Finder makes money from featured partners, but editorial opinions are our own. Advertiser disclosure

What is Compound Finance?

We explore how to use Compound Finance for lending and borrowing

In the traditional world of finance, users can deposit cash savings in a bank account and earn interest on the savings. However, for many cryptocurrency investors, the option to generate interest on cryptocurrency holdings has not been an option. This has often meant that cryptocurrencies sit in a digital wallet or on an exchange without yielding interest.

Thanks to advancements in decentralized finance (DeFi), the process of borrowing and lending, and therefore the potential to earn interest on cryptocurrencies, is now prevalent in the crypto space. Compound Finance is one such protocol.

Borrowing and lending with Compound is accessible to anyone anywhere in the world and requires no special permissions.

DeFi protocols are experimental works in progress. Funds deposited into DeFi protocols in general can be at risk of smart contract vulnerabilities, malicious developers and hacks. DeFi Protocols are generally governed by token holders through a DAO (decentralised autonomous organisation).

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

What is Compound Finance?

Compound Finance is a decentralized lending and borrowing protocol built on the Ethereum blockchain. Lenders can deposit funds in exchange for a return on their investment and borrowers can gain access to credit in exchange for depositing collateral. With the application of smart contracts and algorithmically adjusted interest rates, the system is frictionless, highly accessible and removes the cumbersome processes of traditional financial banking.

Launched in September 2018, Compound Finance has been thoroughly field-tested in comparison to newer DeFi protocols and holds a relatively high platform reputation. At the time of writing, the platform currently holds $9.1 billion worth of cryptocurrency assets.

It bridges the gap between those that wish to lend Ethereum-based, ERC-20 assets with those that wish to borrow them. In comparison to traditional banks, Compound Finance offers users interest rates far above the current global average.

Smart contracts are utilised to automate the process of borrowing and lending. This includes the storage and management of funds that are added to the platform. Interest rates are adjusted by an algorithm that increases or lowers rates based upon supply and demand.

The platform is accessible for anyone that has a Web3 digital wallet, such as MetaMask. In comparison to conventional borrowing and lending services, Compound requires no permissions and allows anyone to use the platform.

The native token to the Compound Finance protocol is COMP and is used to incentivize lenders and provide governance to the platform.

As the protocol is decentralized, Know Your Customer (KYC) data is not required. There are no penalties for withdrawing funds and no minimum or maximum limit on the time funds can be deposited onto the platform.

How to supply assets on Compound

To interact with the Compound Finance protocol, a user needs to have a Web3 digital wallet like MetaMask. This Web3 digital wallet acts as a bridge between the decentralized Compound application and the cryptocurrency assets that you hold. Aside from the cryptocurrencies you want to interact with, a user will also require a small amount of Ether (ETH) so that transactions on the Ethereum blockchain can be completed.

How to supply assets on Compound:

  1. Compound Finance. Head over to the Compound Finance website and choose App at the top right of the screen. On the following page, you will be prompted to connect your Web3 digital wallet. Select your chosen wallet and connect.
  2. Select an asset. Choose a cryptocurrency asset that you would like to lend. Choose the digital asset.
  3. Enable. In the pop-up screen of your chosen cryptocurrency asset, select Enable. This will allow Compound Finance to access funds in your digital wallet. A small transaction (gas) fee will be required at this step. Confirm the transaction via your Web3 digital wallet.
  4. Supply. Once enabled, supply your chosen cryptocurrency asset. Choose your chosen asset again. This time you will have the option to enter the amount you wish to supply. Enter the amount and hit Supply.
  5. Confirm. Review the gas fees and confirm the transaction via your Web3 digital wallet.

After lending, you will be able to view your supply balance and net annual percentage yield (APY) on the Compound dashboard. The net APY will be an average figure if you supply more than one cryptocurrency asset.

For deposited cryptocurrency assets, users will earn the associated interest rate (APY), which is dynamic and changes based upon supply and demand. Alongside the interest rate, lenders will also earn the native COMP token, which is distributed proportionally based on what percentage of the market that user is supplying. The higher the interest rate, the more COMP tokens that individual market will receive.

The COMP tokens can be withdrawn at any time to be cashed out or exchanged for other cryptocurrency assets.

Deposited assets can be used as collateral for any loan a user wishes to take out in the future.

Interest on supplied tokens is accrued using liquidity provider tokens, known as cTokens.

cTokens

When lending assets with Compound, supplied assets are represented and tracked by tokens called cTokens. cTokens are Ethereum-based, ERC20 tokens that are minted and provided to a user when that user lends funds to the Compound protocol.

For example, if you deposited the stablecoin DAI into Compound, you would receive cDAI tokens back in your digital wallet.

