Compound Finance COMP rewards

Last Wednesday’s governance call brought attention to how the treasury’s COMP is being managed/spent. The original intention by Compound Labs was to distribute COMP tokens to users of the protocol and attract more users to the protocol. The protocol is currently rewarding 2252 COMP per day. That is worth roughly $900k. Most of the COMP rewarded to market participants ends up being sold. For example, Yearn Finance is has about $1B in assets that are being used to farm on Compound.

We need to find new ways to build the community and distribute the treasury’s massive COMP position in a way that directly benefits the protocol and its tokenholders. It has been over a year since the incentives began. I think it is time for the community to take a different tack.

Off the bat, I will say I am against burning COMP and doing an airdrop. I think a burn is the least efficient way to distribute funds because it does not attract new users. An airdrop to users who have historically used the protocol is better than burning but not much better, in my opinion.

Robert Leshner posted in the Discord, “my personal view is that any change should be methodical, not a huge step. And, any reduction, should be paired with new ways of distributing COMP to users to increase the community, grow the protocol, and improve the protocol.”

Below are a few ideas for the community to consider/debate. Please post which ideas you like/dislike.

  1. Reward voters with one or more votes for each proposal they cast a vote. All types of votes would qualify for the reward. It would be some kind of pro-rata their voting power up to a limit, so people don’t just make a zillion wallets to participate in governance and so already large holders don’t receive outlandish rewards. Here is a link for how many COMP the top 100 voters would get if they voted. Feel free to copy the sheet and adjust the parameters. Very roughly speaking, I think we could see +250 new voters.
  2. Separate supply and borrow side COMP rewards. This has already been brought up in the forums a couple of times. I think it is a great idea. Incentivizing borrowing doesn’t make a ton of sense, so shifting it towards the supply side would better distribute COMP and improve protocol liquidity.
  3. Supersizing the grants program: Larry and I have been discussing what the grants program will do in September when the trial period ends. We think building out a full-time team (notice plural) to run the program and take a more active role in development would be awesome. We haven’t talked too much about what it will look like, but it likely follows what the Uniswap Grants program is doing. They have a three-person full-time team working and have been making some impressive headway. I won’t say much on this because we need to flush out a more comprehensive plan, but I will say we are looking for a full-time grants lead and others interested in working full-time on grants. DM Larry or me if you want to talk more about that.
  4. We could start a program to help cover fees related to using Compound. Balancer did something like this where they covered ETH fees associated with trading. A long, long time ago, I did some research on this to see if we covered 80% of ETH fees associated with Compound functions what it would cost the protocol. I could revitalize some of that work if the community likes the idea.
  5. We could distribute additional COMP rewards to users who also participated in governance. Balancer was the first protocol to start doing this and saw an immediate increase in governance participation. Users who were farming BAL that also participated in governance received extra BAL. We could implement a program that rewards farmers with an extra 2% (open to suggestions) if they vote in the latest completed governance proposal. I think this is a great idea to get users of the protocol also engaged in governance.

I want to note that ideas 1, 4, & 5 would likely be done off-chain. I could develop a script that analyzes activity (open-source) that generates a list of addresses and comp rewards. That list would be published on IPFS and be used for a merkle root drop similar to Balancer’s weekly claim or Sushi’s vesting program. We could do it weekly, bi-weekly, or monthly. To manage this, we would likely use the existing community multisig (or make a new one) to control the COMP and verify the IPFS data/claim. Here is a link to the Balancer site and repo.

Here is my rank of the above ideas (1 being best - 7 being worst):

  1. Supersize the grants program
  2. Separate compSpeed into supply & borrow.
  3. Distribute additional COMP rewards to protocol users who also vote.
  4. Compound protocol usage fee reimbursement.
  5. Reward people for voting
  6. Airdrop (bad idea)
  7. Burn (worst idea)

Since I didn’t go into detail here, feel free to ask questions. I think I will make a poll a week from today after people have had a chance to ask questions, so we can try to gain a consensus on what people like. If we can reach a consensus, @elee and I can develop it (although we’re getting pretty busy), or I would be happy to work with the community or hand it off altogether to someone.

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Would delegated COMP votes count for the the delegator or for the voter? Delegating one’s votes to a representative that the user trusts is an important option in COMP governance and so we wouldn’t want to punish smaller holders (or large holders) simply for participating in a legitimate governance process.

