Compound, an Ethereum-based decentralized financial protocol, eventually released a governance token, COMP, earlier this year, following in the footsteps of other decentralized finance protocols. “COMP enables community governance — it isn’t a fundraising mechanism or an investment opportunity,” according to a press release issued on February 26th. COMP will remain unavailable to the general public until the decentralization process is completed.”
As seen by the preceding letter, the currency was introduced in private: the token was held by venture capital funds, major players in the DeFi business, and Compound Labs, the protocol’s operators. Institutional holders of COMP, including PolyChain Capital, Dharma, Argent, Dragonfly Capital, and others, unanimously decided to make the coin public on June 15th.
COMP has had remarkable growth since its inception. The asset’s market valuation has risen to $740 million, surpassing Maker (MKR), DeFi’s poster child MakerDAO’s governance token. However, few people in the business understand what COMP is and how to get it.
1/ What is COMP?
Simply explained, COMP is a governance token that allows users to affect the operation of the Compound system. “We’re happy to announce a governance framework that allows you to discuss, debate, and adopt improvements to Compound – without relying on, or requiring, our staff in any way,” says Compound Labs.
This is a change from the prior method. Which gave Compound Labs a lot of leeway in deciding how the protocol should be implemented. That’s not to argue it was a bad strategy. Compound Labs amassed tens of thousands of users and a profitable business worth hundreds of millions of dollars.
By allowing a smart contract owned by users to alter Compound, the launch of COMP further decentralizes one of the largest participants in DeFi. If decentralization is to be maintained, this is a crucial step.
What is COMP – ERC-20’s standard asset?
Whether it’s a DeFi corporation, a venture capital fund, or a well-known bitcoin user, voting rights can be delegated to an Ethereum address of one’s choice. Similar to how democracies function, users are given the option of delegating a candidate who best embodies their beliefs.
Addresses with delegations totaling more than 1% of COMP’s supply can propose governance actions. This bare minimum prohibits addresses with no financial stake in the network from suggesting foolish or harmful actions.
Governance actions are not recommendations, but rather executable code that is implemented into Compound after a majority is reached. COMP holders vote on actions three days after they make their initial request. If the proposal obtains at least 400,000 votes (out of a total of 10 million eligible votes once all COMP is distributed) and a majority of those votes are “yes,” the action is postponed for two days.
Because the governance model can be changed, the timelock helps protocol users to plan for the transition. However, this would necessitate one entity proposing and passing a governance action to change the paradigm.
Compound describes three major acts that may be completed: adding support for a cryptocurrency, modifying how a market’s interest rate is calculated, and changing an asset’s collateral element.
So far, all nine recommendations have passed virtually unanimously, indicating that COMP’s major shareholders are in agreement. Apart from what has already been said, COMP is of limited use. Though there have been conversations of allowing COMP holders to profit from Compound’s market activity, this is still a young notion.
2/ What is the Ethereum Token and How Can You Get It?
COMP is now available in one of two methods for DeFi retail users:
To begin with, it may be obtained by swapping other cryptocurrencies for it. COMP may be purchased, like most other public digital assets, by swapping a “reserve asset” in the crypto realm.
COMP may be exchanged for ETH on Uniswap and other decentralized exchanges at the time of writing. FTX facilitates the buying and selling of COMP using US dollars and Tether’s USDT stablecoin. In addition to a futures market geared for traders. There are a slew of additional exchanges that accept the cryptocurrency, and more venues are joining it every week.
Second, make use of Compound.
Currently, anybody utilizing or borrowing cryptocurrency from Compound’s ETH, DAI, USDC, USDT, BAT, REP, WBTC, and ZRX markets can claim a specific amount of COMP, up to 2,880 every day.
The amount a user can claim is determined by how much interest is accrued. Lead to the result of their transactions with the Compound market(s) they are utilizing. And the quantity allotted to each market is determined by the amount of interest it generates throughout the whole Compound ecosystem.
However, this technique of dissemination isn’t without flaws. The Compound Labs team is looking into the following four strategies to standardize the distribution of COMP:
- lowering the amount of leverage that can be used to borrow assets
- Models of interest rates are being updated.
- The formula for distribution has been updated.
- Increasing the distribution speed of COMP
3/ A Quick Overview of Yield Farming
The practice of “yield farming” is one of the reasons COMP is so popular right now. The compound has devised a scheme motivating users to adjust how they utilize the protocol. This increases COMP by permitting the release of 2,880 units of a rather expensive cryptocurrency to ethereum users each day. Yield farming may take various forms. There are two main ways that clever DeFi users are taking advantage of COMP’s public introduction to boosting their profits:
- Leveraging Your Cryptocurrency: As long as the cost of borrowing cryptocurrency is less than the profit earned by putting cryptocurrency into Compound and claiming COMP. One may profitably leverage their cryptocurrency holdings. This is accomplished by depositing a cryptocurrency into Compound. By using it as collateral for a loan, trading the loaned cryptocurrency for another asset, depositing the swapped loan, and repeating the process.
- Providing Liquidity: The decentralized trading of bitcoin to cryptocurrency is a vital part of this yield farming frenzy. Users have been maximizing their COMP claim by depositing USDC/DAI into Compound, withdrawing USDT, exchanging the borrowed USDT for USDC, and repeating the procedure until they no longer want or can take on any more leverage. Compound presently does not enable the decentralized trading of tokens. However, users may earn fees by providing liquidity to prominent decentralized marketplaces like Curve.fi.
Despite being chastised for not being truly decentralized, Compound has provided a number of benefits to crypto and DeFi users. The Compound team intends to hand over complete authority of the protocol to the community in the future via a Decentralized Autonomous Organization.