Compound, a leading interest rate protocol launched in September 2018, enables users to permissionlessly borrow and lend assets from collateral pools on the Ethereum blockchain. Its algorithm-driven interest rate model adjusts rates based on the utilization ratio of lent assets. The protocol introduced its V2 upgrade in May 2019, adding support for multiple assets, individualized risk models, and smart contract gateways. A pivotal shift occurred in April 2020 when community governance replaced the protocol administrator, empowering COMP token holders to control the protocol. That June, Compound initiated a groundbreaking liquidity mining program, distributing 42% of the total COMP supply to users over four years.
Following the market downturn in May and subsequent economic slowdown, most metrics declined broadly. However, activity rebounded strongly by the end of Q3 2021. Outstanding loans and deposits reached all-time highs, though these figures would have been even higher if not for a COMP distribution error on September 30 that triggered approximately $3 billion in withdrawals.
Key Performance Indicators in Q3 2021
Outstanding Loans and Deposits
Outstanding loans grew by 57% during the quarter as markets recovered from the crash and depositors sought increased leverage. This surge was largely driven by heightened liquidity in Compound markets over the preceding six months, which pushed borrowing rates to historically low levels. Favorable conditions—rising collateral values, attractive borrowing costs, and improved market sentiment—drew borrowers back in droves. Unsurprisingly, most borrowing activity was denominated in USDC and DAI.
Including COMP incentives for borrowers, interest rates hit 0% at their July low. Rates only began recovering in the latter half of the quarter as utilization increased in Compound's most popular borrowing markets: USDC and DAI.
Outstanding deposits grew by 48%, fueled by market recovery, rising token prices, and new deposits chasing higher yields. WETH, USDC, and DAI contributed most significantly to this growth, though the impact of USDC and DAI was understated in final quarterly figures due to the September 30 withdrawals.
Interest and Protocol Revenue
As liquidity flooded Compound markets, depositors received the lowest interest rates in the protocol's history. Though conditions varied across markets, stablecoin yields rebounded substantially after hitting lows in July.
The trend of deposit growth outstripping loan growth is best illustrated by the overall utilization rate. Since early 2021, utilization fell from 58% to 38%—a 20% drop—as depositors supplied abundant liquidity.
Historically low rates led to the first quarterly decline in interest income in over a year. Despite a 57% increase in loans, interest income fell 19% from $96 million in Q2 to $78 million in Q3. This primarily reflected reduced rates on DAI and USDC loans, the largest drivers of interest income.
Though Compound doesn't directly impose fees, it implements a "reserve factor"—a percentage of borrower interest paid that supports governance or acts as insurance against defaults. The reserve factor varies by asset, with DAI's set at 15%, the highest among stablecoins. Consequently, DAI contributed nearly 50% of protocol revenue. As borrowing rates for DAI and other stablecoins remained historically low, protocol revenue fell for the first time in over a year, dropping 17% from $11 million to $9 million.
Borrowing Volume and Liquidations
Both borrowing volume (originations) and deposit volume declined significantly despite strong growth in outstanding loans and deposits. This is unsurprising given that activity only rebounded late in the quarter as market conditions warmed.
Liquidations also fell sharply, hitting their lowest level in over a year. Following Q2's extreme market volatility, Q3 saw relatively muted volatility initially and largely one-directional movement later, driving liquidations down from $333 million to $27 million.
COMP Token Incentives
COMP token incentives, a key growth driver since June 2020, declined in Q3 due to lower COMP prices after May's crash. Including token rewards paid to depositors and borrowers, the interest Compound generated did not exceed the token rewards it distributed.
Compound Market Micro Overview
Q3 saw few parameter changes across Compound markets except for LINK. However, the protocol added four new collateral assets: MKR, AAVE, SUSHI, and YFI. Below is an overview of Compound's five largest markets.
USDC
USDC became Compound's largest lending market in Q3 and the biggest driver of loan growth, surging 101% from $1.1 billion to $2.4 billion. This growth far exceeded deposit increases, driving utilization from 50% to 85% by quarter-end. Consequently, USDC market rates rose sharply from 2.7% to 7.6%.
