Compound is a decentralized money market protocol built on the Ethereum blockchain.

Vision:

To build a multi-currency money market fund that provides a money market for different currencies internally.

Market Need:

Compound is a protocol on Ethereum used to create pools of assets whose interest rates are determined algorithmically based on supply and demand. Suppliers and borrowers interact directly with the protocol to earn or pay a floating rate. The Compound protocol aims to solve liquidity issues through a money market system, as most cryptocurrencies sit idle in exchanges and wallets without accruing interest for their owners.

Solution:

The COMP token incentive model subsidizes both lenders and borrowers using a "stock" model, allowing lenders to earn higher returns and borrowers to receive lower interest rates. By incentivizing lenders to deposit more and borrowers to take out larger loans, the token ensures that both parties are motivated to participate actively, increasing the liquidity of the Compound market. COMP tokens will be distributed for free to users of the protocol who engage in lending transactions. The more one lends or borrows, the more COMP they receive, a process referred to as "lend-to-earn."

The specifics of the mechanism are as follows:
4,229,949 COMP tokens are placed in a "reservoir" smart contract, with 0.5 COMP being distributed per Ethereum block (approximately 2,880 COMP daily), which means it will take four years for all tokens to be distributed;
COMP will be allocated across each lending market (e.g., ETH, USDC, DAI) based on the interest generated by that market, meaning the allocation ratio can change;
Within each market, 50% of the COMP is allocated to suppliers, and 50% to borrowers, with users receiving an amount proportional to their share of the market;
Once an address earns 0.001 COMP, any transaction within Compound will automatically transfer the corresponding COMP to their address, with smaller amounts able to be claimed manually.

Features:

The main participants in Compound include lenders, borrowers, liquidators, and Compound itself.
First, lenders deposit eligible assets into Compound smart contracts. Currently, Compound accepts nine eligible assets, and future COMP holders (legislators) can vote to approve new assets. There are 11 distinct token pools within Compound (BAT, DAI, SAI, ETH, REP, USDC, WBTC, UNI, COMP, ZRX, and Tether (USDT)).
After depositing assets, lenders receive corresponding cTokens (e.g., cBAT, cDAI, cSAI, etc.).
Second, after depositing assets, lenders gain the ability to borrow. Borrowers must ensure that the value of borrowed assets is less than the current value of deposited assets, meaning the loan-to-value ratio is less than 1.
Finally, borrowers must repay their loans with interest, which serves as the primary source of income for Compound.
If the value of borrowed assets increases or the value of deposited assets decreases, causing the debt-to-collateral ratio to approach the safety threshold, liquidators can step in to settle the debt and acquire the originally deposited assets at a discount, rendering the cTokens held by the lender worthless.

In the liquidation mechanism of the Compound protocol, a collateral factor attribute is added to each asset type, defining the amount of other assets that can be borrowed per unit of collateral. If the value of collateral falls below the required collateralization ratio (typically 150%), a liquidation process is triggered, allowing liquidators to immediately purchase the collateral (such as ETH) at a 3%-5% discount from market price.

Incentive Mechanism:

The governance token of the Compound protocol, COMP, represents the voting power of its holders, enabling community members to propose and vote on changes to the protocol. In the lending mining incentives introduced by COMP, 42.3% of the 4.23 million tokens will be allocated to lenders, and 42.3% to borrowers, with users earning COMP in proportion to their share of the market.

Token Distribution and Release:

With a fixed total supply, 42.3% of tokens will be distributed starting June 16th, with 0.5 COMP per Ethereum block, resulting in 845,989 COMP produced annually over four years.

23.96% has been distributed to Compound Labs shareholders,
22.26% will be allocated over four years to founders and team members,
3.73% will be reserved for future team members,
50.05% is reserved for protocol users (with 42.3% already defined).

Audit:

On September 3, 2019, security firm Zeppelin completed an audit of Compound.

Market Perspective:

Lending mining and liquidity mining are mechanisms for distributing and incentivizing tokens, serving as excellent catalysts, but only when the project has a solid foundation. Even without the COMP token, Compound could continue to operate successfully. In terms of DeFi economics, continuing the development of the "decentralized" concept of Bitcoin requires further innovative attempts, and Compound marks a significant start.

Risks:

Risks include network congestion during sharp declines in token prices, preventing liquidations from executing; smart contract vulnerabilities; and security attacks.

Value Assessment:

The COMP token currently binds only to voting rights, not dividends, serving as a community governance token. Users engaging with the Compound platform incur two types of expenses: transaction fees paid to miners on Ethereum for confirming blockchain transactions, and the spread between deposit and borrowing rates. The profit from this spread and the portion of interest income may support the value of COMP, although it remains unclear how these profits will be utilized (previously, the white paper suggested they would serve as economic profit for the Compound operating team).