In keeping with the most recent analysis, one of many business’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 a purpose to display that liquidity mining on Compound wants severe fixing.
Compound’s miners aren’t hodlers
One of many first protocols to introduce liquidity mining, Compound rapidly grew to change into a DeFi powerhouse. With over $12 billion in whole worth locked (TVL), it’s the fifth-largest DeFi protocol in response to Dapp Radar.
However, paying out incentives to customers to people who contribute liquidity to the protocol comes at a price. 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 characterize 69% of all COMP mined, which implies that they make up nearly all of COMP holders.
Nonetheless, only a few of those accounts really find yourself holding the tokens. In keeping with the report, solely 19% of the accounts have saved greater than 1% of the COMP they claimed, dumping 99% of their liquidity incentives in the marketplace. A tiny 7% of the accounts saved greater than 50% of their liquidity incentives.
In the case of collaborating 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 attaining their supposed targets? Within the case of Compound, it appears clear that liquidity mining incentives are a poor approach to flip customers into stewards of the protocol.” the report concluded.
Nonetheless, there’s a answer to Compound’s downside.
Kroeger proposes solely incentivizing lending on the protocol to discourage liquidity miners from recursive borrowing and lending. Lenders are usually extra keen on passively incomes yield and collaborating in good governance in the long term.
To raised align incentives of those liquidity miners, he additionally proposes introducing a vesting schedule for accrued tokens—COMP tokens with a vesting schedule may then themselves be tokenized and these tokens may retain governance rights.
And eventually, as an alternative choice to liquidity mining, the protocol may utterly revamp its mannequin to “governance mining.” As a substitute of distributing tokens to customers that lock up capital within the protocol, Compound may 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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