Compound - DeFi Lending Protocol

I've been using Compound since 2019. Made some money, lost some to liquidations. It's one of the safer DeFi protocols, but let me tell you what you actually need to know.

How It Really Works

You deposit crypto, earn interest. Simple as that. Interest rates change constantly based on how many people are borrowing vs lending. Sometimes you're earning 8% APY, sometimes 0.1%. That's DeFi for you.

When you deposit, you get cTokens (like cUSDC for USDC). These slowly become worth more over time as interest accumulates. You can withdraw anytime by converting them back, but gas fees will eat your profits on small deposits - stick to $1000+ positions minimum unless you're on L2s.

The Stuff They Don't Tell You

Gas fees are brutal. On Ethereum mainnet, a simple deposit can cost $20-50 or whatever insane amount Ethereum feels like charging during busy periods. I learned this the hard way trying to deposit $200 USDC and paying $40 in fees - felt like getting robbed at the gas station. Use Arbitrum or Polygon unless you're moving serious money.

Rates fluctuate constantly. I've seen USDC lending rates go from 12% to 0.5% in a week during market volatility. Don't count on any rate staying stable. The protocol adjusts rates automatically using some math nobody fully understands - more borrowing = higher rates for lenders.

Getting liquidated at 3am sucks. If you borrow against your deposits and crypto crashes, you can get liquidated automatically. I lost a few hundred bucks worth of ETH when everything went to shit in early 2020 because I was overleveraged. Don't borrow more than 50% of your collateral factor - markets crash fast in crypto.

Multi-Chain Bullshit

Compound works on 10+ networks now, but the experience varies:

• Ethereum: High fees but most liquidity
• Arbitrum/Base: Lower fees, good for smaller amounts
• Polygon: Cheap but sometimes buggy bridge transactions

Each chain has different tokens available and rates. I mostly stick to Arbitrum these days unless I'm moving $10k+.

Security: Pretty Good But Not Perfect

Compound's been around 7+ years without major hacks, which is impressive in DeFi. They've got a $1M bug bounty and proper security audits. But smart contracts can still fail - remember, code is law in DeFi.

My rule: Don't put more than 10% of your crypto in any single DeFi protocol, including Compound. I once tried to arbitrage rates between chains and lost $200 in bridge fees. Diversify or get rekt.

Now that you understand the basics and risks, let's dive deeper into how this stuff actually works under the hood.

How Your Money Really Works in Compound

When you deposit USDC, you get cUSDC tokens. The math is needlessly complicated - basically: as interest accumulates, each cUSDC becomes worth more USDC. You don't need to claim anything - just hold the cTokens and they automatically increase in value.

Real example: Deposit 1000 USDC, get 50,000 cUSDC at 0.02 exchange rate. Six months later, that 50,000 cUSDC might be worth 1050 USDC. Withdraw anytime to get your principal plus interest.

The contract math is needlessly complicated because blockchain developers love showing off, which is why you sometimes see weird decimal amounts of cUSDC instead of nice round numbers.

Borrowing and Liquidations: What Can Go Wrong

Each asset has a "collateral factor" - basically how much you can borrow against it:

• ETH: around 80-something percent - basically you can borrow most of your deposit value but not all
• USDC: ~87% (more stable = higher factor)
• Random altcoins: Much lower or zero

Here's where people get rekt: Market crashes fast, your collateral value drops, suddenly you're overleveraged. Liquidation bots are watching 24/7 and will liquidate positions automatically.

I learned this the hard way: Deposited $2000 ETH, borrowed $1400 USDC. ETH dropped 30% overnight, got liquidated at 3am, lost $200+ in liquidation penalties. Don't borrow more than 50% of your collateral value if you want to sleep at night.

V2 vs V3: Which to Use?

Compound V2 (the original): Cross-collateral lending where you can borrow any asset against any collateral. Higher gas costs, but simple to understand.

Compound V3 (Comet): Single-asset markets where you borrow one thing (like USDC) against multiple collateral types. More gas efficient, but you need to understand which market you're in.

I still use V2 for most stuff because I understand it. Spent 3 hours trying to understand V3 before giving up and sticking with V2. V3 is more efficient if you're just earning yield on stablecoins.

Multi-Chain Gotchas

Ethereum mainnet: Original deployment, most liquidity, highest fees. Only worth it for large positions ($10k+).

Layer 2s (Arbitrum, Base, Polygon): Lower fees but:

• Bridge delays when moving money between chains
• Different tokens available on each chain
• Sometimes weird rate differences between chains

Pro tip: Check rates across chains before depositing. Sometimes Arbitrum USDC rates are 2x higher than Ethereum for no clear reason - DeFi markets are weird like that.

Price Oracles and Flash Crashes

Compound uses Chainlink oracles for asset pricing, but these can lag during extreme market moves. I've seen situations where:

• ETH crashes 40% in minutes
• Oracle takes 10 minutes to update
• People get liquidated at stale prices

Nothing you can do about this except maintain conservative collateral ratios and don't use leverage during volatile periods.

Mobile Apps and Interfaces

The official Compound interfaces work but aren't great on mobile. UI is clunky and transaction confirmations are slow.

Better integrations:

• Zerion: Clean mobile interface, shows all positions
• DeFi Saver: Automated liquidation protection (costs extra)
• Rainbow Wallet: Built-in Compound integration

Hot take: Just use the web interfaces on desktop. Mobile DeFi is still painful.

So how does Compound stack up against the competition? Here's my brutally honest take after using all the major platforms.