rates through asset-based supply and demand dynamics in a money market system. It aims to address the liquidity problem in the cryptocurrency space where most assets remain idle in exchanges and wallets, providing no interest to their owners.
The COMP token incentivizes lending and borrowing by subsidizing both sides, allowing lenders to earn higher returns and borrowers to access lower interest rates. The incentivized behavior encourages lenders to deposit more and borrowers to borrow more, thereby improving liquidity in the Compound market. COMP tokens are distributed for free to users of the protocol, simply by engaging in lending and borrowing transactions on Compound. The more one borrows, the more COMP tokens they receive, a process known as "borrowing mining."
Project Features
Compound has four main participants: lenders, borrowers, liquidators, and Compound itself.
Firstly, lenders collateralize eligible assets into the Compound smart contract. Currently, Compound accepts nine eligible assets, and in the future, COMP holders (legislators) can vote to approve new eligible assets. There are currently 11 different token pools within Compound (BAT, DAI, SAI, ETH, REP, USDC, WBTC, UNI, COMP, ZRX, and Tether(USDT)).
After lenders collateralize assets, they receive corresponding certificate tokens called cTokens. Because there are 11 assets, there are 11 types of cTokens, called cBAT, cDAI, cSAI, etc.
Secondly, once lenders collateralize assets, they become eligible to borrow. Lenders can become borrowers and the borrower's borrowing limit must be less than the current value of the collateralized assets, meaning the borrowing amount-to-collateral ratio must be less than 1.
Finally, borrowers must repay their loans and pay interest. This interest is the primary source of revenue for Compound.
If a borrower's debt balance approaches the liquidation threshold due to an increase in the value of the borrowed asset or a decrease in the value of the collateralized asset, the liquidator mechanism will settle the debt and receive the originally collateralized asset from the lender to liquidate and profit from. After liquidation, the lender's cToken becomes invalid.
In Compound's liquidation mechanism, a collateral factor attribute is added to each type of asset. This attribute defines how many units of a certain asset can be borrowed against a unit of collateral. This is known as a collateralization rate. Currently, most lending protocols require over-collateralization with a required collateralization rate of less than 150%. If the value of the collateralized asset falls below 150% of the required collateralization rate (e.g., for ETH), it triggers the liquidation process. Once initiated, liquidators can immediately acquire the collateralized asset (e.g., ETH) at a discount of 3%-5% below market price.
Incentive Mechanism
The COMP token serves as a governance token, allowing holders to vote on protocol changes. Through the borrowing mining incentive introduced by COMP, 50% of the initial 4.23 million COMP tokens will be allocated to lenders, and 50% to borrowers. Users receive COMP proportionate to their assets' share in the market.
Token Distribution and Release
COMP has a fixed total supply. 42.3% of the tokens will be mined along with Ethereum blocks, generating 0.5 COMP per Ethereum block, resulting in an annual supply of 845,989 COMP. This mining will continue for four years.
23.96% has already been distributed to Compound Labs shareholders.
22.26% will be allocated to founders and team members over four years.
3.73% will be allocated to future team members.
50.05% is reserved for protocol users.