Despite $1.3 billion in loan repayments after the COMP distribution error, USDC still accounted for 43% of all Compound loans at quarter-end.
DAI
DAI was the second-largest driver of loan growth, increasing 27% from $1.6 billion to $2.1 billion. Similar to USDC, this growth outpaced deposits, pushing utilization from 69% to 83%. DAI market rates rose from 3.4% to 4.7%. Compared to USDC, DAI's interest rate curve is slightly more favorable, resulting in lower rates at certain utilization levels.
On September 14, Compound Proposal 059 passed, compensating users affected by DAI's unexpected price spike to $1.30 on Coinbase Pro on November 26, 2020. A total of 6,817,798 DAI from the market reserves was allocated for user compensation.
WETH
WETH is Compound's largest outstanding deposit market and the primary driver of deposit growth in Q3, increasing 119% from $2.5 billion to $5.5 billion. Approximately 40% of this growth resulted from ETH's price rising 32% from $2,275 to $3,000 during the quarter.
ETH accounted for 39% of Compound's outstanding deposits.
USDT
USDT's Q3 trajectory closely resembled DAI and USDC. Outstanding loans increased 89% from $341 million to $645 million. Utilization rose from 57% to 86%, driving rates up from 3.0% to 5.6%.
WBTC
WBTC deposits grew 78% from $1 billion to $1.8 billion. Similar to ETH, about 45% of this increase was driven by BTC's price rising 25% from $35,047 to $43,825 during the quarter.
Governance and Key Events
COMP Distribution Error
On September 30, community members reported anomalous COMP distribution activity after executing Proposal 062, which concerned COMP reward allocation. An address called "drip" on Compound's Reservoir, triggering the distribution of 202,472.5 COMP (approximately $68 million) to the Compound Comptroller. According to Yearn core contributor Banteg, about one-quarter of the COMP could be drained, though the exact amount wasn't confirmed by the Compound Labs team.
Following the error, the community passed a proposal temporarily halting COMP reward distribution to prevent further issues until correct logic was restored.
Governance Decisions
Key proposals passed in Q3 included:
- Proposal 062 (September 27): Split COMP reward distribution into borrower and supplier rates and implemented error fixes.
- Proposal 061 (September 16): Granted Gauntlet funds for ongoing market risk management, including optimizing yields and capital efficiency.
- Proposal 060 (September 16): Established a whitelist for contributor addresses to submit proposals regardless of delegated COMP.
- Proposal 059 (September 14): Compensated users affected by the November 2020 DAI price anomaly.
- Proposal 057 (August 24): Transferred "Pause Guardian" ownership from Compound Labs to a community multi-signature wallet for enhanced decentralization.
- Proposal 056 (August 16): Set initial collateral factors for newly supported assets: LINK (50%), MKR (35%), AAVE (50%), SUSHI (40%), YFI (35%).
- Proposal 054 (August 2): Added AAVE, SUSHI, and YFI as supported assets.
- Proposal 053 (August 1): Added MKR as a supported asset.
- Proposal 052 (July 12): Lowered the governance proposal threshold from 100,000 COMP to 65,000 COMP.
- Proposal 051 (July 12): Granted funds to Getty Hill for oracle development coordination.
- Proposal 050 (July 5): Reduced gas costs for claiming COMP from multiple markets and allowed abandoned markets (SAI, REP) to be liquidated.
Governance Discussions
Forum discussions in Q3 included ideas for improving COMP reward distribution, scaling the grants program, and deploying COMP on Layer 2 solutions like Arbitrum and Optimism to reduce transaction costs for users. Community consensus favored deploying upgradable COMP tokens on Optimism, governance by Compound governance, with initial functionality as a simple ERC-20 set controlled by the Optimism gateway.
Grants Program Overview
The Compound Grants Program (CGP), launched in April, distributed over $750,000 to more than 30 grantees. Funding supported open-source dashboards, analytics, hackathons, and research. As the program concluded in September, lead Larry Sukernik noted successes included reasonable but generous grant sizes, milestone-based funding, and betting on actors. Challenges included expecting applicants to navigate the process without guidance and promising two-week turnarounds. Insights from CGP 1.0 will inform CGP 2.0 design.
