Issuing coins to stimulate lending, is DeFi so lacking in liquidity?
Produced | Odaily (ID: o-daily)
Produced | Odaily (ID: o-daily)
image description
Image source: DeFi Maeket Cap
Compound focuses on lending business, and was awarded the title of "DeFi Bank" because its business logic is similar to that of traditional banks. Different from the bank model, Compound’s lending is done in a decentralized manner. The algorithm sets the interest rate for each token. Both borrowers and lenders get what they need on Compound, and Compound charges 15% of the interest as a handling fee.
At the end of February this year, Compound officially announced its plan to issue the governance token COMP, with a total issuance of 10 million pieces (ten times that of MakerDAO’s governance token MKR); at the end of May, Compound officially announced the distribution plan for the governance token COMP; in June On the 16th, users began to receive COMP tokens one after another. As a result, Compound surpassed MakerDAO and became the No. 1 DeFi market capitalization.
image description
Image source: Uniswap
As of press time, the trading price of COMP on Uniswap is 0.393ETH (a total of 640 RMB), an increase of 848% within a day.
secondary title
How to understand governance tokens?
The tokens of different blockchain projects perform their duties: for example, the original goal of Bitcoin is value circulation, which is actually used for value storage; such as PoS and PoS-like tokens, which prove the right to participate in network construction and operation, and need to be pledged Only tokens can participate in block generation; some (such as Kyber) can capture transaction fees and capture value by destroying tokens; there are also MKR, 0x, etc., whose functions are mainly governance. Of course, most tokens have more than one use. There are tokens that capture fees as well as governance, such as MKR and Kyber.
COMP, which this article focuses on, is currently a pure governance token.
According to official information, COMP is an ERC-20 token. Token holders have "voting rights" on the Compound governance agreement, allowing holders to entrust tokens to others to vote, and any token holder can participate Governance of Compound. As long as you have 1% of the entrusted tokens, you can initiate governance proposals, including adding new assets, changing the parameters or variables of various agreements such as interest rate models.
secondary title
COMP Allocation Mechanism
The developer Compound Labs once stated that the Compound company itself will not sell or reserve any COMP, and the tokens are distributed to the company’s shareholders and team members. The founder Robert Leshner also specifically emphasized: “COMP is not a financing method or investment tool, the meaning of COMP is only to improve Compound’s community governance capabilities.”
Therefore, in the allocation rules, more than half of the COMP is allocated to the real users of the protocol:
50.05% （5,004,949 COMP) are reserved for users of the agreement (42.3% of which have been clearly allocated, which will be detailed in the next part);
23.96%（2,396,307 COMP) to shareholders of Compound Labs;
22.26%（2,226,037 COMP) has been allocated to the founders and team of Compound Labs and needs 4 years to fully unlock;
3.73% （372,image description
secondary title
How do investors obtain COMP?
According to the official article, 4.23 million COMP will be distributed to users for free, as long as users use the Compound protocol for loan transactions. This rule can be called "borrowing is mining" or "liquidity mining".
These 4.23 million COMP tokens are placed in a "Reservoir" smart contract, and each Ethereum block will transfer 0.5 COMP tokens (that is, about 2880 COMP tokens per day), which means It will take 4 years to distribute all of them;
COMP will be allocated to each lending market (ETH, USDC, DAI, etc.) in proportion to the interest generated in the market, which means that the allocation ratio will change at any time;
In each market, 50% of COMP will be allocated to asset providers, 50% of COMP will be allocated to borrowers, and users can obtain it according to the proportion of their assets in the market;
Once an address gets 0.001 COMP, any transaction in Compound will transfer the corresponding COMP to their address, and for smaller amounts, the obtained COMP can also be collected manually.
In summary, new COMP will be rewarded daily to protocol users based on usage. Borrowers and lenders of each asset will be rewarded, new COMP will be issued every block, and approximately 2880 COMP will be provided to users of the protocol every day for 4 years.
image description
Image source: Compound
It can be seen from the figure that the vast majority of tokens are allocated to the USDC and USDT markets, and the USDC and USDT markets receive 90% of the allocation of COMP tokens.
The higher the price of COMP, the stronger the incentive for users to save and borrow money. As long as the COMP price keeps rising, people can borrow to earn COMP even if they have no need to borrow.
secondary title
Can the "borrowing is mining" model last for a long time?
Although the utility of COMP is designed for governance, the founder has repeatedly emphasized that COMP is not a means of financing or an investment tool, but observing the current price performance of COMP and the reaction of the market, COMP has indeed stirred up a wave among investors in the currency circle FOMO emotions.
Some people compare Compound's "loan-to-mining" model with FCoin's "transaction-to-mining" model that became popular in 2018, and believe that the two are essentially the same, which is likely to lead to illusory growth in transaction volume, and the incentive mechanism is only a short-term "drinking poison to quench thirst". Once speculators exit, the risk of collapse is huge, and it will also lead to the centralization of Compound, which violates the vision of the decentralized protocol.
Cao Yin, the Digital Renaissance Foundation, also told Odaily, "The 'loan/traffic mining' model pioneered by Compound is not much different from FCoin's 'transaction-mining' model, and there are not many innovations in essence. But for some cold-start small projects, this model can help them start quickly, and it still has some meaning for them.”
However, Cao Yin is not optimistic about the value of governance tokens like COMP. He believes that the value of the DeFi project itself is not linked to the value of governance tokens. Governance tokens are only a tool for platform users to participate in project governance, and Not participating in the dividend rights of the Compound project, which is also the difference between Compound's "loan mining" and FCoin's "transaction mining".
Moreover, Compound currently does not seem to have the idea of expanding COMP into a Compound mortgage asset. Even if the price of COMP drops to zero, it will not affect the progress of Compound's lending business, at most it will affect Compound's governance. Of course, it is very difficult for this situation to occur at present. From the above distribution diagram of COMP, it can be seen that the governance right of Compound is still in the hands of the team.
Cao Yin also believes that if COMP is only viewed as a governance token, the current currency price must be overvalued.
However, as far as the current early stage is concerned, the emergence of the COMP token incentive mechanism will undoubtedly drive the rapid growth of Compound's lending business. Strong incentives will change the behavior of users using the Compound protocol and attract new types of users including speculators and arbitrageurs.
Participants will borrow assets they don't actually need, but only pay interest to earn COMP tokens. As long as the returns are profitable, borrowers will flock to them.
Under such circumstances, the market value of COMP may far exceed its intrinsic value, and the day when everyone is worried that "the incentive model will always collapse" may indeed come. Once the market value of COMP will start to decline, it may trigger a reverse amplification force.
A lower COMP value will reduce incentives, which will cause borrowers and depositors to leave, accruing less interest, further depressing the value of COMP tokens, creating a downward spiral.
All in all, "XX is mining" is not new to you and me in the currency circle. It is a good thing that DeFi is out of the circle. The educational significance of this model to the market is worthy of recognition. After all, it still attracts many people to try it for the first time DeFi, even traded on Uniswap for the first time.
References:
References:
"Value Capture of DeFi Governance Tokens"
"Compound Governance Tokens Will Open Defi's Pandora's Box"
"A List of Allocation Plans for the Decentralized Lending Protocol Compound's Governance Token COMP"
