Compound III, also called Comet, organizes a market around a single base asset. Users can supply that asset to earn the market's supply interest, or borrow it against accepted collateral. Supplying another supported token as collateral increases borrowing capacity but does not itself earn Compound III supply interest. This distinction is easy to miss when reading explanations of older lending designs. The relevant market contract and version determine which asset is borrowed, which assets count as collateral, and which balances accrue interest.

The base-asset account balance is positive for a supplier and negative for a borrower. Supplying base assets can therefore repay an existing borrow before creating a positive supply position; withdrawing can consume supplied value or create debt if collateral permits it. Internally, principal balances are combined with supply or borrow indices to account for interest. Collateral caps limit a market's exposure to particular tokens, and borrowing factors constrain how much value can initially be drawn against them. Those limits are parameters rather than permanent properties of a token.

Compound III separates initial borrowing limits from liquidation thresholds, providing a buffer between opening a position and becoming liquidatable. When an eligible account is absorbed, its collateral and debt are transferred into protocol accounting and reserves cover the debt. The protocol can then sell seized collateral under its configured conditions to replenish reserves. This differs from assuming that every liquidation is a direct exchange between the original borrower and one liquidator.

Oracle values, collateral liquidity, and reserve adequacy all affect the outcome when market prices move sharply.