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This might be more involved than what you are envisioning, but it may be worth looking into SourceCred. I know Maker utilizes them to reward governance and forum participation programmatically on a weekly basis.

Regardless, I agree with your overall statement in that we should be weighting COMP rewards more heavily to those who are actively participating in the community rather than those farming via Yearn who sell it instantly on the market. It just makes sense and we know from Balancer that it is a positive incentive loop.

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It would be based on total votes and not COMP holdings.

More rewards for the same small group of large comp holders that currently exist.

Oligarchy comes to mind. But agree comp burn is purely a valuation tool not for governance.

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#5 , love it… engagement is super important

Thanks Getty! I’d like to share my .02 DAI

TL;DR: the protocol’s current incentives are structured around incentivizing capital, not users. This has been the logical approach to bootstrapping liquidity in the first year of decentralized governance, but I agree with Getty that the protocol would be better served to begin realigning incentives so that some fraction of them are more squarely targeted at the engagement of users.
…I hear the counterargument that splitting capital across a number of wallets (so-called Sybil attack) makes any distinction between capital and users impossible. I have stated before and continue to argue that Sybil attacks on user-focused incentivization strategies can be made unprofitable by logarithmic distribution of incentives (e.g. +0.1 COMP per factor of 10 in whichever metric the incentive is based on) as long as gas costs are finite and measurable.

I am marginally supportive of idea 1 (paying active voters with COMP) as a temporary measure, ideally decaying in size over time, because the potential engagement upside is worth it. If even a small fraction of users who earned COMP through Coinbase Earn participated in governance (could even be integrated with Coinbase Earn as a follow-up tutorial), it would be a major win for engagement and a significant return for those users under the formula @Getty proposes. As stated in my TL;DR, I would argue for a logarithmic distribution (or a piece-wise step-function distribution approximating it). I would still support @Getty’s distribution if the community prefers it. Importantly, I would not support a distribution model in direct proportion to COMP holdings: that goes back to incentivizing capital over users.

I’m excited that there is already a PR for idea 2 (split borrow/supply streams for COMP rewards) by @arr00 and @TylerEther. I hope this will be proposed and adopted as soon as due diligence is completed. It’s my second-favorite idea of the bunch.

Idea 3 (expanding the Grants program) is my favorite: it does more to serve the protocol and tokenholders than the other ideas while incentivizing the best kind of user engagement: converting users into developers, program managers, community evangelists, what-have-you, all roles that help build the community alongside the protocol. While I am a recent beneficiary of the program, I don’t anticipate applying for another grant any time soon because of time constraints; I think that reduces any conflict of interest I might have in encouraging expansion of Compound Grants.

I support Idea 4 (partial reimbursement of costs to interact with the protocol): it values users over capital and makes a huge difference for smaller participants. It’s my impression that the perspectives of small users are massively under-represented in these sorts of governance discussions. From a small user perspective, even a partial gas reimbursement is a major user incentive and would make a huge difference, especially with engagement in governance (yes, there is comp.vote, though it is still a bit hard to discover for new users).

I am opposed to Idea 5 because the reward structure incentivizes capital over users, which is what I’m arguing we should be trying to push beyond. If I borrow $1M of assets on Compound and my friend borrows $1K of assets, I should not be rewarded 1000x the amount of bonus COMP rewarded to my friend for the same action/effort/cost. I would be more supportive of this idea if it were recast as a gas reimbursement for voting with rewards disbursed relative to ETH spent to vote (not relative to amount of COMP farmed).

Many of the largest COMP holders appear to be opposed to Idea 6 (airdrop to early users). Going back to my main argument that the protocol should seek strategies to incentivize users, not just capital, I think folks are underappreciating how powerful of a community-building opportunity we have before us to start the process of incentivizing real users with an acknowledgment of the protocol’s earliest adopters. These are our evangelists and educators, the folks who can share their experiences with the protocol with their friends, the folks who will actually bother to write letters to their legislators when a bill misunderstands what smart contracts are or what decentralization means. The protocol doesn’t owe them anything, but that doesn’t mean it’s not in the protocol’s best interest to afford them a meaningful opportunity to engage in governance that doesn’t require them to market buy (like many of them probably have) while whales quickly farmed enough COMP to sell to them or submit a CAP.

