Compound

Compound is a decentralized lending protocol that allows users to supply crypto assets as collateral to borrow a single base asset (like USDC, USDT, WETH) across multiple EVM chains. Users can also earn interest by supplying the base asset, with interest rates determined algorithmically based on supply and demand. The protocol supports isolated markets per base asset with configurable collateral types and risk parameters.

The Compound protocol creates yield for participants through two main sources: interest paid by borrowers and rewards paid in the protocol's own COMP token.

Interest from borrowing: When you supply a base asset (like USDC or WETH) to Compound, you earn interest. This interest is paid by borrowers who take out loans using their crypto as collateral. The interest rates are set automatically by the protocol's algorithm, which adjusts them based on how much of the asset is being borrowed versus how much is supplied. A small fee (called a reserve factor or governance fee) is taken out of this interest and goes into the protocol's own reserve fund.

COMP token rewards: In addition to interest, the protocol distributes COMP tokens as rewards to both suppliers and borrowers. These rewards are based on how much you use the base asset—supplying it or borrowing it. The protocol tracks your usage with a special system in its main contract. Once earned, you can claim these COMP rewards through a separate rewards contract. Importantly, these rewards only start accumulating when the total supply of the base asset in the market is above a certain minimum threshold set by the protocol.

In summary, yield flows in two directions:

• From borrowers to suppliers as interest payments.
• From the protocol's COMP token reserves to active participants as rewards.

The protocol also captures a fee for its governance. This design creates a dynamic yield that changes with market demand, encouraging people to both supply liquidity and take out loans.