From a DeFi Star to an Institutional Service Provider, Compound Declares the End of the Retail Era
- Core Takeaway: Compound Finance has approved a $52 million budget and replaced its management team, strategically shifting from retail lending to RWA, institutional credit, and compliance integration to address a survival crisis marked by a 90% decline in TVL. This move signals the end of the era in which DeFi relied on token incentives to attract retail users.
- Key Elements:
- Compound's TVL has fallen from a peak of approximately $12 billion in 2021 to its current $1.2 billion, a 90% decline. During the same period, Aave's TVL stands at roughly $14.8 billion, more than ten times that of Compound.
- Compound pioneered liquidity mining in 2020, but what it attracted was profit-seeking capital rather than loyal users. COMP's price has dropped from a high of around $900 to less than $50 today, reducing the appeal of token incentives to zero.
- Aave has taken the lead through multi-chain expansion (Arbitrum, Optimism, etc.), the launch of the GHO stablecoin, and the Horizon protocol, which offers RWA-backed lending for institutions. Compound has lagged behind in product innovation and governance efficiency by at least two years.
- The new budget will be allocated to compliance infrastructure for institutional clients: whitelist mechanisms, legal entity integration, risk management frameworks, and KYC/AML integration, targeting traditional financial institutions subject to regulatory compliance.
- Industry context: Total DeFi TVL has fallen by more than one-third year-to-date to approximately $70 billion, impacted by market corrections, yield compression, and security incidents such as the $292 million KelpDAO exploit.
Original Author: Xiaobing
On August 17, the Compound Finance DAO approved the largest budget in the protocol's history — $52 million — while simultaneously replacing its management team and announcing a strategic pivot from retail lending to a full focus on RWAs, institutional credit, and compliance integration.
The decision was driven by a set of grim numbers.
Compound's TVL has plummeted from its peak of approximately $12 billion in 2021 to its current $1.2 billion, a decline of 90%. Over the same period, Aave's TVL stands at approximately $14.8 billion — more than ten times that of Compound. The pioneer and once-synonymous name of DeFi lending has now been left far behind by its successors.
The $52 million and a strategic pivot represent Compound's attempt to answer an existential question: When retail users stop coming, can this protocol still survive?
Why Did Retail Users Leave?
Compound invented liquidity mining in the summer of 2020, rewarding deposits and borrowing behavior with COMP tokens. This mechanism ignited the entire DeFi Summer, catapulting the protocol's TVL by dozens of times within weeks and inspiring the incentive design of nearly every DeFi protocol since.
But liquidity mining has an inherent contradiction: it attracts yield-chasing capital, not loyal users. When token rewards diminish or the token price falls, capital immediately migrates to higher-yield opportunities. COMP's price has dropped from a high of around $900 in 2021 to less than $50 today, rendering the appeal of token incentives virtually zero.
Aave did several things right during the same period: it expanded to multiple chains more quickly (Arbitrum, Optimism, Polygon, Avalanche, etc.), launched the GHO stablecoin as a new revenue stream, and offered institutional RWA-backed lending through its Horizon protocol, using tokenized money market funds as collateral to lend out USDC and GHO.
Compound's response lagged by at least two years. It fell behind in multi-chain expansion, stagnated on product innovation, and its governance efficiency has long been criticized. In September 2025, the DAO even rejected a proposal to recall 300,000 COMP tokens previously allocated to special delegates, with 70% of participants voting against it. Governance gridlock and strategic drift have left Compound bleeding in the DeFi competition.
What Does $52 Million Buy?
The direction of the new budget is clear: institutions.
According to a CoinDesk report, Compound plans to use the funds to build compliance infrastructure for institutional clients: whitelist mechanisms, legal entity integration, risk management frameworks, and KYC/AML integration. The target clients are traditional financial institutions that want to lend and borrow on-chain but are constrained by compliance requirements.
The new management team is described as having "deep institutional experience." Himanshu Sahay, co-founder and CTO of crypto lending firm Arch Lending, commented that $52 million coupled with a team possessing institutional background "is a serious move that should improve execution." But he added a crucial caveat: institutions "review the structure, not the team."
Compound's transition won't be easy. Institutions need more than just a smart team and a battle-tested smart contract; they need legal opinions, insurance coverage, audit reports, clear custody structures, and a predictable regulatory path. Each of these requires time and money, and has almost nothing to do with coding capability.
Gal Stern, Chief Business Development Officer at deBridge, offered a more optimistic assessment: now is a good time to do this kind of work — channeling real capital into structural buildout while bringing in professionals who can "explain DeFi in their own language" to risk committees.
DeFi's Collective Shift
Compound is not the only DeFi protocol pivoting toward institutions.
Aave's Horizon protocol is awaiting DAO approval, designed with a hybrid model: the liquidity pool remains permissionless, but collateral is restricted to approved RWA tokens. The revenue share structure starts at 50% for the Aave DAO in year one and declines to 10% by year four, targeting the $16 trillion tokenized asset market projected by Standard Chartered.
MakerDAO (now Sky) completed this shift even earlier, allocating a substantial portion of its assets to U.S. Treasuries and on-chain RWAs. The underlying backing for its stablecoin DAI/USDS has transitioned from purely on-chain assets to a hybrid portfolio dominated by Treasuries.
The entire DeFi industry's TVL has declined by more than a third year-to-date to approximately $70 billion, hit by a combination of the broader crypto market correction, compressed yields, and protocol security incidents (including the $292 million theft from KelpDAO in April).
In this environment, institutional transformation is both a proactive choice and a forced survival mechanism. Retail TVL is draining, token incentives are unsustainable, and margins on pure on-chain lending are narrowing. While institutional capital has longer client acquisition cycles and higher compliance demands, it at least represents a more stable and predictable source of revenue.
Can "Permissionless" Be Defended?
Compound's core value proposition is a permissionless lending protocol. Anyone can deposit assets to earn interest, anyone can collateralize to borrow, with no credit checks, no KYC, no approval processes. This is the fundamental characteristic that distinguishes DeFi from traditional finance.
But the needs of institutional clients are exactly the opposite. They require whitelists (trading only with verified counterparties), legal structures (a responsible party identifiable when problems arise), and compliance interfaces (satisfying regulatory reporting requirements). These needs fundamentally conflict with "permissionless."
Aave's solution is layering: keeping the base layer permissionless while adding a permissioned layer (Horizon) on top. Whether Compound will adopt a similar strategy remains unclear based on currently available public information. What is certain, however, is that if the $52 million is primarily allocated to building out the institutional business, the protocol's center of gravity will be irreversibly shifted from retail to institutional.
For COMP holders, the evaluation criteria for this budget should be simple: 18 months from now, has Compound signed actual institutional clients, has it generated sustainable protocol revenue from institutional lending, and has TVL stopped declining and started recovering? If the answer to all three is no, then $52 million will go down as the most expensive directional bet in DeFi governance history.
For the entire DeFi industry, Compound's transformation is a signal. When the protocol that invented liquidity mining begins to abandon token incentives for retail users in favor of legal structures to attract institutions, an era has truly ended.
But whether the new era can arrive still depends on whether those institutional risk committees are willing to sign off on a smart contract audit report.
