As decentralized finance matures, legacy protocols like Compound are evolving to remain competitive in a multichain world. Once a category-defining protocol on Ethereum, Compound has taken meaningful steps to streamline its model, expand to new chains, and position itself for the next wave of DeFi users and developers.
Overview
Compound is an open-source, algorithmic money market protocol that allows users to lend and borrow crypto assets permissionlessly. Launched in 2018, Compound helped establish the peer-to-pool lending model. It was among the first DeFi protocols to popularize yield farming by introducing its COMP governance token in 2020.
Compound operates on Ethereum and other Layer 2 networks today through its next-generation protocol, Compound III—a leaner, safer version designed to minimize risk and improve capital efficiency.
Key Features
Compound III (v3)
Compound’s latest version, also known as Compound III, simplifies the lending architecture by introducing a single collateral asset model. Borrowers deposit one type of collateral and borrow a single base asset, typically a stablecoin like USDC, reducing complexity and limiting systemic risk.
Key improvements:
- Isolated risk per collateral type
- Cheaper gas fees due to streamlined smart contracts
- Improved liquidation mechanics for greater protocol stability
Multichain Expansion
Compound III is now deployed on Ethereum, Arbitrum, Base, and Polygon, marking the protocol’s shift toward broader accessibility across the Ethereum Layer 2 ecosystem. This multichain approach aims to offer faster, lower-cost lending services while maintaining security standards.
Governance via COMP
COMP, Compound’s governance token, allows the community to propose and vote on protocol upgrades, interest rate models, risk parameters, and more. Governance decisions influence which assets are supported and how rewards are distributed, shaping the protocol’s evolution.
Permissionless and Composable
Like other DeFi protocols, Compound remains fully EVM-compatible and permissionless. Developers can integrate Compound’s markets into dApps or aggregators like Yearn, Instadapp, or DeFi Saver.
Ecosystem Activity
Compound remains one of the most battle-tested DeFi lending protocols, with over $3.5 billion in cumulative borrow volume and $2.15B+ in Total Value Locked across deployments as of March 2025, according to Defillama.documentation, or follow their updates on X.
While Compound’s TVL has been surpassed by newer entrants like Aave and Morpho, the protocol’s focus on risk minimization, efficient capital deployment, and governance-led upgrades continues to make it a cornerstone of the lending stack.
The recent deployment of Compound III on Base underscores its intent to stay competitive within fast-growing L2 ecosystems, offering users low-fee, high-speed alternatives to Ethereum Layer 1.
Funding and Backers
Compound Labs, the development company behind Compound, previously raised from leading investors including a16z crypto, Paradigm, and Bain Capital Crypto. The launch of COMP marked one of the earliest transitions to community-led governance in DeFi history.
Token Utility
COMP is primarily a governance token. Unlike other protocols that use native tokens for incentives or staking, Compound has focused on long-term sustainability over aggressive liquidity mining. That said, governance can vote to reintroduce or modify incentives as needed.
Why It Matters
Compound remains a foundational protocol in decentralized lending—and its evolution reflects broader trends in DeFi: simplicity, safety, and scalability.
- Streamlined Lending Model: Compound III reduces attack surfaces and makes lending safer for all participants.
- L2 Strategy: With deployments on Base and Arbitrum, Compound meets users where fees are low and adoption is accelerating.
- Governance Resilience: Active COMP governance ensures the protocol evolves with market needs without centralized oversight.
- Security Track Record: Years of audits, usage, and open-source contributions make Compound one of the most trusted names in DeFi.
As DeFi continues to expand across chains and user types, Compound’s focus on risk-managed innovation keeps it relevant in an increasingly complex ecosystem.
For more, visit compound.finance or follow @compoundfinance.