We can incentivize current and future users to do the things that we want them to do by spending COMP now to reward them for those behaviors; but when the incentives run dry, typically so do the incentivized activities. Loyalty is a scarce resource in DeFi, though fortunately Compound’s “lego” has gained the loyalty of many DAOs whose protocols rely on Compound under the hood. Still, there’s no cohort on the scale of 10K people we can count on more to do the things we can’t incentivize in a targeted way, or to carry on with those things beyond the available runway of COMP incentives, than the protocol’s earliest users.

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A great thread @getty.

I’d like to suggest taking decisions that support users that hold small amounts of COMP. It’s users that form a community and that spread the word. Also, a small COMP holder today, might be a big supporter in the future…

Here are some concrete suggestions to complement what has been said and suggested above:

  • Enable to vote for for free when using Coinbase wallet.
    (Unfortunately this isn’t possible yet through https://comp.vote/ )
  • Enable a cheap withdrawal/transfer of COMP from the compound app to the wallet.
    (At the moment it’s simply not economical to use the official claim COMP function. Without COMP in the wallets there is no way to vote/to get engaged, if I am not mistaken.)
  • Shifting COMP rewards to the supply side.
    (To attract more users that wil then learn more about Compound and the community.)

Maybe one other idea to add to the (on-chain) list would be that of support for COMP as a backstop - and enabling incentivizing users (beyond the odd $30m in ctoken reserves) to create an ‘equity-tier, insurance-like’ fund.

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@allthecolors well said.

I really like the goals that @getty , @allthecolors and others have laid out.
Broad goals:

  1. Incentivize participation in governance and voting
  2. Incentivize new users over new capital.

I’d like to lay out two more broad goals that are worthy of COMP distribution:
3) Maximize protocol revenue even at the expense of TVL (the Uni-V3 strategem)

Losing the recursive farming TVL on collateral assets is not a big loss as it doesn’t add much to net liquidity. COMP farming TVL was arguably more important when TVL was what made a protocol viable, but those days are long gone. Revenue is more important. So eliminating the 50/50 reward is a big step towards more efficient use of COMP. It will also reduce selling pressure from pure farming strategies.

  1. Support and expand the protocol (especially V3 - Gateway)

Incentivizing use of V3/Gateway is critical for making Compound a key protocol for every single smart contract chain. We’ve seen the huge opportunities that arose on BSC, Polygon, and Solana & should work hard to cement Gateway as THE key liquidity provider and bridge between chains. So, incentivizing supply on Gateway is critical, and to a lesser extent incentivizing borrowing.

Borrowing is already very lucrative to those who are sophisticated enough to do it. Borrowing stables enables long positions and yield farming. On the volatile side, shorting alone is a massive incentive; it allows massive optionality that hasn’t been fully realized by retail users.

Shorting lets you delta hedge, which could cover a large % of your ETH or BTC holdings and insulate your borrows during market crashes. This is arguably more important than making money with naked shorts.

The major gap on the borrow side is sophistication of users and usability of tools. Things like Instadapp fill a need in that regard. The space has the potential to evolve beyond interest rate arbitrage and yield farming. This is where the grant program can step in big-time! Grants should be supporting projects not only on the lending side but also targeted towards borrowers.

There could be small projects targeted towards making borrowing from Compound more convenient (better UX), widespread (e.g. credit cards or payday loans type deal), or more tightly integrated into swap platforms (e.g. like Impermax on a bigger scale and multichain)

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shoutout to @getty and @allthecolors for caring.

If you take a look at who are the biggest market participants, you get Yearn, Instadapp accounts, and some other friends who like to hang out in the HF (1.00-1.05) range. Yes, they stabilize rates, yes, dumping COMP is kosher, its a free market, but is this the way to run a business?

I mean compound isn’t a business, its a bunch of bytecode and magic internet money, so there’s no precedence. That’s why we must create precedence. Compound was the first to liquidity mine in money markets, and became a large portion of the money markets because its giving away 10 times as much as it makes, kind of.

Ether we act like a bank and figure out our balance sheet prospectus, start compiling by Basel 3/4
(We mostly are, our reserve ratio is above 7% on average and who knows about Tier 1 and Tier 2 equity) or, we act like a business and stop giving equity away for no reason. Around 30% of emitted daily is dumped on on chain, which is fine, but it should be addressed. I think a slp/LP/BLP COMP/ETH token as collateral would help align incentives in that regard.

