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Decentralized finance (DeFi) lending platform Compound (COMP) can be considered the catalyst for the yield farming frenzy that kicked off in mid-2020.
While MakerDAO was the first DeFi project allowing users to take out loans, Compound was the first to offer permissionless lending pools, enabling users to earn interest on their crypto deposits.
They do not need to negotiate terms like maturity, interest rate, or collateral with the counterparty. The protocol pools Ethereum (ETH)-based assets and loans them at a rate that is automatically adjusted, which is usually much better than those offered by traditional banking. Every money market is unique to ERC-20 and contains a public LEDGER of all transactions and historical interest rates. At the time of writing, Compound Finance was the third-largest DeFi protocol by total value locked, which was $5 billion according to DeFi Pulse.
The protocol pools together Ethereum (ETH)-based assets, and lends them out at an automatically-adjusted floating rate, which is usually much better than that offered at any high street bank. With platforms like COINBASE Ventures, Polychain Capital, and Andreessen Horowitz among its investors, the platform has greatly expanded its venture capital backing.
At the time of writing, Compound Finance was the third-largest DeFi protocol in terms of total value locked (TVL), which was a reported $5 billion according to DeFi Pulse.
The Compound Finance was initially designed to support just six crypto tokens: ETH, 0x, augur, basic attention token, dai, and USDC.
The Compound Finance whitepaper was published in February 2019 by founder Robert Leshner and co-founder Geoffrey Hayes. A supplied asset's balance is represented by the C Tokens, which are equal to the underlying Asset which is going to earn interest. Providing assets involves additional confirmation transactions, gas fees, and withdrawing them when you are done to claim the Earned COMP.
Whenever ethereum demand spikes, the gas price can skyrocket making the platform expensive to use for small transactions. The platform is heavily venture capital-backed with big names such as Andreessen Horowitz, Polychain Capital, and Coinbase Ventures taking part. These are now the largest holders of the governance token so can exert a major influence over voting and the direction of the protocol.
Compound Finance initially supported just six tokens: ether (ETH), 0x (ZRX), augur (REP), basic attention token (BAT), dai (DAI), and USDC. In contrast to the protocol, which holds 10% of interest paid as reserves, the rest goes to collateral suppliers. The latter has its own “ Open Price Feed” contract which contains the current exchange rates of all supported assets.
It uses cryptocurrency exchange exchange rates and collateral factors to determine interest rates and collateral factors. Its interest rates are derived from a lender's "utilization rate" that represents lenders' capacity to lend; they just can't face a run on liquidity.
Just like most DeFi protocols, crypto collateral must be provided before users can do anything on the system. Supplied asset balances are represented by cTokens, which are issued at 1:1 representing the underlying asset that earns interest and serves as collateral.
Supplying assets do involve additional confirmation transactions and gas fees, as do withdrawing them and claiming earned COMP. During times of high ethereum demand, gas fees can spike making the platform very expensive to use for small transactions.
Borrowing rates on these collateral tokens depend on which token it is, some have better values than others. It has inspired a variety of competitors to launch their own community governance tokens, with a view to becoming fully decentralized.
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Borrowing on Compound requires In the early days of cryptocurrency, around 2,880 tokens were distributed a day, and the collateral surged as a result of the first real liquidity farm in the world. A decentralized protocol establishing money markets, with interest rates algorithmically set up according to supply and demand. In 2018, Compound raised over $8 million. The next year, the company raised $25 million in Series A funding.
There were around 3.8 million COMP left at the time of writing.They are the largest holders of the governance token, so they may be able to exert a great deal of influence over the voting and direction of the protocol.The primary purpose of the COMP token was for community governance and according to the Compound’s founder, Leshner:“The community and employees who invest in its future deserve to contribute.” Because only addresses with more than 100,000 tokens can make a difference, proposals must be submitted within a three-day voting period and a minimum of 400,000 votes must be cast to reach quorum.
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?? As a result of these mechanisms, Compound survived the March 2020 “Black Thursday” event that caused mass liquidations on MakerDAO vaults.
The platform itself is autonomous and decentralized, but the governance system cannot be considered such since it is also fully transparent.?? Compound was the leading DeFi protocol by total value locked in mid-2020 as liquidity surged to $1 billion in collateral levels by mid-August. As the degenerate farming frenzy gathered steam, it began to lose ground to rival protocols offering better returns through food themed yield farms.
