The long shadow of the Compound Finance whitepaper

From algorithmic roots to segregated markets

Compound launched on Ethereum in September 2018 following its 2017 foundation. The project initially secured $8.2 million in seed equity in May 2018 from Andreessen Horowitz, Bain Capital Ventures, and Polychain. The original whitepaper describes an algorithmic model where interest rates change as the utilization of a pool fluctuates. Lenders deposit assets and receive cTokens, which act as a claim on the pool. This mechanism allows the exchange rate of cTokens to rise as interest accrues. Compound V2 launched in May 2019 and used the ERC20 standard to allow users to use interest-bearing positions in other applications. The protocol distributed 10 million COMP tokens, sending 4,229,949 to users over four years and 2,396,307 to shareholders. Now, Compound V3, or Comet, uses segregated markets on Ethereum, Polygon, Base, and Arbitrum. In V3, only lent assets can be borrowed, and collateral assets do not earn interest. This design protects depositors, but it also limits the potential yield for those providing collateral to ensure protocol safety. I find the decision to prevent collateral from yielding returns in Compound V3 to be a major disadvantage for those seeking maximum capital efficiency.

Aave, Morpho, and the battle for stablecoin yield

Aave and Morpho now compete for the same liquidity that Compound once dominated. Aave V3 users on Ethereum earn a 4.60% APY on USDC, while Compound V3 users on Ethereum earn a 3.23% APY for the same asset. On the Base network, Aave V3 provides a 3.79% APY for USDC, which remains higher than the 1.5% to 5.0% range offered by Compound V3 on that specific chain. Morpho captures market share by acting as a peer-to-peer matching engine for Aave and Compound, holding $500 million in total value locked. Aave also manages its own stablecoin, GHO, through the GHO Stability Module. On October 5, Aave increased its Core GHO borrow rate to 4.5% to replenish USDC reserves. This hike followed a report from TokenLogic on October 2 that the module faced depletion. Aave also sought a 25-million-GHO facilitator and a route to borrow $25 million in USDC or USDT against DAO balance sheet assets. You already know that these rate adjustments attempt to balance liquidity and demand. The complex interplay between GHO borrowing costs and stablecoin reserves introduces risk for lenders.

Governance wars and the buyback reality

Governance and token economics drive much of the tension between Compound and its rivals. Compound uses COMP tokens to manage protocol upgrades, where any address with 100,000 delegated COMP can propose changes. Since the beginning of 2026, crypto projects spent $640 million on token buybacks, which is a 17% increase over the $545 million spent during the same calendar period in 2025. Hyperliquid and Pump.fun account for nearly 90% of this total. Aave demonstrated how treasury needs can halt these programs when it paused purchases on April 19 after the rsETH bridge incident. The SEC’s Division of Corporation Finance addressed buybacks in a new set of FAQs in September 2026 and stated that a buyback announcement alone does not prove an investment contract exists. The agency’s March interpretation says a network counts as functional when its native token can perform its programmed utility. However, the debate continues regarding whether these purchases create real value or merely mask instability. While platforms like Pump.fun use 50% of revenue for buybacks, the token price can still fall significantly. Pump.fun has destroyed 167.7 billion tokens through $462.5 million in cumulative purchases. Hyperliquid has bought $1.3 billion of HYPE since its launch. Does the heavy reliance on these internal rate adjustments make the protocol vulnerable to sudden liquidity exits? Even with these massive volumes, the industry continues to question if buybacks can rescue fundamentally unsustainable protocols.