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Compound launches native governance token

Compound Finance moved away from a centralized governance model to one driven by community governance. Every Compound user, both borrowers and lenders on the DeFi platform, will now receive a native governance token called COMP every time they make a transaction.

The Compound platform white paper was released in June 2019. It describes Compound as a platform built on the Ethereum (ETH) blockchain that establishes money markets, “which are pools of assets with algorithmically derived interest rates, based on the supply and demand for the asset.”

Suppliers and borrowers of assets on the Compound platform interact directly with the protocol. Platform users earn or pay a floating interest rate and do not have to negotiate terms such as maturity, interest rate, or collateral with a peer or counterparty.

Every borrowing and lending market, or money market, is unique to each Ethereum token that the Compound platform supports. For example, an ICO token like 0x (ZRX) has unique lending and borrowing rates for US dollar stablecoins like USD Coin (USDC). Each money market on the platform has a transparent and publicly viewable ledger, which contains a record of all historical transactions and interest rates.

Supplied asset balances are represented by cTokens or Collateral tokens. These tokens are unique to Compound but conform to ERC20 smart contract token standard. cTokens represent an underlying asset, which users will earn interest on, and serves as a representation of collateral used for a loan.

Users can borrow up to 50-75% of each of their individual cToken balances, depending on the assessment of the price reliability of the underlying Ethereum asset. Users may add or remove funds at any time, however, if a users debt becomes undercollateralized, public liquidators may claim their assets. Liquidators receive a 5% discount on liquidated assets and this serves as an incentive for them to perform their services.

A Compound governance token called COMP was announced in February. 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.

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.

Prior to the full public launch of the new Compound Finance token driven Governance platform, users were given an opportunity to select which assets they favored adding to the Compound platform.

There was a large choice of assets that could have been made available as new collateral options for loans on Compound. They include application tokens like Decentraland (MANA), Exchange tokens like Huobi Token (HT), and stablecoins TrueUSD (TUSD).

Maker (MKR) and Tether (USDT) led this initial poll. Tether will now be added to the platform, and marks the first key governance decisions handled by users of the platform.

The distribution is allocated to each individual money market, and will be proportional to the interest being accrued. As market conditions change and assets on Compound become more or less popular, the allocation of COMP between assets will change too.

Within each money market, 50% of the distribution is earned by suppliers (lenders), and 50% by borrowers. In real-time, users will earn COMP in proportion to their balances. This means Compound platform users now get a “second” interest rate on top of what they may earn from lending.

As per data from DeFi Pulse, there are currently ~US$ 114 million worth of Ethereum assets locked into the Compound platform. This currently makes it the third-largest platform in DeFi, after the Maker protocol and the Synthetix derivatives platform.

Compound founder Robert Leshner has said that teams in crypto that have stockpiles of DAI and crypto are the most frequent protocol users. During an interview in late 2019, Leshner explained how the San Francisco-based startup plans to further “decentralize” the protocol by allowing crypto exchanges and custodians, like Coinbase, to play a greater role in maintaining the protocol going forward.

In November 2019, Compound Finance raised US$25 million in a round led by Andreessen Horowitz’s a16z crypto fund. This followed a US$8.2 million seed round led by Bain Capital Ventures, Andreessen Horowitz and Polychain Capital.


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