We (Gauntlet) wanted to provide an update on our work to add better incentives for COMP distribution. First, we wanted to go into more detail on the reasoning behind our current proposal. Next, we describe our plan going forward to get this proposal out to Mainnet.
Why vesting?
COMP Rewards have driven usage of Compound (and honestly, of DeFi in general) since their inception last year.
However, we could categorize this usage into two buckets:
- Organic Demand
- People who already wanted to use the protocol, who now receive COMP rewards
- COMP Farming
- People using the protocol just for the COMP rewards
- These people often use circular borrows and immediately sell the COMP.
- People using the protocol just for the COMP rewards
From Robert’s announcement, the goals of COMP distribution are for users to “automatically receive governance rights, for free— in order to shape the future of the protocol”
In the case of farming, this goal is not met because these users clearly have no intention of shaping the future of the protocol, as they immediately surrender those rights to their exit liquidity. It can be hard to differentiate the nature of usage between the two categories above but from some simple analysis, it’s clear that farming is a considerable percentage of current usage. A second problem arises as well with farming - it creates a huge stream of COMP that is consistently dumped on exchanges, punishing protocol supporters who hold COMP.
So how can we distribute COMP to people who care about the future of the protocol? The vesting and cooldown proposals that Gauntlet has put together use a simple heuristic to determine if users have interest in the success and future of Compound - they are long COMP.
Now, on a short timeframe (e.g. a cooldown or vesting period of < 30 days), the effects of any vesting/cooldown proposal would merely mitigate the second issue of COMP being dumped on exchanges. But as that timeframe increases, you force farmers to take on more and more COMP exposure.
- Why wouldn’t this just delay when farmers dump all of the COMP?
- With the simplest assumptions, it would, but it would also force the farmers to care about COMP price (as a proxy for Compound in general) for the length of the vesting/cooldown period
- One thing to note that the cost incurred is commensurate to the user’s desire to be long COMP. If you want to hold all of your farming rewards as COMP, the cost is negligible.
- This would ideally make farming more attractive to users who cared about the future of Compound, and should shift the user base in this direction. If/when these changes go through, we’ll see if this is the case.
- There is clearly a balance here, because you also start to deteriorate the experience for organic demand users who now have to manage the cooldown period
- Even some organic users want to reduce exposure, which is reasonable to a limited extent even for the most ardent of Compound supporters
Now, this is not the only way to reward people who care about the protocol with COMP, you could create a staking pool (as SNX, AAVE, and others have) or pay users in COMP to vote. However, neither of these would fix the current issues with distribution, though it would reward users who bought COMP from farmers and then participated, which would have its own benefits. Also just a reminder - COMP can now be paid directly to community contributors (after proposal CP030). Participants who drive value to COMP, who might rely on COMP rewards, can just get them directly via Governance.
Next steps
We got great feedback on Discord as well as during the dev call, and we’ve put together a plan for addressing the most salient points here. Most notably, this new version will preserve the existing API much better. Going forward, our plan is to:
- Incorporate final dev feedback
- Audit the code with Quantstamp
- Testing on Kovan
- Propose adding the cooldown logic (ETA first week of February, though timelines are not finalized). Starting with a 0-length cooldown, the community can decide on what works over time.
If the proposal passes, we’ll then reach out to wallets and other partner applications as we work to turn on the functionality by setting a cooldown > 0.
If it doesn’t, we’re happy to respect the community’s decision here. Vesting was something that was first suggested on these very forums, and while we think the tradeoffs it presents are good for Compound, we understand how other community members might disagree. We’ve now produced two tested and working implementations, and those will be available to the community in the case minds change.