Compound's New Governance Token Helps Platform Coins Further Shed Stigma
Also, a look at the DeFi tea-leaves amid the crypto market slump, PoolTogether also issuing tokens, Loopring launches exchange.
Hello Defiers and happy Friday. Here’s what’s going on in decentralized finance:
- Compound Finance is introducing a governance token
- Bullish signs in DeFi amid crypto market slump
- PoolTogether tokenizes tickets
- Loopring launches scalable DEX
and more :)
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Token Democracy Bringing Platform-Specific Coins Back
Compound Finance wants to decentralized governance by introducing a token to its system. The plan shows platform-specific coins are losing their stigma and becoming more sophisticated.
Compound Finance, the second-largest lending platform in DeFi after MakerDAO, is planning to distribute tokens among Compound shareholders in proportion to their stakes —initially, the coins won’t be available to the public. The goal will be for the coins, called COMP, to help management cede control of the protocol to the broader community.
In this new financial system, something as radical as a company’s management team democratizing decision making, has come to be one of the basic features expected of these companies. Any direct control or influence over code and governance is reviled. And that’s because it defeats the whole purpose of DeFi and Web3, which is to be trustless. That means users don’t have to trust banks and processors in the middle of transactions, and they don’t have to trust the teams building these dapps either.
Right now, Compound is further from the most decentralized extreme of the spectrum relative to other projects like Uniswap and MakerDAO, as its team can unilaterally change how the project works, and its code is not open source. A governance token would be a big step towards the more decentralized end of the spectrum.
There are variations of these so-called governance tokens, but the general concept is that they each represent one vote (1 token = 1 vote, not 1 person = 1 vote). That’s because in systems where people are represented by crypto addresses, identity is easily manipulated — as easy as creating a new crypto address. MakerDAO, 0x and Aragon are already using their platforms’ own tokens for governance. Kyber Network and Synthetix are also moving in this direction. [Read The Defiant’s post about it: Synthetix and Kyber Are Latest to Join DAO Wave].
Besides carrying voting rights, governance tokens often carry other benefits and are used for things besides voting. In the case of MakerDAO, MKR tokens get burned when they’re used to pay fees required to close out a loan on the system. This could be seen as an indirect dividend, as each time MKR is burned, the price is pushed up.
Not an Investment
This is a lot more sophisticated and nuanced than most of the so-called “utility tokens” of the ICO days. Projects introducing a token whose only function is to simply buy goods and services offered on the dapp are becoming less frequent, as it became apparent there was no real use for those coins, other than to sell them for ether and bitcoin. The market has caught on and the bar for projects that want to add a token is a lot higher.
Compound’s token will be used solely for its governance function and is not meant to be an investment, the company’s CEO Robert Leshner wrote in a post.
“It isn’t a fundraising device or investment opportunity. Until the decentralization process is complete, COMP will not be available to the public.”
Here’s how it works:
- COMP, an ERC20 token, allows the owner to vote or to delegate voting rights to the address of their choice, meaning it’s not necessary to own COMP tokens to participate in governance.
- Anybody who owns or has at least 1 percent of COMP delegated to their address can propose a governance action.
- Proposals, which are meant to be executable code, are subject to a a three-day voting period. If the majority of votes and a 4 percent quorum approve a proposal, it can be implemented after 2 days.
Leshner declined to provide more details than what was disclosed in the post.
The two-day buffer before a proposal is implemented may be a lesson from the potential attack discovered on MakerDAO’s governance system, which would allow anyone with enough MKR tokens to create a proposal and vote to steal funds, without giving other token holders to react. This vulnerability pushed the Maker team to change the buffer time before votes are executed from 0 to 24 hours.
Tokens used to be mainly a tool for teams to raise money before delivering their product, causing a complete misalignment of incentives. It’s a positive development that in this new wave of Ethereum-based applications, tokens have the specific function of aligning the project with the community, by becoming a tool to vote.
DeFi Shows Improving Sentiment Amid Crypto Slump
Ether bulls are getting whiplashed. Last week, ETH crossed $280 and $300 was in the horizon. This week, Ethereum’s cryptocurrency has slumped 20 percent from those highs to a little over $220, causing liquidations on decentralized finance to spike and value locked to drop. But there are signs that traders are regaining confidence.
