Compound, the leading DeFi platform in total value locked (TVL), has changed its COMP token distribution mechanism through a community vote that passed on June 30. This move comes barely a month after Compound took over the DeFi space following the initial distribution of its COMP tokens.
According to its new governance protocol, COMP tokens will no longer be issued based on interest earned or paid, but on USD-backed stablecoins borrowed or lent via Compound.
The DeFi market has been growing exponentially, and currently stands at a TVL of $1.64 billion, according to DeFi Pulse. Much of this growth can be attributed to the rise of ‘Yield Farming' as a liquidity creator and money-making avenue within crypto. With projects like Compound making a killing in this market, a shift towards sensible allocation protocols is inevitable, given the high APR's which may be unsustainable in the long-run.
COMP Tokens New Governance Distribution Model
Compound leverages smart contracts to create liquidity through its automated money market services.
Initially, Liquidity Providers (LPs) on this protocol were awarded COMP tokens based on the amount being given or earned from an underlying digital asset. However, the Coinbase-backed venture is now making its shift, after it emerged that LP's are farming COMP tokens with less liquid digital currencies like the Brave token (BAT).
The community has since changed its approach under the Compound governance proposal 11. Under the new governance, COMP tokens will be issued based on USD stablecoins borrowed or provided within the Compound ecosystem. According to the Compound community, this will move liquidity to more fundamental assets with stablecoins being at the top of the list.
Several crypto stakeholders took part in this vote; prominent names include Kyber, Dragonfly Capital, and Dharma. In total, 771,804 COMP were staked in favor of the shift, with only one voting against. Following the move, Dharma's Brendan Foster expressed optimism, arguing that this new incentive approach will favor actual value providers to Compound's protocol:
“The goal of the COMP distribution is to allocate COMP to users who are generating value for the protocol, whether by supplying capital or by paying interest on borrow.”
DAI Stablecoin Now Exposed to COMP's's Yield Farming
While the progress might be right for Compound's ecosystem, the MakerDAO community has already expressed concerns about what may be a Dai takeover. Cyrus Younessi, one of MakerDao's risk team member, posted a summary on what this shift by Compound could mean to the demand of Dai stablecoins:
“My expectation is that the two most popular farming assets will be USDC and Dai due to the shapes of their (attractive) interest rate curves. While USDC is easier and safer to farm (fixed oracle price of 1, larger supply, larger potential supply, greater liquidity), Dai will earn more COMP up to a 98% utilization rate.”