The COMP tokens fell from over $335 to under $100 and TVL had plummeted to $600,000.
The protocol has had a number of security audits and is one of the few in the DeFi ecosystem that has not suffered a hack or flash loan exploit.
No rewrites were found
When Compound Finance launched its COMP governance token in June 2020, the team behind the project made the first step to decentralize the ownership, management, and governance of the protocol.
“By placing COMP directly into the hands of users and applications, an increasingly large ecosystem will be able to upgrade the protocol, and will be incentivized to collectively steward the protocol into the future with good governance.”
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However, what actually happened to Compound, and a large number of DeFi protocols that followed, was the majority of tokens ending up in the bags of a few whales and early investors.
Either way, on its first day of trading on June 16, 2020, COMP became the most valuable DeFi asset, at the time, making the protocol a market cap “unicorn” as it reached a billion dollars.
In contrast to the high street banks, cryptocurrency traders do not have to negotiate terms such as maturity, interest rates, or collateral with counterparties. The Compound Finance protocol has over $5 billion in total market value, according to DeFi Pulse Network.Compound Finance whitepaper was published in February 2019, by founder Robert Leshner and co-founder Geoffrey Hayes.
The Compound distribution tracker shows how much is distributed to each token pool. At the time of writing, over 614,000 COMP had been distributed and there were around 3.8 million to go under the protocols tokenomics system.
They are the largest holders of the governance token, so they may be able to exert a great deal of influence over the voting and direction of the protocol.
The primary purpose of the COMP token was for community governance, and according to Compound founder, Leshner:
“The individuals, applications and institutions that use the Compound protocol are capable of collectively stewarding it into the future — and are incentivized to provide good governance.”
However, since proposals are limited to addresses with more than 100,000 tokens, it is really only the whales and investors that can make a difference.
Once submitted, a three-day voting period commences and a minimum of 400,000 votes must be cast to reach quorum. All supplied assets are represented by cTokens, which are all issued at 1:1 representation of the underlying collateral that earns interest and serves as collateral. The process of providing assets involves further confirmation transactions and gas fees, as well as withdrawing the assets and claiming earned COMP.
The public distribution of COMP includes approximately 4.3 million tokens out of a maximum supply of 10 million, dispersed over a four-year period via the protocol to liquidity providers.
?? These two token holders alone make up 27% of the voting power with Bain Capital Ventures holding an additional 10%, according to the protocol governance overview.
It sets 10% of interest payments as reserves, and all the rest to collateral suppliers. Compound has established its own market-based “Open Price Feed” contract that sets the market rates of all supported assets.
It calculates interest rate based on how much of lenders’ assets are pulled in by borrowers in order to prevent a run on liquidity. While the platform itself is autonomous and decentralized, the governance system cannot really be considered so when compared to other DeFi platforms, though it is very transparent about this.
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Compound was the leading DeFi protocol by total value locked in mid-2020 as liquidity surged in propelling collateral levels to almost $1 billion by mid-August.
It started to lose ground to rival protocols offering better returns through food themed yield farms as the degen (degenerate) farming frenzy gathered steam. In addition, Compound began distributing COMP to users of the protocol depending on the amount of collateral users provided.
However, being one of the early DeFi protocols like MakerDAO, Compound had a resurgence towards the end of the year and has surged into 2021 in terms of volume, token price, and liquidity.
By mid-February, COMP token prices had surged to a new all-time high of around $550 and total value locked on the platform reached a record $5 billion according to DappRadar. DeFiPulse reported a similar figure.
COMP tokenomics and governanceThe primary purpose of the COMP token was for community governance, and according to Compound founder, Leshner: "Contributors to the Compound Protocol have an informal opportunity to collectively steward the future of the protocol to the benefit of all its participants." Only accounts with more than 100,000 tokens can make a difference, which makes whales and investors the only ones of importance. Once proposals have been submitted, they must reach quorum within three days by receiving at least 400,000 votes.
There have been no formal announcements yet but it is likely that the protocol will implement Layer 2 scaling solutions at some stage in 2021 to ease the burden of high transaction fees.
