A new type of user reward scheme to distribute the Compound governance tokens (COMP) has led to a significant increase in the amount of value locked into the leading decentralized finance (DeFi) protocol.
Traders using Compound are now “farming” COMP tokens.
Notably, the total value locked into Compound’s contracts has surged dramatically from around $100 million just recently to over $600 million, according to DeFi Pulse data. The Compound protocol is now ranked #1, overtaking MakerDAO, a major Ethereum-powered lending system that had comfortably been in first place for a long time.
The COMP token reward scheme involves regularly depositing the token to all users’ balances that are active on Compound. This includes the DeFi protocol’s borrowers and lenders.
The amounts involved have been quite substantial, with the Compound protocol having distributed around 2,880 COMP token each day – which are valued at approximately $670,000 at the time of writing. More than 4 million COMP still need to be distributed.
The COMP token price rose sharply when it was confirmed that Coinbase would add support for the token. The San Francisco-based exchange has also previously invested in Compound.
Coinbase Pro (for professional traders) will begin supporting COMP trading on June 23, 2020. Following the announcement, the token’s price surged past $370, up nearly 4x from just a few days ago.
The token’s high issuance rate and a surge in price have led to a trend called “COMP farming.” The trend has also picked up because of the new reward system. Many traders have been borrowing and lending funds via the protocol, and they’ve been leveraging their positions by recursively lending the same tokens they had initially borrowed.
The interest rate on certain tokens issued on Compound, such as BAT and wBTC, went as high as about 30%. However, the COMP token is currently trading at only around $128, down nearly 70% in just the past 24 hours.
Tony Sheng, principal at Multicoin Capital, said that “farming” comes with serious risks such as collateral assets potentially getting stolen. Traders may also get liquidated unexpectedly or quickly due to unpredictable market events, like the loss of a peg for synthetic assets such as stablecoins.
Tether (USDT), the world’s largest stablecoin by market cap, saw its volume on Compound recently surge past $100 million.
As noted in a release shared with CI:
“USDT has grown faster than all rival offerings on the Compound protocol… Some of the USDT investors indirectly interact with the Compound protocol, which focuses on establishing money markets that are a pool of assets with algorithmically derived interest rates.”
Calvin Liu. strategy lead at Compound, argues:
“Tether is an extremely useful asset in the Compound ecosystem … [it’s] one of the most liquid markets in the Compound protocol and accordingly across all of DeFi.”
“Compound and its peers are driving a nascent alternative financial system that is disintermediating the need for banks and trusted, centralized third parties.”