Compound (COMP) In-Depth Analysis: How the DeFi Lending Foundation Protocol Works

Imagine your cryptocurrency assets are not just sitting in your wallet, but earning interest automatically every 15 seconds, just like in a savings account at a bank. This is not a futuristic fantasy but a core feature that the Compound protocol has been implementing daily on the Ethereum blockchain since 2018.

As one of the earliest decentralized finance (DeFi) lending protocols, Compound has revolutionized our understanding of how to utilize crypto assets, transforming static holdings into dynamic yield-generating tools.

01 Compound Protocol: Redefining the Value of Crypto Assets

Compound is not just another ordinary DeFi project; it is a true pioneer in on-chain lending. Founded by Robert Leshner and Geoffrey Hayes in 2017, the protocol aims to address issues of intermediaries and inefficiencies in traditional financial systems.

Imagine a financial world without banks, manual approvals, fully driven by code—that’s the financial ecosystem built by Compound.

Within the Compound ecosystem, anyone holding cryptocurrencies can become a lender, while users needing funds can borrow against their crypto assets as collateral. All of this is automated through smart contracts, eliminating the role of traditional financial intermediaries.

The smart contracts of the Compound protocol have undergone multiple audits, handling billions of dollars in transactions since launch without major security incidents, earning it a reputation of being “battle-tested.”

02 Core Mechanisms: How Smart Contracts Drive Automated Lending

The core operation of Compound is built on three key components: liquidity pools, cToken system, and an algorithmic interest rate model.

When users deposit assets into Compound’s liquidity pools, they receive corresponding cTokens as proof of deposit. For example, depositing ETH yields cETH, and depositing USDC yields cDAI. These cTokens are ERC-20 tokens that can be traded on the market or used in other DeFi protocols, showcasing the so-called “money Lego” feature.

Interest rates are determined entirely by market supply and demand. When demand to borrow a certain asset increases, the interest rate automatically rises; conversely, it decreases when demand drops.

This algorithmic interest rate model adjusts every 15 seconds (roughly every Ethereum block), ensuring efficient allocation of funds.

Risk management is another critical aspect of the Compound system. The protocol sets a “collateral factor” for each supported asset, determining how much users can borrow against their collateral. For example, ETH has a collateral factor of 75%, meaning users can borrow up to 75% of the value of their ETH collateral. This mechanism effectively prevents systemic risk.

03 COMP Token: More Than Just a Governance Tool

The COMP token is the native governance token of the Compound protocol, with a fixed total supply of 10,000,000 tokens. As of December 2025, approximately 8,865,066 COMP are in circulation, accounting for nearly 90% of the total supply.

The distribution of COMP is carefully designed: 42.3% for liquidity mining rewards, 24% allocated to shareholders, 22.5% to founders and the team, 7.75% reserved for the community, and 3.72% reserved for future team members.

Holders of COMP tokens have voting rights on protocol changes, including decisions on adding or removing assets, adjusting interest rate models, and modifying risk parameters. Each COMP token represents one vote, and users holding more tokens have greater influence in governance decisions.

The launch of the “liquidity mining” program in June 2020 radically changed the DeFi landscape. Users could earn COMP tokens simply by using the protocol (depositing or borrowing), which in turn ignited the summer of DeFi frenzy.

04 Current Market Performance and Future Outlook

According to the latest Gate market data, as of December 26, 2025, the trading price of COMP is $26.4. The token has shown positive momentum in the short term, rising 2.2% in 24 hours and 2.3% over 7 days.

Despite recent gains, COMP still faces significant market pressure, with a 10.6% decline over 30 days, a 34.4% decline over 90 days, and a 68.9% decline over the one-year cycle.

From a broader time perspective, the current price of COMP is significantly below its all-time high. Data shows that the highest price of COMP reached $909.09, while the lowest was $13.9288. The current price has fallen more than 95% from its peak.

Fundamentally, Compound remains an important player in the DeFi lending space. It supports multiple cryptocurrencies, including ETH, WBTC, USDC, DAI, USDT, and other mainstream tokens. Despite competition from protocols like Aave, Compound maintains a vital position in the DeFi ecosystem due to its first-mover advantage, robust security record, and simple design philosophy.

05 How to Participate in the Compound Ecosystem on Gate

For users looking to earn yields through the Compound protocol or trade COMP tokens, Gate offers a secure and convenient platform. Gate not only supports COMP token trading but also provides relevant market data and analysis tools.

Users can directly trade COMP on Gate and participate in the growth of this foundational DeFi protocol. It’s important to note that all investment decisions should be based on thorough research and personal risk assessment.

Although the Compound protocol has undergone multiple audits and has a good operational record, inherent risks in DeFi still exist, including smart contract vulnerabilities, market volatility, and liquidation risks.

Particularly, when the value of a user’s collateral drops close to the borrowed amount, automatic liquidation may be triggered, leading to asset loss. Therefore, maintaining appropriate collateral ratios and closely monitoring market changes are crucial when participating in Compound or other DeFi protocols.

Future Outlook

As of December 26, 2025, the COMP price on Gate is shown as $26.4, reflecting a market capitalization based on over 8,865,066 circulating tokens.

However, the true value of Compound is not just reflected in the token price. As the DeFi industry matures from hype to stability, protocols like Compound that focus on solving real financial needs and providing transparent, permissionless lending services will increasingly be recognized as essential infrastructure components.

Looking ahead, with more institutional participation in DeFi and further adoption of blockchain technology, time-tested protocols like Compound may enter new development phases.