But honestly, cut 100% of COMP distribution, we need a clean slate to help gateway and other bridges, lets stop giving away over 600 COMP a day to Yearn, and I don’t know, give it to ourselves?

some dashboards I made

https://app.flipsidecrypto.com/dashboard/y-dai-AcpK-S
https://app.flipsidecrypto.com/dashboard/y-usdc-_WiNbL

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I’m a big fan of the kyber pool governance model. (Except for the burn capability)

1.Governance trust less pool staking. ( delegator keeps all staking rewards)
2. Voting epoch occurs every two weeks. Increased voting periods, greater rewards, greater participation.
3. Minimum 2 week staking period to qualify for voting rewards.
4. Votes required,l to approve proposal based on % staked, not % of total supply.

I might be missing something here. How is it a bad idea to reward early users? What would comp be without the risk those people took. People could’ve lost all their money but they used the protocol anyway and trusted comp. Does that not mean anything to the founders?

Do yall worry that airdropped users will just dump the tokens? vest it if you have to. Then while it’s vested give those users an early credit so they can make proposals and stuff.

If it’s more governance participation you’re looking for then I believe giving power to your day 1 supporter would do that.

I wish there was more discussion on this other than “we just don’t wanna do that”

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This topic is okay. I like 2, 3 (if there is any way to make it non-gameable), 5 is the same as 3 basically and I do like the Airdrop idea if it can be done in a way where users can only claim it if they continue to use the protocol & we have it to where zero COMP will be essentially burned due to non-accessible accounts.

With that said, I’m with @massnomis for turning this protocol into a business (or at least a self-sustaining protocol that will always have a COMP balance in which can be used for stuff, like for paying @getty and @allthecolors). Just think, if Compound runs out of COMP, what does this forum look like?

I see there being an unlimited (sort of) supply of COMP that can help with distributing the COMP rewards to suppliers/borrowers. The COMP earning rewards on the borrow side of the COMP market could actually be used as a stream of income for continuing rewarding Compound users.

Everyone’s first take at this market (me included) see the borrow cap or the distribution of COMP rewards as something we need to stop immediately. However, looking at it from a POV where it was Compound Governance in control of the Borrowed COMP, it kind of makes sense as a revenue stream.

I say that Compound should depreciate the current COMP market and create a new one where our community adjusts the amount of COMP borrowed to maximize COMP rewards / incentivize COMP suppliers. This could be a non-collateralized debt position which would be secured by the Compound Treasury. Not only could this keep the COMP rewards going longer (forever), but also could implement something like a quarterly vote to where the community chooses a proposal to back with the borrowed COMP.

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Fantastic ideas @getty !

I very much support idea 3 - supersizing the grants department. We could do a trial run of a decentralized grants department and have it overseen by a few key individuals. That way, we can collectively generate the best ideas to grow Compound and even further, the DeFi ecosystem.

I’m against incentivizing people to participate in governance. We don’t want ill-informed voters and/or people simply voting with the herd. Rather, I think we should push to get people to delegate their votes to active governance members - the people who know the protocol the most and have skin in the game. We could reward these delegates for the governance work they’re doing.

In talking to friends, the #1 reason why they aren’t using DeFi and why I don’t really encourage them to use it is because of gas fees. Gas fees are acceptable for those with $10k+ in crypto, but it’s hard to justify paying $20+ to deposit when they’re only playing with a few hundred dollars. So I’m all for gas fee reimbursements and hope that doing so creates [more] precedence for other protocols to do the same.

We could even do more in regards to gas fees… possibly enable minting/borrowing/redeeming/repaying by signature? Then have Compound Labs batch execute these events? Off-topic though.

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Gas improvements are coming. Decentralized, open-source batch smart contract. Along with other gas improvements which are rewarded through RFPs. I don’t like the idea of spending more on gas fees. When DeFi goes mainstream, gas fees will be the least of our worries.

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That’s interestin discussion overall, as indeed COMP distributions have a lot of things to improve. I see kind of a lot of focus on rewarding voters, that in some way mentioned both in 1 and 5 ideas, so i want to start with that.

