Compound plans to reduce liquidity rewards to drive out speculators

Compound, which kicked off a wave of liquidity “mining” in 2020, is phasing out this set of incentives.

A few days ago, Tyler Loewen, a member of the Compound community, launched Proposition 92, which proposed to reduce the existing COMP rewards by 50%. On March 27, the proposal was voted and implemented, which reduced the daily release of COMP from 2,312 to 1,156.

From the perspective of the community, the token reward has attracted many speculators to come to earn income. They are not the real users of the protocol, and they will dump COMP immediately after getting the reward, which is extremely unfavorable for real users and token holders. .

Tyler Loewen also plans to launch a proposal to remove liquidity rewards on April 15 after the token reward was lowered, arguing that it makes more sense to use the rewards for the actual business layer of lending.

Tyler Loewen’s ultimate goal is to introduce an alternative reward program “kickstart reward”. The logic of this program is to increase the annualization of deposits for an asset to rapidly expand the market size of the asset. When the amount of deposits reaches a certain level, the lending rate will also become Low enough to attract more lending activity.

Since the rise of liquidity contribution rewards, the overall market size of DeFi has grown significantly, but its shortcomings have also been revealed during this period. Universal liquidity incentives often attract many unfaithful traffic, which is not conducive to the long-term development of the protocol. In the opinion of industry insiders, it is a better choice to use incentives to make the protocol meet market demand faster.

Compound passes liquidity reward halving proposal

On June 15, 2020, the Ethereum lending protocol Compound launched a pioneering liquidity incentive plan to distribute COMP token rewards to both parties involved in lending. This move has become the fuse that detonated the DeFi market. Applications such as Balancer, Curve, and SushiSwap have launched incentive mechanisms, triggering a wave of “income farming” gold rush.

Today, nearly two years later, Compound, the originator of liquidity mining, has seriously considered stopping the COMP incentive program. The community believes that the token reward has attracted many speculators to come for income farming. They are not the real users of the protocol. After getting the reward, they will dump COMP immediately, which is extremely unfavorable for real users and token holders.

On March 19, Tyler Loewen, a member of the Compound community, launched Proposal 92 with the theme of “COMP Reward Adjustment” in the governance module. He proposed to reduce the existing COMP rewards by 50% as the first step for Compound to completely stop liquidity incentives. .

Compound plans to reduce liquidity rewards to drive out speculators

 Compound reward halving proposal approved

According to Tyler Loewen, the original goal of the COMP reward program was to distribute tokens to protocol users, and while this was an effective way to launch Compound and reward early users, the practice of COMP farming for profit has become very problematic. He observed that currently, most of the COMP distributed by the reward program sells out immediately, a farming practice that does not bring value to the protocol or existing users and token holders.

On March 24, the proposal received more than 880,000 COMP votes in favor and 87,500 COMP votes against. In the end, with the support of institutions such as Polychain Capital, MonetSupply, GFX Labs, Pantera Capital, etc., the proposal passed smoothly and has been implemented on March 27th.

According to the original COMP distribution method, 2312 COMP will be distributed every day, and this distribution mechanism will continue until the reserves are used up. It will take approximately 4 years for all of the over 4.5 million COMP allocated to the reserve to be distributed. At this rate, the COMP reward is expected to continue for more than two years.

After the passage of Proposition 92, the daily distribution of COMP will be reduced to 1156 pieces, which means that the yield of yield farming will be reduced by 50%, and the distribution time will be extended.

Judging from the current community discussions, many people are open to stopping the distribution of rewards, and community member Clairvoyant Labs said that it agreed to end the inflation of COMP so that the share of COMP holders is no longer diluted.

According to the plan of Proposition 92 initiator Tyler Loewen, he will also launch a proposal to “reduce existing rewards to zero” on April 15. “This proposal marks the sacrifice of the protocol, users and token holders. The era of costly COMP farming is coming to an end.”

Whether or not the proposal will pass is yet to be voted on, but the Compound community’s intent to expel speculators is clear.

The community intends to introduce an alternative reward program to motivate users

As of March 29, the total value of encrypted assets (TVL) locked by the Compound protocol was $7.28 billion, up 3.79% in the past seven days. After the proposal to halve the reward was passed, the TVL of the protocol has not been significantly lost.

It is foreseeable that if the reward distribution is stopped, the user’s pledge yield on Compound will also drop significantly. At that time, users who are chasing deposit income will not rule out migration to other protocols, and the risk of insufficient liquidity of deposit and loan funds may appear.

To prevent this from happening, Tyler Loewen believes Compound needs to further refine the interest rate model. He stated that the market size and activity of the protocol should not be determined by the COMP reward, but should be let supply and demand take over. “In the past, we have deeply ignored interest rate models, and current sub-optimal interest rate models may struggle to maintain lending markets for various assets while maintaining sufficient liquidity.”

At present, the interest rate of mainstream assets deposited in Compound is not superior to that of lending platforms such as AAVE. Taking USDT as an example, the annualized rate of return of AAVE is 4.89%, dForce is 6.41%, and Compound is 3.55%; when the deposit asset is ETH, the annualized rate of return of AAVE is 0.39%, dForce is 1.02%, Compound is only 0.07%.

Because the yield is not as good as other DeFi protocols, Compound’s TVL currently ranks 8th in DeFi protocols, behind Lido, Maker, Aave and other applications with “financial management” attributes.

Compound plans to reduce liquidity rewards to drive out speculators

 Compound TVL ranks 8th in DeFi protocols

Community members believe that Compound’s interest rate model still has room for optimization, and it is necessary to intelligently measure the market supply and demand relationship, and then adjust to the optimal interest rate level in real time to attract users to join.

In addition, once Compound’s proposal to stop liquidity incentives is passed, Tyler Loewen also plans to introduce an alternative reward program “kickstart reward”, which is to incentivize an asset’s market size to reach X dollars within three months with a Y% annualized rate of return . where X and Y are used as variables for further discussion.

For example, Compound wants to open a lending channel for APE Coin, but the liquidity is not enough, then the platform can use the reserve fund to increase the yield of the APE deposit pool, for example, to attract $10 million in deposits with an annualized yield of 8%. Tyler Loewen believes that only by attracting depositors to provide sufficient liquidity can borrowing costs be lowered and more borrowing activity be attracted.

After the announcement of Tyler Loewen’s proposal plan, there has been a lot of discussion. Most community members believe that it is a more ideal solution to use incentives in the business scenario of lending itself, rather than uniformly issuing rewards to all deposit and lending users.

Changes in Compound’s liquidity incentive strategy have also inspired other DeFi protocols. At present, except Uniswap no longer distributes UNI, most DeFi protocols still maintain a liquidity incentive scheme, but the drawbacks of this method have already emerged. favorable.

DeFi industry observers believe that after recognizing the drawbacks of liquidity mining, protocols should focus on demand and use incentives to meet demand. For example, when people have new asset trading needs, DEX protocols can pass The incentive method quickly increases the liquidity of new assets to reduce transaction slippage, thereby attracting users to trade. “When incentives return to business scenarios and no longer pursue short-term TVL and user growth, the protocol can be on a healthy development track.”

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/compound-plans-to-reduce-liquidity-rewards-to-drive-out-speculators/
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