They are liquidity provider tokens that ensure a user remains in control of their digital assets at all times. The tokens can be used at any time to withdraw your cryptocurrency assets.

cTokens represent the user’s proportion of the supply pool they have lent cryptocurrency assets to. cTokens accrue interest from the associated market, which means over time, the cTokens will be able to redeem more of the underlying asset than what was deposited. This is how lenders earn interest through Compound.

Because cTokens are in ERC20 form, they can be easily transferred on the Ethereum blockchain to other DeFi protocols. Because cTokens correlate to an actual asset, they are valuable to other DeFi protocols, which means they can be used to earn additional interest through other lending protocols.

How to borrow on Compound

When borrowing from Compound, aside from a Web3 digital wallet, the only other thing a user requires is the cryptocurrency to be deposited as collateral. Compound, like many other DeFi protocols, works on an over-collateralization basis, which means that the amount deposited as collateral must be higher than the borrowed amount.

For example, at the time of writing, the limit for most assets on Compound is currently 80% — which means a user can borrow 80% of what was deposited as collateral. If you deposited $100, you would be able to borrow a maximum of $80.

The borrowing limit is calculated automatically for users based on their deposited funds. The protocol won’t allow a user to go over that borrowing limit.

Thanks to the over-collateralization and the decentralized system, there’s no need for credit checks or income statements.

To borrow, a user must first supply cryptocurrencies to the platform. Please review the section on supplying assets on Compound above. A unique feature of Compound is that regardless of the asset supplied to the protocol, the user can borrow any other cryptocurrency asset.

How to supply assets to Compound:

  1. Connect. Head over to the Compound dashboard and connect your Web 3.0 digital wallet.
  2. Collateral. Cryptocurrency assets lent to the Compound protocol can be viewed in the Supply column of the Compound dashboard. Select the Collateral slider next to each deposit you wish to use as collateral.
  3. Enable. Choose Use X as Collateral. This will require a transaction confirmation via your Web3 digital wallet. This step will enable deposited cryptocurrency assets to be used as collateral against future loans.
  4. Select an asset. In the Borrow column on the Compound dashboard, choose the asset that you would like to borrow.
  5. Enter the amount. Enter the amount that you would like to borrow. On this pop-up window, you will see Borrow Limit Used. This is the maximum amount of the chosen cryptocurrency you are entitled to borrow based on the collateral you have supplied. Once you’re happy with the amount, hit Borrow.
  6. Confirm. Confirm the transaction through your Web3 digital wallet.

Once the transaction is completed, you will be able to see your Borrow balance alongside your Supply balance on the Compound dashboard.

The associated interest will be accrued to the Borrow balance total.

Liquidations and the borrowing limit

The Compound Finance protocol uses over-collateralization to ensure no KYC or credit checks are required by borrowers before they take out a loan. Over-collateralization means that a user must deposit more than the loan required. If a user cannot repay a loan, then the protocol can use some of the collateral to pay it off instead.

When borrowing through Compound, it is always advisable to stay well beneath your borrowing limit. The price of cryptocurrency assets can change quickly so the collateral provided to Compound may decrease in value against the assets borrowed. If this occurs and the borrowing limit is reached, the account will move into negative account liquidity or liquidation.

At this stage, Compound will sell some of your collateral to move the account back into positive liquidity. To avoid this scenario, it is always worth having a comfortable buffer within your borrow limit.

How to Repay on Compound

Once you have used the borrowed funds for the intended purpose, you will want to repay the loan so that you can stop being charged interest on it.

  1. Select an asset. On the Compound dashboard, select the asset associated with the loan that you would like to repay.
  2. Repay. Choose the Repay tab, which is alongside the Borrow tab.
  3. Enter the amount. To repay the entire loan, select MAX or else enter the amount that you would like to repay. Choose the Repay button at the bottom of the screen.
  4. Confirm. Confirm the transaction through your Web3 digital wallet.

Once the transaction has completed, your previously borrowed funds will disappear from the borrow section on the Compound dashboard.

What does the COMP token do?

The COMP token is the native cryptocurrency to the Compound Finance protocol. The token was launched in 2020 to incentivize the use of the platform and to decentralize governance.

Compound Finance is a decentralized protocol and is governed by holders of the native COMP token. COMP token holders can vote on items such as the direction of the platform, interest rate decisions and the development of additional protocols. This ensures no one entity has control over its use or development.

Alongside the governance use case, the COMP token holds value in its own right and is therefore an incentive for lenders and borrowers of the platform. COMP can be exchanged for other cryptocurrency assets at any time.

COMP tokens can be purchased via an exchange, or they can be earned through lending or borrowing on the Compound Finance protocol. Users that lend and borrow digital assets are rewarded a proportion of the daily minted COMP token that is proportionally distributed to users based on the amount held in the platform and the interest rates at the time.

