Based on the most recent research, one of many trade’s largest DeFi protocols is going through an incentive disaster. In his report, Alex Kroeger, an Ethereum researcher, discovered that almost all Compound’s liquidity miners have little to no financial curiosity within the protocol and don’t take part within the protocol’s governance.
The report analyzed the highest 100 accounts by accrued COMP from liquidity mining with the intention to show that liquidity mining on Compound wants critical fixing.
Compound’s miners aren’t hodlers
One of many first protocols to introduce liquidity mining, Compound shortly grew to turn out to be a DeFi powerhouse. With over $12 billion in whole worth locked (TVL), it’s the fifth-largest DeFi protocol based on Dapp Radar.
However, paying out incentives to customers to those who contribute liquidity to the protocol comes at a value. Researcher Alex Kroeger argues that liquidity incentives dilute token provides and rewards customers that contribute nothing to a protocol’s governance.
Kroeger analyzed the highest 100 accounts by accrued COMP from liquidity mining and located that they accrued a complete of 808,825 COMP tokens, equal to round $270.9 million. These accounts signify 69% of all COMP mined, which signifies that they make up the vast majority of COMP holders.
Nonetheless, only a few of those accounts really find yourself holding the tokens. Based on the report, solely 19% of the accounts have stored greater than 1% of the COMP they claimed, dumping 99% of their liquidity incentives available on the market. A tiny 7% of the accounts stored greater than 50% of their liquidity incentives.
On the subject of taking part within the protocol’s governance, the numbers paint a a lot bleaker image—out of the highest 100 addresses, just one ever voted on a protocol proposal.
“Liquidity mining applications advantage extra consideration in DeFi governance extra broadly–are they reaching their supposed targets? Within the case of Compound, it appears clear that liquidity mining incentives are a poor strategy to flip customers into stewards of the protocol.” the report concluded.
Nonetheless, there’s a answer to Compound’s drawback.
Kroeger proposes solely incentivizing lending on the protocol to discourage liquidity miners from recursive borrowing and lending. Lenders are usually extra concerned about passively incomes yield and taking part in good governance in the long term.
To higher align incentives of those liquidity miners, he additionally proposes introducing a vesting schedule for accrued tokens—COMP tokens with a vesting schedule might then themselves be tokenized and these tokens might retain governance rights.
And at last, as a substitute for liquidity mining, the protocol might fully revamp its mannequin to “governance mining.” As an alternative of distributing tokens to customers that lock up capital within the protocol, Compound might distribute tokens primarily based on contributions.
No matter what you assume the aim of liquidity mining ought to be, I feel the size of this system means it deserves extra cautious measurement and consideration of its prices of and advantages.
— DeFiCorgi.eth (@alex_kroeger) November 15, 2021
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