Total value locked in DeFi has plunged from a record $1.2 billion on Feb. 14 to $955k, according to DeFi Pulse. The slide in assets held in DeFi platforms started just after the bZx exploits, in which traders made close to $1 million by manipulating the market. The decline in the crypto market that followed probably spurred further outflows.
In the last two days, more than $3 million in collateral was liquidated, according to LoanScan, which only tracks Compound, dYdX, and MakerDAO’s old system. That’s the highest since December, when ETH also dipped. Liquidations spike when ether sells off, as the cryptocurrency is used as collateral against loans. When that collateral is worth less than the required ratio relative to the loan, it’s sold off.
Still, loans originated in the three protocols jumped in the same period (Feb. 26-27), to $48 million, with 47 percent of the loans in MakerDAO’s stablecoin Dai, and 39 percent in ETH. The large majority —85 percent— were taken out via the dYdX protocol. These last two days pushed February into a record month for DeFi loans.
Image source: LoanScan
It could be that DeFi traders are taking out loans to buy the dip. Most of DeFi lending is effectively being used as margin trading, where users deposit collateral to take out cryptocurrency loans, which they use to buy more cryptocurrency. If the gains with those trades are greater than the interest on the loan, then the user makes a profit.
A closer look at the total value locked also offers some bullish signs. While ETH locked had dipped from 3.2 million at the start of the month to 2.78 million on Feb. 22, it has started to climb again and is now at 2.85 million. Locking up ether as collateral takes believing it won’t suddenly drop and liquidate loans.
Image source: DeFi Pusle
Dai and BTC locked in DeFi had continued climbing throughout February. That means that a decline in ETH locked and the ETH price is what explains the drop in total value locked below the $1 billion milestone.
The crypto market tends to be more volatile over the weekend. We’ll see if those who took the risk and bought the risk made the right choice.
PoolTogether is Tokenizing Lottery Tickets
Users can now buy tokens to participate in the PoolTogether lottery. The protocol’s new plDAI and plUSD tokens represent ownership of tickets eligible to win prizes, and can be stored in users’ wallets and transferred to others.
PoolTogether pools participants’ funds into DeFi lending platforms and awards the interest gained to lottery winners, while the rest can keep the money they put in. Before, participants had to deposit crypto in a PoolTogether smart contract to be eligible to win. The platform has made the process easier by allowing users to buy tokens instead. It also means these tokens can be used in other platforms too.
The protocol introduced a chat bot where anyone texting the word JOIN to the US number (616) 369–9060, would get a free ticket, with 1,000 tickets available —I tried it and it didn’t work for me, though; maybe they were out of tickets. Regardless, it’s an innovative way to try to get a broader audience to use the dapp and we’ll probably see more projects experimenting in ways to increase adoption.
Loopring Launches First zkRollup Exchange
Loopring, a protocol for scalable Ethereum exchanges, islaunching the Loopring Exchange on Ethereum mainnet. It’s the first publicly accessible exchange using the zkRollup technology.
The exchange is non-custodial and capable of a throughput that’s 1000x greater than current decentralized exchanges, at a 600x cheaper settlement cost, according to the Loopring announcement. The platform is in “public beta,” and far from perfect at the UX level, the team wrote.
Actor Steven Seagal Fined by SEC for Touting Token Offering: Bloomberg
Seagal was promised $250,000 in cash and $750,000 worth of tokens for touting an initial coin offering from a company called Bitcoiin2Gen. He agreed to settle the SEC’s allegations without admitting or denying wrongdoing, and will pay a $157,000 fine and the same amount in disgorgement.
Why Flash Attacks will be the New Normal: Haseeb Qureshi
Haseeb Qureshi of Dragonfly Capital says, flash loans are a big security threat, but they’re here to stay, “and we need to think carefully about the impact they will have for DeFi security going forward.”
Rocket announces it issued a loan backed by tokenized art.
Rocket @RocketNFTAnnouncing Loan #3: 1,000 DAI to @reneil1337 against @josiebellini NFT Art 🖼 - 1st ever Crypto Art-backed loan 🎨 - 2 pieces of Josie + 1 @poapxyz from @EFDevcon as reputation - 6 months term, 15% interest (30 APR) More loans to come through soon NIx
6:03 PM ∙ Feb 26, 202098Likes28Retweets
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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.
About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.