Compound’s Approach to DeFi Governance Starts With Giving Away COMP Tokens

Users of the Compound lending platform will begin earning COMP tokens in mid-June, pending the public review of the decentralized finance (DeFi) firm's distribution plan.

COMP, the governance token for the Ethereum-based lending dapp, was first announced in February. According to a draft blog post shared in advance with CoinDesk, roughly 42% of the total supply of COMP tokens will move into a reservoir pool and begin daily distributions to users of the protocol for the next four years.

"Today, we're excited to announce that Governance is ready to scale from our core team and shareholders, to the entire Compound ecosystem," Compound's founder, Robert Leshner, wrote in the blog post.

Read more: Compound Extends DeFi Ethos to Itself, Launches Governance Token

As previously reported, anyone can propose a change to the Compound protocol. Changes might include adding new assets, changing the model for setting a given asset's interest rate or sunsetting an asset. All of these actions were recently tried out in a closed test of the governance platform, according to the blog post.

A proposed governance change will only go to a vote if 1 percent of the total supply of COMP tokens signals that it should do so. From there, the full process from voting to code change takes several days.

COMP token allocations were described when the plan to decentralize was first announced: 46% will be held by shareholders, founders and the Compound team, but about half of that is subject to a four-year vesting period. This means a large portion of the voting power is controlled by the people who created Compound, even if the company that did so won't hold any COMP.

"Delegation is core to this decentralization," Leshner told CoinDesk. "COMP token holders (most of which are not in the business of writing protocol upgrades) already delegate to the community; adding tens of thousands of new token holders will multiply participation."

How distribution works

Revealed today, new COMP will be awarded every day to users of the protocol, based on usage. There will be rewards to borrowers and lenders in each asset and new COMP will be distributed at every block. Approximately 2,880 COMP per day will be released to users of the protocol.

Half the distribution each day goes to suppliers of assets and half to borrowers. Assets that are seeing the most activity will also receive the most COMP tokens each day, so allocation will move with the market.

Read more: DeFi Startup Compound Finance Raises $25 Million Series A Led by A16z

Right now, COMP purely runs Compound. No returns accrue to the token in its present design, but that is something COMP holders could address themselves later.

"The governance right gives the community complete control to evolve the economics of the protocol and COMP in entirely new ways – so I have no idea what COMP looks like in two years," Leshner wrote.

As of press time, some $98.5 million worth of crypto assets are locked into the Compound protocol, with yields ranging from 0.7% for supplying BAT to 2.70% for tether (USDT).