Library Credit and stable value2019Design paperCorpus record

Compound: The Money Market Protocol

Compound. Robert Leshner and Geoffrey Hayes.

The 2019 Compound paper: pooled lending markets where suppliers earn a floating rate and borrowers post collateral. Interest rates are a function of utilisation, set in the protocol rather than negotiated bilaterally.

Compound's paper turns deposited tokens into a fungible claim and lets borrowers post collateral and draw a balance, with interest rates that move automatically as utilisation of the pool changes.

The five-minute read

Supply is a pool, not a matched loan

Lenders do not pick a borrower. They deposit into a market and receive cTokens. Borrowers draw against the pool if their collateral covers the debt under the protocol's factors.

Interest is a function of utilisation

As more of the pool is borrowed, the rate rises, which is meant to pull lenders in and push borrowers out. The kink in that function is a governance choice the paper makes structural.

cTokens are the receipt

The exchange rate of a cToken increases as interest accrues. A lender redeems by burning cTokens, not by recalling a specific loan.

Collateral factors decide how far a borrower may go

Each asset has a factor less than one. A borrower whose debt exceeds what the factors allow can be liquidated. The factor is the risk policy.

Liquidation is a discount, not a courtroom

A liquidator repays part of the debt and seizes collateral at a discount. The paper relies on liquidators showing up while the collateral still covers the debt.

One action, walked through

A lender deposits an asset and receives cTokens at the current exchange rate.
A borrower supplies collateral, then calls borrow. The protocol checks the sum of collateral values times factors against the new debt.
Interest accrues each block according to the utilisation model. The borrow balance rises. The cToken exchange rate rises.
If the borrower's health falls through the threshold, a liquidator repays some debt and receives collateral plus the liquidation incentive.
The lender redeems cTokens for the underlying, receiving their share of the pool including interest and any shortfall the pool absorbed.

The argument, unpacked

The rate model is a governor, not a promise

A high borrow rate does not create a lender who is not there. If utilisation sits at the kink because liquidity left, borrowers simply pay more until they are liquidated or markets move. The paper should be read as a feedback loop with failure modes, not as a guarantee of a moderate rate.

Oracle prices are inside the solvency check

Collateral factors apply to a price. If the price is stale or manipulable, the health check is fiction and liquidations are either late or unfair. The paper's risk section depends on a price the 2019 text does not fully decentralise. Name the oracle.

cToken composability spreads the pool's risk

Once cTokens are used as collateral elsewhere, a shortfall or a frozen market is no longer local. The paper's fungible receipt is what makes that possible. Usefulness and contagion are the same feature.

What has to be true

Liquidators can act before collateral gaps too far. Congested blocks delay them.
The price feed is timely. A paper solvency check on a wrong price is insolvency.
Collateral factors are set below realistic crash sizes. Governance that raises them is taking risk on behalf of lenders.
The underlying token rebases or confiscates nothing. The cToken math assumes balances behave.

What happened after the paper

Compound v2 became a reference money market, and later versions and forks changed the rate model, the oracle and the governance token. The Comptroller risk engine is the piece to study. A current supply APY is not in the paper and should not be implied by it.

What to check before you use the idea

What is the collateral factor, and which oracle feeds the health check?
Where is the kink in the interest model, and who sets it?
What is the liquidation incentive, and is there a liquidator when the chain is congested?
Are cTokens reused as collateral in another protocol?

Terms

cToken: A receipt whose exchange rate rises as borrowers pay interest into the pool.
Utilisation: The fraction of a market's deposits that is currently borrowed. The interest model reads this number.
Collateral factor: The fraction of an asset's value that counts toward borrowing power.
Liquidation: A third party repaying debt to seize discounted collateral when a borrower is under the health threshold.

The problem the paper names

Matching a lender to a borrower is slow, and a bilateral loan does not let a supplier exit without the borrower's cooperation. Compound pools suppliers of one asset and borrowers of that asset, and prices the rate from how full the pool is.

What the design proposes

Each asset is a market. Supply and borrow balances are claims on that market, not IOUs against a named person.
A collateral factor limits how much a borrower may take against a given asset.
If health falls through a threshold, a liquidator may repay part of the debt and seize collateral, with a discount.

How the mechanism is specified

The interest-rate model is a public function of utilisation. Changing the function is a governance action, which the paper locates outside the core math.
Interest compounds into the exchange rate of the claim token, in the paper's accounting.
Oracle prices determine collateral value. The paper needs an oracle even where it does not dwell on one.

What this page does not treat as proven

A collateral factor is a risk parameter, not a scientific constant.
Liquidation only works if someone is willing and able to do it, and if the oracle is timely.
Later Compound versions and the COMP distribution are not this paper.

Why a venture studio still reads it

The template for on-ledger money markets. A venture copying it needs an answer on oracles, on who sets collateral factors, and on what happens when the asset cannot be liquidated at the price the oracle printed.

This is Blockchain Lab's reading of a public design paper. It is not the paper, not a copy of it, and not an offer of tokens, equity, custody or a partnership. Later network behaviour can diverge from the text. Nothing here is investment, legal or technical advice.

Research status: Design paper. Last reviewed: 1 October 2026. This is a reading of a public paper, not investment, legal or security advice.