Let’s say it straight: amount of voters is really massively irrelevant. It really doesn’t matter if people vote or not and especially very small, “dust amount” holders. They have absolutely zero impact on outcome, and in general, holders of single-digit comp should rather be delegating than voting themselves. Voting power is what matters, not amount of voters. Voting power is concentrated in very few accounts. How and if they vote DO matter, remaining 10-20% (that isn’t exact number) of voting power spreaded across hundreds of adresses does not. That’s the facts. Participation doesn’t really matter and that goes directly from distribution of voting power and thus anything spend on incentivising useless action is wasted money. Who we going to fool here with massive participation when every single decision can be made regardless of participation of masses.

However, i fully support everybody who want to execute their voting power. Either by directly casting a vote, or by delegating their voting power to their representative. That’s their right.

But i’m really curious: Does nobody really thought why participation isn’t that massive? Aside of people just thinking that their vote matters not?

The problem here isn’t because people are so ignorant. It’s just COMP token design itself is so bad and outdated. It kind of based on assumption that COMP token is valueless governance token, which primarily would be held in wallet. And that kind of
assumption never worked from the very beginning. As soon as it hit AMM and become paired to assets which have value, it gained value as well, regardless of initial vision.

So right now COMP is financial asset, which do have a value which also “kind of” could be used in governance.

The problem here is that there are 2 basic real life usecases for that type of financial assets:

  1. It can be used as collateral

  2. It can be used for LP at AMM DEXes like usiswap, sushiswap, etc.

And interesting enough if you try to use it in any of this ways, you are instantly unable to participate in governance by design. Because in both cases you can’t keep token in wallet. And thus it instantly looses it’s utility in governance.

Fortunately Compound is Lending platform by itself, so Collateral usecase is relatively easy to solve with already pretty much existing code. And here we come to COMP staking. What is COMP staking? Well, in our case, it’s basically just a Compound
market with only Supply side present. But it wouldn’t earn any interest, you’ll tell me. Yea, and it’s not supposed to. But it will earn COMP distribution. And it will give that distribution for those who hold COMP. And that is, a way to
improve COMP distribution. AND because same address hold the same amount of cCOMP, it’s theoretically possible for COMP staker to participate in governance still.

And of course, we should never forget that existing COMP market is a SHAME and DISGRACE of all DeFi. Example of market manipulation via artifitially setting CAP and rewarding select portion of users for months, at the expense of everybody else.

Every single person holding more than 65k COMP should feel personally responsible in that mismanagement. Because they actually are, by being aware, having power to create a proposal to fix that and yet taking no action. And if regulation eventually comes to crypto, that would be example of inability of DAO to properly self-regulate. Because, they would say look, they created special privileged group of users, who are earning extra rewards. And that isn’t a market condition, it’s a manipulation.

It’s worth reminding that the problem is still there: COMP market, as it is now is NOT fine.

But let’s go back on topic of improving COMP distribution. It could be somewhat fixed for users who LP COMP in v2 type of AMM. It’s a bit more complicated because of oracle for LP tokens, but it can be done in same way as COMP staking, as a one-
sided Compound market for LP tokens. Voting portion is more complicated as amount of COMP in LP varies, maybe somebody could find technical solution for that. But so far aside of Snapshoting i don’t see anybody made a way to give LP voting power.

Creating such tools not only improve distribution itself: Part of COMP distribution could be diverted to COMP staking and to LP staking. But that also will improve liquidity. Users, who provide liquidity for COMP tokens in various DEXes, are in some
way doing more for protocol, then users just supplying or borrowing funds to Compound.

And actually big portion of users will be able to actually execute voting powers which they DO already have, but actually unable to use, because it have financial costs to actually pull their tokens either from collateral, or from LP to wallet to participate.

