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.

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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.

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Key Features of Compound III

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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

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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

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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

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How Compound III Works

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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

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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

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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

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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

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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

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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.

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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

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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.