Compound Proposal 022: Systematically Reduce Emission Quantity

I agree with @brendan_dharma that the community seems to prefer the introduction of vesting schedule vs. reduction of COMP distribution. Although modifying COMP distribution can also happen in tandem of additional ways for COMP distribution, including to third parties, which might be good for the future of compound. Some concrete examples:

  • Setting aside x% of remaining COMP for a bug bounty program that will focus on the long-term sustainability of compound protocol
  • Incentivize integration of compound to smart contract wallets or even financial institutions (i.e. CeFi actors)

However, I acknowledge that such proposals might be contentious for the community if not done carefully1

1 Like

Yes, I probably should have been more clear about this. Our goals with the reduction are really two fold:

  1. To allocate a portion of the COMP emissions for usage in the protocol later (e.g. bug bounties, audits, payment to developers)
  2. To incentivize long-term holding of COMP

In order for the former to be viable, we need to add in vesting (see: Vesting for the Compound protocol). However, we believe that lower emissions now and then adding vesting is the correct ordering for the following reasons:

  • Builds a larger reserve for bug bounties, contribution/security, incentivized voting participation, and to protocols that build on top of Compound
  • Will lead to a lessened concentration of COMP on centralized exchanges and increased holding times, especially as farming adds perverse incentives for long-term holders
2 Likes

Reposting what I wrote in the Discord here:

I’m pretty unconvinced on the proposal to reduce COMP emissions. If the goal is “building up a reserve of COMP that can be used for paying for other community needs” it seems like it’s a very roundabout way to get to it. Why not just create a proposal to re-allocate a portion of undistributed COMP? Or why not use the COMP already allocated to that purpose? Thinking of “775,000 COMP are reserved for the community to advance governance through other means — which will be announced at a future date”

The secondary goal is to stop people from farming + dumping COMP – I’m all for that but don’t see how reducing emissions will help with that.

Finally, we’ve already reduced emissions since COMP launched. Reducing again seems to actually be going against the current evidence in the market that faster emission rates lead to both broader and deeper governance participation.

2 Likes

The $COMP sold will be lower, by 20% and I don’t see how reducing COMP emissions would help stop from farming + dumping either.

@tarun With COMP emissions, you are trying to privatize system’s shares to users. A similar system of giving shares to workers happened back when Soviet Union collapsed and privatized government owned factories to workers who promptly sold it for a dinner and a bottle of vodka to a few folks hoarding them who are now known as oligarchs.

With COMP a basic question remains - why would anyone keep COMP ? Answer this and you will solve your problem.

As I see it now, the current answer is to govern the protocol by an elite few and the majority is on for a ride, for whom it wont matter anyway as we cannot get enough of it to voice our point of view.

And this emission reduction is a prime example of that. Someone with a lot more shares will do as they please, always, imposing their will on the majority ( With all due respect to the Monte Carlo simulation from above).

And that’s life.

2 Likes

Gauntlet’s ill-considered proposal seems like nothing more than a thinly veiled attempt to cause a short term pump in COMP prices. Gauntlet fails to demonstrate how reducing yield benefits the users of the protocol in the long term, indeed, they fail to demonstrate why yield selling is actually a problem.

1 Like

Gauntlet’s proposal is not even worth consideration without a clarity on how that COMP would be spent and the benefits it would provide to the platform and its users. Further, such extreme volatility of COMP yields at the whims of preminers will destabilize trust in the platform.

To preserve control in the hands of users, a system must restrict the commodification of that control. This is why most (if not all) democracies forbid the outright buying and selling of votes.

A better system for true user control of Compound would be a hybrid. For example, say 50% of total voting weight is distributed among active users proportional to their current stake in the platform (the value lent/borrowed) and it is not tokenized (cannot be taken off platform, bought or sold). The remaining 50% is commodified as COMP governance tokens that can be bought and sold on the open markets.

@RacerX - an interesting point. Potentially $MKR / $DAI type of relationship would work better. Separating voting coin (shares) from common coin (shares).