Not like i’m strongly against rewarding voters, even though i believe it’s useless spending of COMP. But unless things mentioned above are solved, yeah, i might pull 1 COMP or whatever minimum needed to get distribution and do signing. But i’d
surely not going to pull all tokens from where it makes financial reason for me to keep to just cast a vote, which wouldn’t change anything. (Yeah, as a very long time user, i do hold some very minor voting power, and yes, i pretty much never participate for the reasons i outlined. I’m aware of proposals and could be voting still, if technical options would exist even without any specific rewards for doing so)

I want to shortly mention airdrop. It’s not really that much bad idea. And it doesn’t need to be 200m airdrop. It’s just dragged for so very long time while it should be closed long ago. There is nothing really to discuss, basically only founders and early investors have the voting power to pass it or not. They should just voted on that long ago instead of collecting opinions from those whose opinion doesn’t matter in decision making. Idea itself isn’t that bad, yes. It indeed somewhat improve distribution, because right now COMP isn’t really going to users pretty much at all. It goes to big capital in vast
majority, not to the broad community: small users are diluted by massive capital.

As for expanding grants and separating supply and borrow markets for rewards being able to be fine tuned, it’s both great ideas, enough was said on those and i very much agree with support of that, voiced by others.

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I address only 1.

Depending on how it’s done, rewarding people for voting could be a lite version of raiding the treasury:

Whoever votes ‘yes’ on this proposal will split the treasury with me in proportion to voting power.

Compare it to:

Those who vote will receive funds from the treasury in proportion to voting power.

To avoid abuse, I see two problems to solve.

  1. Sybil attacks - create many wallets to vote and receive a flat Comp reward.
  2. Whales draining the treasury at the expense of small holders through a scaling Comp reward.

To address these, Getty suggests a scaling reward up to a limit. (@allthecolors suggests logarithmic scaling, but I address linear.)
This limits 1. because the reward scales up to a point (say 10,000 votes). Basically empty wallets cannot game the system.
This tries to limit 2. to some debatable level. However, this fails to protect against Sybil attacks by any user able to command greater than 10,000 votes during the duration of the program. A user able to command 40,000 votes could split the COMP between multiple wallets during the voting rewards program. Maybe current large COMP holders would be honorable and not Sybil, but there are people who might buy a lot of COMP to farm voting rewards.

How many COMP would someone have to hold to get 10,000 votes in during a duration?
What would they do to artificially increase this number? Make lots of pointless proposals to vote on?
What limits this? If there are 10,000 proposals to vote on today, someone with 1 COMP could receive the maximum reward by voting 10,000 times today.

Is the goal more people thinking about governance?
If so, another way of doing that might be COMP rewards from the grants program to people contributing thoughtful comments on comp.xyz.

If ‘more people thinking about governance’ is not the goal, what is? And why?

This is a great list, and is sure to start a well-needed discussion in the community.

The highest priority, IMO, should be the optimization of the 2,312 :comp:/day distributed to each market, since small changes can have huge rampifications for how COMP is distributed, held, and used, and this currently represents almost the entirety of the distribution.

This is achieved by:

  1. Separating the compSpeed into separate supply & borrow incentives, work which is almost complete (any / all additional eyes, and auditing welcome; as a community we should bring this work to the finish line)
  2. Modifying the COMP distribution in ways which put more tokens into the hands of users; this likely means tying COMP more directly to “natural” use-cases, and less to “farmed” use-cases; collateral assets having COMP rewards only on the supply-side, and borrowing assets (stablecoins) configured with reserveFactors to make “folding” the asset un-economical (no “negative spreads”), but attractive to normal use. If done correctly, more COMP can get into the hands of users looking to participate in governance.

In terms of additional approaches / programs, as a guiding principle:

Expanding the grants team to encompass a full-time team has large upside–to encourage, and coordinate improvements to the protocol that are sustainable (long-term). Protocol improvements – whether on market selection, parameter selection, rate models, new features, and integrations are all results that compound. This is a great direction to explore, especially with the benefit of hindsight after months of operating the grants committee.

Another direction that the community can look, would be increasing the reserves of the protocol directly; figuring out a way to reward users that directly add reserves to the protocol, in markets that have the lowest ratios of reserves:borrowing. This is an alternative to providing COMP to farming users, while capturing most of the value for the protocol (and all users). This could increase safety & liquidity, while testing a new distribution model. It could be tied to vesting, etc.

Rewards for voting on proposals are interesting, but could create perverse behavior (e.g. making hundreds of “dummy” proposals, simply to capture more COMP). If this path is explored, it should be a set quantity of COMP per month, regardless of how many proposals there are, multiplied by participation rate. Now that there is an “abstain” option, it could bring participation close to 100%. This could even include a “quadratic” type reward, where smaller addresses earn a larger relative reward.