Holders of the COMP token can view their balance either through their digital wallet or on the Vote tab on the Compound Finance dashboard.

Where to buy COMP

Use the table below to compare exchanges that sell the COMP token, or read our full guide about how to buy COMP.

1 - 5 of 14
Name Product Deposit methods Fiat Currencies Cryptocurrencies Offer Disclaimer Link
Finder Award
OFFER
eToro USA LLC Cryptocurrency Trading
Bank transfer, Debit card, PayPal, Wire transfer
USD

80
cryptocurrencies

Get $15 when you sign up and buy $100 of crypto. T&Cs apply.
Disclaimer: eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.

Capital at risk

View details
OFFER
Uphold - Digital Asset Platform
Bank transfer, Credit card, Debit card, Bank transfer (SEPA), Apple Pay, Google Pay
USD, GBP, AUD, EUR, CAD, CNY, JPY, SGD, INR, NZD

243
cryptocurrencies

Refer a friend to earn US$20 — $10 for you and $10 for the person you refer. T&Cs apply.
Terms apply. Cryptoassets are highly volatile. Your capital is at risk.

Capital at risk

View details
Paybis Cryptocurrency Exchange
Bank transfer, Credit card, Debit card, Neteller
EUR, GBP, USD, AUD, CAD, PHP, SGD, CHF, HKD, JPY & 30+ more

357
cryptocurrencies

US residents: Restricted in the following states - NY, CT, NM, WA, HI, AL, VT, FL, AK, NV.

Capital at risk

View details
Robinhood Crypto
Bank transfer, Cash, Debit card
USD

15
cryptocurrencies

Capital at risk

View details
Finder Award
Kraken Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, Apple Pay, Google Pay, SWIFT, ACH online banking
USD, EUR, CAD, GBP, CHF, AUD

235
cryptocurrencies

Capital at risk

View details
Disclaimer: Star ratings are only displayed for products with 10 or more reviews.
loading

Our verdict: Should you use Compound?

Compound Finance is a very easy, and extremely user-friendly platform for cryptocurrency investors looking to earn interest on their cryptocurrency holdings. Not only does it offer the option to obtain a return on investments but in comparison to traditional financial models interest payments can be significantly higher.

The platform is one of the oldest among the DeFi protocols and has a high reputation among users. Although highly reputable, the protocol still utilizes smart contract technology and is still integrated within the larger DeFi ecosystem, so the risks of lending with Compound should still be assessed. Even if slightly limited in variety, there are still plenty of popular cryptocurrency tokens for the average investor looking to put their assets to work.

Pros and cons

Pros

  • Return on investment. Returns on deposits can be much higher when compared with traditional financial entities such as banks.
  • Tried and tested. The protocol is one of the older DeFi protocols, launching back in 2018.
  • Noncustodial. Users remain in control of their digital assets at all times, even when lending.
  • No restrictions. There is no minimum or maximum amount of time assets can be lent or borrowed for.
  • No KYC data. The protocol is completely permissionless, meaning no KYC or income statements are required for either borrowing or lending.

Cons

  • Limited cryptocurrencies. There are currently only nine cryptocurrency options for both borrowing and lending.
  • Smart contract risk. The protocol is heavily reliant on smart contracts, which are always at risk from technical bugs.
  • Liquidation. Due to the volatility of cryptocurrency markets, liquidation events can catch users by surprise.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Whether products shown are available to you is subject to individual provider sole approval and discretion in accordance with the eligibility criteria and T&Cs on the provider website.

Name Product Deposit methods Fiat Currencies Cryptocurrencies Offer Disclaimer Link
eToro Cryptocurrency Trading
eToro Cryptocurrency Trading
Bank transfer, Credit card, Debit card, Neteller, Skrill
EUR, GBP, NZD, USD, AUD, HKD, SGD, CHF, NOK & 5+ more

78
cryptocurrencies

Disclaimer: Cryptoasset investing is highly volatile and unregulated in the UK and some EU countries. No consumer protection. Tax on profits may apply.

Capital at risk

View details
Binance Cryptocurrency Exchange (Not available to US users)
Bank transfer, Cryptocurrency
-

369
cryptocurrencies

Capital at risk

View details
KuCoin Cryptocurrency Exchange
KuCoin Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, PayPal, P2P
USD, EUR, GBP, RUB, CNY, AUD, KRW, JPY, TRY, VND

743
cryptocurrencies

Capital at risk

View details
Bybit Cryptocurrency Exchange
Bybit Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, P2P
USD, AUD, CAD, EUR, GBP, NZD, HKD, JPY, SGD, PHP

279
cryptocurrencies

Disclaimer: Highly volatile investment product. Your capital is at risk.

