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.
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.
“The practice of COMP farming for profit 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 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.
In March, 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. “Since most COMP being distributed by the current rewards program is instantly sold off, existing users and token holders are at a great disservice,” he said.
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.
If that vote passes, Loewen will submit proposals for his third and fourth steps – optimize the protocol’s interest rates, then design a new rewards program.
“We’ve deeply neglected our interest rate models,” Loewen wrote. He said the current models make it “tricky” to offer attractive rates to lenders and borrowers while keeping enough money swirling around Compound’s liquidity pools.
“After upgrading our existing and future markets with optimal interest rate models, we’ll be in a great position to have an effective rewards program to kickstart 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 votes in favor and 75,012 against.
Teddy Woodward, the co-founder of Notional Finance, tweeted that Loewen’s proposal to remove COMP rewards entirely is “a bad idea.” Notional Finance is one of Compound’s largest lenders, supplying roughly $400M – or approximately 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 toward Compound’s competitors.”
He said that 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.
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.
According to DeFi Llama, Compound is currently Ethereum’s seventh-largest protocol with $6.24B locked. Aave is in fifth place, with $9.75B. Should the proposal pass, “Aave would become the defacto money-market of choice, not Compound,” Woodward concluded.
Others like Loewen’s roadmap. ‘EatSleepNTrade’ commented that it ends the practice of farming tokens only to dump them on the market.
‘Idan_Leevin’ asked Woodward when the rewards should be diminished. At the “end of the day you can’t subsidize usage forever.”