The objective of the COMP rewards program was initially to distribute the token to our users. The sad truth is that an overwhelming amount of the COMP rewards are being farmed and instantly sold off, making the rewards program ineffective in achieving the initial goal. I believe there’s a clear need to re-evaluate how best to distribute the token to our community.
When a market first launches, we don’t see much activity until the market receives COMP rewards. There’s little incentive to deposit into it when there’s no borrowing demand (or rewards), and there’s no borrowing demand because there aren’t enough tokens to borrow to make the cost of the borrow transaction worth it.
A market needs to have great enough incentives for depositors to provide enough liquidity to make the cost of borrowing worth it.
The above statements I made in my prior proposal still hold. At the time of writing, I advocated for our users - who are also token holders - to continue receiving a share of the protocol. Decentralization of ownership matters. However, my perspective on the overall issue was slightly incorrect.
Since most COMP being distributed by the current rewards program is instantly sold off, existing users and token holders are at a great disservice. Their share of the protocol is being diluted for nothing other than farming COMP for profit. This COMP farming behavior is not the kind of activity that will bring value to the protocol, or for the existing users and token holders. Incentives need to be used to grow the protocol to the benefit of the protocol itself and its users and token holders.
Going forward, I now believe it’s best to end the current COMP rewards program and to start a new one with the sole purpose of kickstarting new markets. To our users who have faithfully held the tokens received from the rewards program: thank you for trusting and believing in us. Thank you for sticking with us through thick and thin. It’s not fair that your share of the protocol is being diluted for profit while you faithfully hold on to the token. We will fix this.
Here’s my new action plan.
On Friday, March 18, I will propose on-chain to cut the existing rewards by 50%. Rather than dropping rewards immediately to zero, we allow some time for adjustment.
About a month after, on Friday, April 15, I will propose on-chain to cut existing rewards to zero. This proposal will mark the end of COMP farming for profit at the expense of the protocol, our users, and our token holders.
We’ll let supply and demand take over, rather than COMP rewards essentially dictating market sizes and activity. Now here’s the caveat; we’ve deeply neglected our interest rate models. While our latest version of the jump rate model with its current parameters works okay for stablecoins, they are far from optimal for other markets. These sub-optimal interest rate models can make it tricky to maintain various markets in a way that’s equally favorable for both suppliers and borrowers while maintaining enough liquidity for new borrowers to enter the markets.
I already have a candidate in mind to help us with this who has experience in this area, having worked for one of Canada’s top banks. I will lead this initiative by reading and sharing the latest research papers on this topic (big thanks to my IEEE membership), defining a job scope with expectations and requirements, and coordinating with everyone involved.
After upgrading our existing and future markets with optimal interest rate models, we’ll be in a great position to have an effective rewards program to kickstart new markets. Existing markets with low liquidity that haven’t received rewards before may also obtain these kickstart rewards.
This new rewards program addresses the issue mentioned at the top of this post - we need borrowing activity to make depositing activity worth it, and we need depositing activity to allow for borrowing activity to occur in the first place.
The plan is to incentivize $X market size at a rate of Y% annualized APR for three months to kickstart new markets. The X and Y variables are up for discussion. For example, we could incentivize $10M in deposits at an annualized rate of 8% APR.
This proposal aims to end the practice of COMP farming for profit which only hurts the protocol, our users, and our token holders. We need to incentivize behavior that benefits us rather than diluting our loyal COMP holders. This proposal paves a clear path for that, further strengthening the protocol.