A new proposal aims to drastically overhaul $COMP incentives.
In the summer of 2020, Ethereum lending protocol Compound found that by giving away free governance tokens for borrowing and lending crypto, people are flocking to your platform and pumping the value of your new token.
But when that tap of free cash dried up, those new users disappeared. Nearly two years later, Compound’s token price has fallen 83% from its all-time high, and the protocol has lost significant ground against its peers.
Now the Compound community is using these governance tokens to redesign the incentives that draw people to the platform. One proposal wants to scrap the COMP rewards program entirely — and is gaining a lot of traction.
Mercenary Farming
“The practice of for-profit COMP farming has become very problematic,” wrote Tyler Loewen, the author of the popular governance proposal to overhaul Compound’s incentives.
“This COMP farming behavior is not the type of activity that adds value to the protocol or existing users and token holders. Incentives must be in place to grow the protocol for the benefit of the protocol itself and its users and token holders,” he said.
In March, Loewen outlined a four-phase plan to overhaul the incentives Compound offers its users.
In his first move, Loewen suggested halving the COMP rewards. “As most of the COMP distributed by the current rewards program sell out immediately, existing users and token holders are at a great disadvantage,” he said.
Loewen’s idea received 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 move, which the community is considering through Thursday, would remove COMP rewards entirely.
If that vote is successful, Loewen will submit proposals for its third and fourth steps — tweaking the protocol’s interest rates and then designing a new rewards program.
“We have severely neglected our interest rate models,” wrote Loewen. He said the current models make it “difficult” to offer attractive rates to lenders and borrowers while keeping enough money in Compound’s liquidity pools.
“Having upgraded our existing and future markets with optimal interest rate models, we will be in a great position to have an effective rewards program to stimulate new markets.”
But the second stage of Loewen’s plan isn’t nearly as popular as his first, and there’s a good chance it won’t pass. So far, the proposal has received 101,005 yes votes and 75,012 no votes.
“Bad idea”
Teddy Woodward, the co-founder of Notional Finance, tweeted that Loewen’s proposal to do away with COMP rewards entirely was “a bad idea.” Notional Finance is one of Compound’s largest lenders, providing around $400 million — or about 6.7% of the protocol’s liquidity.
Woodward argued that the move will likely serve to “significantly weaken the protocol’s competitive position” by “driv[ing] capital versus Compound’s competitors.”
He said that most of the borrowing on Compound is driven by recursive borrowing, which means users will continually leverage funds back into the protocol for greater profits from the COMP rewards.
He estimates that eliminating COMP rewards would reduce annual borrowing rates for DAI from 2.77% to 0.72% DAI and from 2.42% to 1.55% for USDC. In that case, lenders would flock to platforms like Aave, where returns are up to three times higher.
According to DeFi Llama, Compound is currently Ethereum’s 7th largest protocol with $6.24 billion locked. Aave is fifth at $9.75 billion. Should the proposal pass, “Aave would become the de facto money market of choice, not Compound,” concluded Woodward.
Others like Loewen’s timetable. ‘EatSleepNTrade’ commented that it ends the practice of farming tokens just to dump them on the market.
‘Idan_Leevin’ asked Woodward when the rewards should be reduced. At the end of the day, “you can’t subsidize usage forever.”
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