Compound offers money markets for supplying and borrowing different assets on the Ethereum blockchain.
Users can supply assets to the market, earning interest on their deposits. They can also use their deposited assets as collateral in order to borrow assets from other markets. The borrowed assets accrue interest over time, which is shared between the suppliers and the protocol. If a borrower’s account balance falls below a certain threshold, due to the value of their collateral falling or the value of the borrowed assets increasing, their position can be liquidated. The liquidator pays back the borrowed assets and in return they earn a portion of the borrower’s collateral.
Users interact with the cToken contracts. These are ERC-20 tokens that represent the assets a user has supplied to the market. As the market accrues interest, the value of the cToken compared to the underlying asset increases. The cToken itself receives a portion of the interest as reserves.