A governance proposal for Compound Finance aiming at abolishing the protocol’s user incentives failed on Thursday, despite substantial support from VC firm Andreessen Horowitz (a16z).
There were 499,849 votes against the proposal and just 492,678 supporting it (where votes equal tokens). More than twice as many crypto addresses voted for the proposal, implying that numerous COMP coin holders were against it.
Now, Compound, which is a lending and borrowing protocol, operates the same way. It pays COMP tokens out to borrowers and lenders on the platform, a practice also known as liquidity mining. Such token payouts function as a yield for users locking in cash into Compound.
Yet some of the protocol’s contributors and investors perceive these benefits as a cause for concern.
Compound developer TylerEther, who submitted the request to Compound’s governance forum, put forward that Compound should cut these benefits to zero. He said that user COMP incentives add no value and that those who obtain rewards soon sell them.
The developer pointed out that whilst the COMP incentives were beneficial in establishing the protocol in its early stages — by rewarding early users — they have grown to be highly troublesome at present.
Since most COMP distributed under the existing reward scheme is sold off instantly, current users and token holders are at a significant disservice. Their share of the protocol is being lowered to earn profits through COMP farming.
Andreessen Horowitz came out in complete favour of the proposal during the voting process. The voting results indicate that the firm accounted for more than half of the favourable votes (492,678).
Running a $4.5 billion crypto-focused fund, a16z has made significant investments in the Ethereum Defi ecosystem, including Compound and such protocols as Uniswap. The firm has been accused of allegedly manipulating decision-making in some Defi protocols by voting with vast numbers of governance tokens purchased directly from protocol creators.
Jeff Amico, a partner at a16z Crypto and head of network operations, highlighted the problem with Compound’s existing reward scheme by claiming that newly-minted Compound rewards went to “recursive positions,” which he argued was a waste of the token’s limited supply.
A recursive position occurs when a user puts cash into a lending protocol such as Compound and then utilises the collateral to borrow more of the same asset to raise the position and earn additional COMP tokens. According to Amico, the Compound protocol spends $60 million every year giving these rewards.
Those who didn’t advocate the proposal, including Compound’s co-founder and chief technical officer Geoffrey Hayes, said that the proposal would jeopardise the company’s decentralisation. Apart from ensuring the liquidity of a system, token payouts contribute to its decentralisation. By widely dispersing a token, the likelihood of ownership concentration is minimised.
“I want to be very clear: decentralisation of the protocol has been, and should continue to be, the primary governance target,” Hayes stated. The protocol should think it over and analyse the proposal’s ramifications. According to Hayes, stopping the incentives may cause the protocol’s general health to deteriorate.
