Compound

What is Compound?

Compound has two meanings in crypto: (1) the financial concept of earning interest on interest, and (2) Compound Finance, a major DeFi lending protocol on Ethereum.

Compound Interest Explained

How Compounding Works

• Interest earned is added to principal
• New interest calculated on larger balance
• Exponential growth over time

Simple vs Compound Interest

Year	Simple (10%)	Compound (10%)
1	$1,100	$1,100
5	$1,500	$1,610
10	$2,000	$2,594
20	$3,000	$6,727

APY vs APR

• APR: Simple interest rate
• APY: Includes compounding effect
• APY always higher for same rate

Formula:

APY = (1 + APR/n)^n - 1

Where n = compounding periods per year

Compound Finance Protocol

What It Does

• Decentralized lending/borrowing
• Algorithmic interest rates
• No intermediaries needed
• Supply assets, earn interest
• Borrow against collateral

How It Works

1. Supply: Deposit crypto to earn interest
2. Receive cTokens: Represent your deposit + interest
3. Borrow: Use supply as collateral to borrow
4. Rates: Automatically adjust based on utilization

Supported Assets

• ETH, WBTC
• USDC, USDT, DAI
• UNI, LINK, COMP
• And more

COMP Token

• Governance token
• Earned by using protocol
• Vote on protocol changes
• Distributed to suppliers and borrowers

Using Compound

Supplying

1. Connect wallet to app.compound.finance
2. Choose asset to supply
3. Approve and deposit
4. Start earning interest immediately

Borrowing

1. Supply collateral first
2. Borrow up to collateral factor
3. Monitor health factor
4. Repay + interest when done

Risks

Protocol Risks

• Smart contract bugs
• Oracle failures
• Governance attacks

User Risks

• Liquidation if collateral drops
• Variable interest rates
• Gas fees on Ethereum

Compound vs Alternatives

Protocol	Chain	TVL	Features
Compound	Ethereum	$2B+	Original, proven
Aave	Multi-chain	$10B+	More features
Venus	BNB Chain	$1B+	Lower fees

Learn about DeFi on exchanges like Coinbase before using protocols directly.