Why Compound is redesigning it’s token-economics

April 19, 2022 Blockchain, Crypto, Digital Assets, Tokens, CBDCs, Metaverse, NFTs, Enterprise, FinTech and Alternative Finance, Fintech Services, Fundraising, Investing, Trading, Innovation and Resources, Leadership, Productivity, Competition, Human Capital, Health No comments

The Defiant | Samuel Haig | Apr 19, 2022

Background

In the summer of 2020, Ethereum lending protocol Compound worked out that if you give away free governance tokens for borrowing and lending crypto, people will flock to your platform and pump the value of your new token. But when that free money spigot ran dry, those new users disappeared. Almost two years later, the price of Compound’s token has fallen 83% from its all-time high, and the protocol has lost considerable ground to its rivals.

See: Intro to yield farming and the latest developments in DeFi

Now the Compound community is using those governance tokens to redesign the incentives that attract people to the platform. One proposal wants to scratch the COMP rewards program entirely – and it’s gaining a lot of traction.

“This COMP farming behavior is not the kind of activity that will bring value to the protocol, or for the existing users and token holders. Incentives need to be used to grow the protocol to the benefit of the protocol itself and its users and token holders,” he said.

4 Phase Plan to overhaul the rewards program

In March, Tyler Loewen sketched out a four-phase plan to overhaul the incentives that Compound offers to its users.

In his first step, Loewen suggested cutting COMP rewards in half. Loewen’s idea attracted 82.1% of the 883,480 votes – just 8% of COMP holders voted against, and nearly 9.8% abstained. The proposal was implemented on March 26.
His second step, which the community is considering until Thursday, would remove COMP rewards entirely.
Optimize the protocol's interest rates
Design a new rewards program

See: Rise of Regulatory Compliant DeFi Protocols

“Bad Idea”

Teddy Woodward, the co-founder of Notional Finance (one of Compound's largest lenders supplying approx 6.7% of the protocol's liquidity), tweeted that Loewen’s proposal to remove COMP rewards entirely is “a bad idea and will drive capital to competitors:

He estimates that removing COMP rewards would cut annual lending rates for DAI from 2.77% 0.72% DAI, and from 2.42% to 1.55% on USDC. If that happened, lenders would migrate to platforms like Aave, where yields that are up to three times greater.
Most of the borrowing on Compound is driven by recursive borrowing, meaning that users will continually leverage funds back into the protocol to generate larger profits from the COMP rewards.

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