Notable grants since June:
- ETH Global Hack Money Hackathon: $37,000, including $12,000 for prizes.
- Messari Integration: $50,000 for incorporating Compound into Messari's research portal and producing four in-depth reports.
- Rabbit Hole Integration: $50,000 for sending users "protocol tasks" to supply and borrow assets on Compound.
- Robust Compound Dashboard: $20,000 for an open-source dashboard displaying Compound data.
- STATION: $50,000 for building a peer-to-peer network focused on self-expression, contribution, and value.
Roadmap
Compound Treasury
Announced at the end of Q2 2021, Compound Treasury is a product designed for businesses and financial institutions seeking exposure to crypto interest markets. In partnership with Fireblocks and Circle, it offers organizations access to USDC rates on Compound without handling private keys or crypto-to-fiat conversions. The product guarantees a 4% annual fixed deposit rate, potentially attracting more dollar liquidity to Compound and making borrowing rates more attractive.
Compound Chain
In preparation for a multi-chain world, Compound Labs published a white paper for Compound Chain in December 2020—a standalone blockchain intended as cross-chain interest rate market infrastructure. A prototype named Gateway, a Substrate-based blockchain governed by COMP token holders on Ethereum, was announced three months later. Gateway aims to enable users to borrow native assets on one chain (e.g., Ethereum) using collateral from another (e.g., Solana). It will also introduce a new stablecoin, "CASH," Gateway's native unit of account, created through borrowing and lending similar to MakerDAO's DAI. All interest is earned and paid in CASH.
Gateway achieves blockchain interoperability via "Starport" connector contracts, which exist as smart contracts on peer ledgers (e.g., Ethereum) and can lock assets until released by Gateway validator nodes. Since March 1, Gateway has operated as a testnet connected to Ethereum's Ropsten testnet.
Conclusion
Despite a slow start amid summer economic doldrums, Compound regained growth momentum in the latter half of Q3 2021, driving many metrics to all-time highs. Like most financial services, the protocol exhibits cyclicality amid sustained growth and adoption, as evidenced by the first nine months of 2021.
The Compound community has much to anticipate in coming quarters, including the upcoming launch of Compound Chain—a key pillar of its multi-chain strategy—and Compound Treasury, a major driver of institutional adoption. As crypto markets continue heating up, Compound will likely benefit from increased demand for leverage. All eyes are on Q4 performance. 👉 Explore advanced DeFi strategies
Frequently Asked Questions
What is Compound?
Compound is a decentralized interest rate protocol built on Ethereum that allows users to lend and borrow cryptocurrencies without intermediaries. It uses an algorithmic interest rate model based on asset utilization.
How did the COMP distribution error affect Compound in Q3?
On September 30, a bug in Proposal 062 led to the erroneous distribution of 202,472.5 COMP (worth ~$68 million). This triggered about $3 billion in withdrawals, slightly dampening otherwise record-breaking quarterly growth in loans and deposits.
What are the main drivers of Compound's growth?
Key growth drivers include liquidity mining incentives via COMP tokens, expanding supported assets (e.g., MKR, AAVE), institutional products like Compound Treasury, and cross-chain expansion through Compound Chain. Market conditions and demand for leverage also significantly influence activity.
How does Compound's governance work?
COMP token holders govern the protocol by voting on proposals. Decisions include adding new assets, adjusting risk parameters, and managing treasury funds. Proposals require a minimum of 65,000 COMP to be submitted.
What is the difference between USDC and DAI markets on Compound?
USDC and DAI are both stablecoins but have different interest rate curves and risk parameters. DAI has a higher reserve factor (15%) and slightly lower rates at similar utilization levels compared to USDC. USDC became the largest lending market in Q3 2021.
What is Compound Chain?
Compound Chain (Gateway) is a cross-chain blockchain that enables borrowing assets on one blockchain using collateral from another. It aims to expand Compound's reach beyond Ethereum and introduce a new native stablecoin called CASH.