A person reward scheme to distribute the brand new Compound governance token (COMP) has resulted in a dramatic rise of the worth locked within the decentralized finance protocol as merchants sought to “farm” the token, as followers affectionately name the observe.
In keeping with knowledge from Defi Pulse, the Compound protocol’s whole locked worth soared from about $100 million to a excessive exceeding $600 million since June 15, the beginning of the COMP token distribution.
Supply: Defi Pulse
Cashback on loans
The COMP reward scheme works by periodically depositing the token to all balances interacting with Compound. This consists of the protocol’s lenders and, crucially, its debtors as properly.
The sums concerned are vital, with the protocol at the moment distributing 2,880 COMP per day price about $668,000 as of press time. Over four million tokens are left to be distributed from an current provide of simply over 2.5 million.
In the meantime, the value of the token went on a parabolic rise as soon as it was revealed that Compound investor Coinbase would record COMP on its Professional platform.
Buying and selling is because of be activated on June 23, however that didn’t cease merchants from elevating its worth to a most of $371, up from simply $78 the day earlier than the announcement.
The excessive issuance and excessive worth, coupled with the best way the reward system is designed, led to the emergence of large “COMP farming.” Speculators have been incentivized to each borrow and lend cash from the protocol on a big scale, leveraging their positions by recursively “lending” the tokens they borrowed.
The annual rate of interest on some tokens on Compound, like BAT and wBTC, reached as a lot as 33% and 27% respectively as of press time. Usually, excessive rates of interest are related to excessive COMP yield.
The revenue machine seems to be unwinding on Monday, as COMP dropped to a worth of $264.
The dangers of “farming”
Some excessive profile commentators like MyCrypto CEO Taylor Monahan voiced their reservations in regards to the scheme and the dangers concerned. Vitalik Buterin, co-founder of Ethereum, mentioned:
“Rates of interest considerably greater than what you will get in conventional finance are inherently both non permanent arbitrage alternatives or include unspoken dangers hooked up.”
Tony Sheng, a principal investor at Multicoin Capital, defined that the dangers to farming contain both theft of collateral property, liquidation on account of market occasions or the lack of the peg for artificial property like stablecoins.
Nevertheless, it’s price noting that these dangers have at all times existed for Compound and lots of different platforms, and aren’t associated to the observe of yield arbitrage. The true threat appears to be for many who are shopping for the “farmed” COMP, as its worth tumbled by virtually 30% since its all-time excessive, sitting at $264 as of writing.
It’s possible that this can enable the “yield bubble” to deflate, as mining COMP will now not be as profitable.