Compound is a decentralized money market built on Ethereum that enables users to lend and borrow from a pool of whitelisted assets.
Compound consists of a decentralized system of lending pools. Users deposit assets they want to lend into a liquidity pool and borrowers draw from the pool when they want to take out a loan. Compound borrowers must first supply assets before they can borrow. Given the high volatility of crypto assets, borrowers must post more collateral than the value of the loan, or commonly referred to as overcollateralization. Interest rates on Compound are driven by market supply and demand. To facilitate this activity, Compound issues cTokens to lenders that reflect accruing interest on the underlying token.
Compound allocates a portion of the interest paid to borrowers to its reserve, which acts as insurance and is controlled by COMP token holders. Each supported asset has a reserve factor that determines how much goes into the reserve. Reserves (controlled by COMP holders) help backstop the system by acting as liquidity in each market to cover any bad debt in case of borrower default and liquidation malfunction.
You earn lending fees on Compound by depositing their idle crypto assets to be used by borrowers looking for leverage. For certain assets, Compound also offers additional protocol incentives in its native COMP token to bootstrap demand.