What is Compound?
Compound Finance is a lending protocol that runs on the Ethereum blockchain. It allows users to lend and borrow popular cryptocurrencies. It seeks to be more frictionless, efficient, and decentralized than current financial money markets. Compound currently is semi-centralized/decentralized due to its open-source smart contracts however there are plans for future implementation of a decentralized autonomous organization and this should allow for markets and interest rates to be governed by the community members rather than the current structure which is made by Compound.
Users who want to borrow digital assets can do so directly with the protocol. They don't need to negotiate anything with a counterparty however do they need cryptocurrency as collateral before they are allowed to borrow. The beauty of this platform is that all you need to participate is a cryptocurrency wallet. This allows you to log into the compound finance DAPP without having to create a new account.
When a user supplies a token, it isn't directly lent to someone else. All of the funds get added to the supply pool and this results in a much higher level of liquidity. This lending mechanism allows users to withdraw their tokens at any time as long as there's enough liquidity in the pool. Compound users can borrow directly through the finance compound finance protocol by specifying which assets they would like to borrow and this asset comes directly from that asset liquidity pool. The interest rate is affected by the amount of liquidity available in the pool. If the liquidity is high then the interest rate is low.
When a user wants to borrow funds the protocol enforces a rule, that each account has to have a balance that covers the amount of borrowed funds. This rule is known as the collateral ratio and a user cannot take any action that would bring their account value below the collateral ratio.