Compound III, also known as Comet, is the latest version of the Compound protocol. This page provides an overview of how Compound III works and its key concepts.

​
What is Compound III?

Compound III is a decentralized lending protocol that allows users to supply assets as collateral and borrow a single base asset. It’s a significant evolution from previous versions of Compound, with a focus on capital efficiency, risk management, and user experience.

​
Key Features of Compound III

​
Single Borrowable Asset

Unlike previous versions of Compound, Compound III focuses on a single borrowable asset per deployment (e.g., USDC on Ethereum). This design choice allows for:

  • Simplified risk management
  • Improved capital efficiency
  • Better user experience

​
Collateral Assets

While there is only one borrowable asset, users can supply multiple types of assets as collateral. Each collateral asset has specific parameters:

  • Collateral Factor: The percentage of the collateral’s value that can be borrowed
  • Liquidation Factor: The threshold at which a position becomes eligible for liquidation
  • Liquidation Penalty: The discount given to liquidators when purchasing collateral

​
Account Management

Compound III introduces several new account management features:

  • Collateral Assets: Users can supply multiple assets as collateral
  • Borrowing: Users can borrow the base asset against their collateral
  • Health Factor: A measure of the safety of a user’s position
  • Liquidation: The process of repaying a user’s debt in exchange for their collateral

​
How Compound III Works

​
Supplying Collateral

Users can supply assets as collateral to the protocol. These assets are then used to secure borrowing positions.

// Example of supplying collateral using Compound React
const { supply } = useSupplyCollateral();
await supply('WETH', '1.0'); // Supply 1.0 WETH as collateral

​
Borrowing

Users can borrow the base asset against their collateral up to a certain limit determined by the collateral factor.

// Example of borrowing using Compound React
const { borrow } = useBorrow();
await borrow('1000'); // Borrow 1000 USDC

​
Repaying

Users can repay their borrowed amount at any time.

// Example of repaying using Compound React
const { repay } = useRepay();
await repay('500'); // Repay 500 USDC

​
Withdrawing Collateral

Users can withdraw their collateral as long as they maintain a healthy position.

// Example of withdrawing collateral using Compound React
const { withdraw } = useWithdrawCollateral();
await withdraw('WETH', '0.5'); // Withdraw 0.5 WETH

​
Liquidation

If a user’s position becomes unhealthy (i.e., their health factor falls below 1), their position can be liquidated by other users.

// Example of liquidating a position using Compound React
const { liquidate } = useLiquidate();
await liquidate('0x1234...', 'WETH', '1000'); // Liquidate 1000 USDC of debt, taking WETH as collateral

​
Interest Rates

Compound III uses a dynamic interest rate model that adjusts based on the utilization of the protocol:

  • Supply APY: The interest rate earned by suppliers of collateral
  • Borrow APY: The interest rate paid by borrowers

The interest rates are determined by the utilization rate of the protocol, which is the ratio of borrowed assets to supplied assets.

​
Protocol Rewards

Compound III may distribute rewards to users who interact with the protocol. These rewards can be claimed by users and are typically distributed in the form of tokens.

// Example of claiming rewards using Compound React
const { claim } = useClaimRewards();
await claim(); // Claim all available rewards

​
Next Steps

Now that you understand the basics of Compound III, you can learn more about the specific Networks and Markets supported by the protocol.