Capital at risk

View details
Gate.io Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card

1607
cryptocurrencies

Capital at risk

View details
Kraken Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, Apple Pay, Google Pay, SWIFT
USD, EUR, CAD, GBP, CHF, AUD

222
cryptocurrencies

Capital at risk

View details
OKX Cryptocurrency Exchange
Bank transfer, Cryptocurrency, iDEAL, PayPal, POLi, SEPA, Faster Payments (FPS)
CNY, EUR, ARS, AUD, BGN, BRL, CAD, CHF, COP

338
cryptocurrencies

Capital at risk

View details
Uphold
Uphold
Bank transfer (ACH), Credit card, Debit card, Apple Pay, Google Pay
USD, GBP, AUD, EUR, CAD, CNY, JPY, SGD, INR, NZD

237
cryptocurrencies

Capital at risk

View details
Paybis Cryptocurrency Exchange
Bank transfer, Credit card, Debit card, Neteller
EUR, GBP, USD, AUD, CAD, PHP, SGD, CHF, HKD, JPY & 30+ more

357
cryptocurrencies

US residents: Restricted in the following states - NY, CT, NM, WA, HI, AL, VT, FL, AK, NV.

Capital at risk

View details
Finder Award
Bitstamp Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, SEPA, Faster Payments (FPS)
USD, EUR, GBP

79
cryptocurrencies

Capital at risk

View details
Coinmama Cryptocurrency Marketplace
Credit card, Fedwire, SEPA, Google Pay, SWIFT, Bank card
USD, EUR, AUD, CAD, GBP, JPY

16
cryptocurrencies

Capital at risk

View details
OFFER
Gemini Cryptocurrency Exchange
Bank transfer (ACH), Cryptocurrency, Debit card, PayPal, Apple Pay, Google Pay, SWIFT
USD, AUD, CAD, EUR, GBP, SGD, HKD, COP

141
cryptocurrencies

Capital at risk

View details
Finder Award
Crypto.com App
Bank transfer, Credit card, Cryptocurrency, Debit card, PayPal, Wire transfer, Apple Pay, Google Pay, SWIFT
USD, EUR, GBP, COP, CHF, HKD, SGD, AUD, CAD, KRW, SEK, CNY, TRY, RON, JPY, NOK, MYR, BRL, DKK, ZAR, BGN, THB, INR, TWD, PHP, IDR, MOP, MDL, SAR, MXN, CLP

318
cryptocurrencies

Capital at risk

View details
loading

Are you visiting from outside the US?

Select an option to continue

Bybit Cryptocurrency Exchange

Bybit Cryptocurrency Exchange logo
  • Offers leverage and derivative trading
  • Supports EUR, GBP and CHF
  • Licensed to operate in all European countries
Go to site
Disclaimer: Highly volatile investment product. Your capital is at risk.

Kraken Cryptocurrency Exchange

Kraken Cryptocurrency Exchange logo
  • Large selection of cryptocurrencies
  • Low fees for active traders
  • Pleasant UI for new traders
Go to site

KuCoin Cryptocurrency Exchange

KuCoin Cryptocurrency Exchange logo
  • Buy, sell and trade over 700 crypto assets
  • Supports 10 Asian fiat currencies
  • Offers crypto futures trading
Go to site

Kraken Cryptocurrency Exchange

Kraken Cryptocurrency Exchange logo
  • Buy, sell and trade over 200 crypto assets
  • Licensed to operate in 17 jurisdictions in Oceania
  • Supports AUD
Go to site

Binance Cryptocurrency Exchange (Not available to US users)

Binance Cryptocurrency Exchange (Not available to US users) logo
  • Supports over 300 crypto assets
  • Binance Pay enables users spend their crypto
  • Binance P2P supports multiple African fiat currencies
Go to site

Binance Cryptocurrency Exchange (Not available to US users)

Binance Cryptocurrency Exchange (Not available to US users) logo
  • Supports over 300 crypto assets
  • Binance Pay works with Credencial Payments to support crypto payments
  • Binance P2P supports five Latin American fiat currencies
Go to site

Bybit Cryptocurrency Exchange

Bybit Cryptocurrency Exchange logo
  • Supports leverage and derivative trading
  • Supports 300 spot trading pairs
  • Low-to-non-existent trading fees
Go to site
Disclaimer: Highly volatile investment product. Your capital is at risk.

More guides on Finder

Ask an Expert

Finder.com provides guides and information on a range of products and services. Because our content is not financial advice, we suggest talking with a professional before you make any decision.

By submitting your comment or question, you agree to our Privacy and Cookies Policy and finder.com Terms of Use.

Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
Go to site