As ongoing community discussions examine optimal solutions for staking and governance improvements within Compound, I present the bold idea of adopting a Vote-Escrowed COMP (veCOMP) model.
Although traditionally associated with AMM protocols like Curve Finance, the veTokenomics approach has demonstrated long-standing success in aligning participant incentives and driving active governance. Adopting such a model in a lending and borrowing context is uncharted territory and undoubtedly daring and I acknowledge that I may not fully grasp all the implications or complexities involved. Nevertheless, given the robustness of both Compound and Curve as essential infrastructures in DeFi, exploring this innovative model might offer valuable benefits. I openly invite the Compound community to rigorously debate, scrutinize, refine, reject, or embrace this proposal.
Adopting a veCOMP (Vote-Escrowed COMP)
This approach could revolutionize Compound’s governance, reduce circulating supply and drive targeted incentives for lending and borrowing pools, ultimately positioning Compound as a leader in DeFi.
Why veCOMP?
Compound’s current governance and rewards model, distributing COMP evenly across pools, has been effective but it lacks the flexibility to prioritize high-impact markets or incentivize long-term holding of COMP.
With a maximum supply of 10 million COMP tokens, a circulating supply of 8,939,960 (per CoinMarketCap data) and a current price of $44 ( 28th March ), we have a unique opportunity to stabilize COMP’s value and align stakeholders with Compound’s growth.
Curve Finance’s veTokenomics model demonstrates that locking tokens for governance (ve-locks) significantly reduces circulating supply, up to three times more effectively than buyback strategies, all while boosting participation and directing rewards to liquidity pools.(https://twitter.com/CurveFinance/status/1896981110518899144/photo/1)
For Compound, a veCOMP system could achieve the same, locking COMP for 1–4 years in exchange for veCOMP, amplifying governance power and reducing sell pressure while driving activity in our lending and borrowing markets.
This aligns with recent community discussions, like “Potential Requirements of Staked COMP” (Potential Requirements of Staked COMP) and “Strengthening Compound Governance Using Staker” (Strengthening Compound Governance using Staker), which call for staking incentives and governance participation.
What’s novel here is applying a veTokenomics model, a primitive primarily seen in AMM protocols, a first to a lending and borrowing protocol like Compound. This would be a groundbreaking DeFi innovation, enabling dynamic, community-driven reward allocation for lending and borrowing pools, a feature untapped in our space.
Proposed veCOMP Model
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Locking Mechanism: Allow COMP holders to lock their tokens in a Voting Escrow contract for 1–4 years, receiving veCOMP proportional to their lock duration. For example, locking 1,000 COMP for 4 years yields 1,000 veCOMP with early unlocks penalized (e.g., 25% reduction per year remaining).
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Gauge Voting for Pools: veCOMP holders vote on which lending/borrowing pools (e.g., USDC, tBTC, ETH) receive COMP rewards via a gauge system. Rewards (e.g., 50% of weekly COMP emissions) are streamed to top-voted pools, incentivizing liquidity and usage.
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Reward Flexibility: Pools can use COMP rewards to lower borrow fees or boost supply APYs, driving activity. veCOMP holders could earn a portion of the fees generated by the Comet to which they direct votes to and even earn a boost (e.g., up to 2.5x rewards) for locking longer, encouraging long-term commitment.
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Community Governance: veCOMP amplifies voting power in Compound governance, ensuring long-term stakers shape the protocol’s future while preserving Web3 ethos and the good function of the protocol.
Simulation: Stimulating tBTC Borrowing in ETH Comets
To illustrate, a little simulation how veCOMP could benefit any Comet pool by incentivizing asset borrowing:
- Current State: Comet asset Y has $500M in total supply, $200M in borrows and a borrow APR of 5%. Asset 2 (i.e tBTC) has $5M in supply, $2M in borrows and a borrow APR of 8%. COMP rewards yield X% APY for both pools, distributed evenly.
- veCOMP Impact: veCOMP holders vote to allocate 50% of weekly COMP emissions to the tBTC pool. Of this, 70% subsidizes tBTC borrow fees, and 30% boosts supply APY.
- Outcome: tBTC borrow APR drops from 8% to 6% and COMP rewards could drive 20% more tBTC activity for voted pool
Why This Is a Game-Changer for Compound
This veCOMP model isn’t just an adaptation, it’s a DeFi primitive for lending and borrowing protocols. While veTokenomics has thrived in AMMs for liquidity provision, applying it to Compound’s pools would be a first, enabling dynamic, community-driven incentives to lower borrow fees, boost supply and target underutilized assets.
This innovation could set Compound apart, reinforcing our leadership in DeFi while preserving decentralization and security ethos.