In the current stock market the “owners” are the voting shareholders (of course much less hands on, however still with some voting power) And then the incentive is to either a) hold the coin (share) to leverage appreciating value or to receive the dividend or both, seems to work out okay …

At first i’m largerly unconvinced that Community opinion actually matters, as Compound Governance is just pretend to be decentralised, while in reality it’s heavily centralised with like 20-30 entities can pass (or block any decision). So only their opinion actually do any difference and everything else can be just discarded as irrelevant noise. It’s worth noting, that pretty much none of controlling entities actually got their voting power from “user distribution”.

The argument that it’s in transition of transferring governance to users, while theoretically good quite contradicts with current proposal. Initial distribution time of COMP tokens is about 4 years to fully distribute. Which is a VERY LONG time for crypto. And yet, less than 2 month from start here is talking that it is too fast. So, here we come to point

1 : If COMP distribution a process of transferring Compound protocol to decentralised governance than we should abstract from current price valuation, which is just temporary noise. In that perspective, decreasing emission is just a way to preserve current status-quo, delay transition to community governance and hold voting power by initial voters, who probably should vote yes. (and i encourage community to pay close attention who will vote yes to that)

  1. Proposal title suggest decreasing emission by 20%, while proposal itself suggest to decrease from current 0.44 COMP/block to 0.176 COMP/block, which is more like 60%, isnt it? How to understand that?

  2. I want to remind everybody, that current price valuation of COMP is fueled by yeild farming hype and big bubble. It’s hardly real and hardly sustainable long term, regardless of what would be done with emission. At the same time COMP and Compound itself is one of the few actual products with long-standing and proven value , sitting at the core of it. Extreme care should be taken, as any radical change can be the pin which blow that bubble.

  3. I don’t really getting argument about centralised exchanges having big portion of COMP. Centralised exchanges are not the owners, but custodians of the COMP, which is likely in hands of many small owners, who (for reason of point 1) can basically benefit from COMP holding only by price speculation, as votes of single-double-triple digit COMP owners are largely irrelevant in decision making process (and holding COMP isn’t incentivesed in any other way either) , not even talking about those who have less than 1 COMP. Besides, do we know that holdings of centralised exchanges are from COMP distribution and not from initial seeded Uniswap liquidity leaked to that exchanges overtime?

To resume, i don’t really see what decreasing emission is trying to acihieve aside of delay of decentralisation process. Maybe attempt of price manipulation? Or attempt of blowing down all that house of cards defi constructed around Compound’s idea of distribution of governce token to users.

However, all of that being said, there is definitely some logic behind saying that might be there should be some improvement in distribution model.

3 Likes

Nice write-up and insights.

I don’t fully understand what the connection is between reducing emissions and increasing long-term hodling. I get that there will be funds for other things, but I don’t think the items mentioned will necessarily help.

One of the biggest reasons there are few long-term holders of COMP is because the (perceived) value of governance today is much less than the market value of the token. Why would I keep COMP knowing that governance is heavily centralized and my vote won’t count? Look at projects like yEarn, etc. No one is selling FYI (quite the opposite) because the expected value of governance (and potentially future cash flows) is much higher than today’s market price.

IMO increasing emissions + vesting would have been a much better solution. This way only people willing to lock up their rewards long term would provide liquidity.

Another way to increase long term hodling is giving COMP utility. Yam.finance showed, unsurprisingly, that when the token is useful for something, farmers/traders will want to own it. Enabling COMP as collateral like CREAM does or partnering with other protocols to support COMP in their projects are two of the many ways this could be accomplished.

1 Like

As a new participant in this ecosystem, it is surprising to see that there are quite a few thoughtful responses and counter arguments to the proposal that are left completely unanswered. And governance poll is already setup without first attempting to at least provide more clarification to these counter arguments.

As many others have asked, I would also be curious to understand why is it considered a problem that most of the earned COMP is sold immediately?

One of the points of COMP distribution, as I understand, is to increase awareness of the platform and increase its user base, integrations and overall usage. Even though most of the new lenders are joining to “wash borrow” to maximize their yield, they are still becoming familiar with the platform and building a relationship with it. They will most likely remain as lenders even in future, as long as over time there will be natural demand for borrowing. (hopefully everyone understands that APRs of >40-50% can’t be sustainable)

The fact that most of the COMP is sold right away seems an extra positive too, because this is potentially bringing other new users too, who believe in compounds future and want to own piece of it without becoming liquidity providers right now.

Of course most important part is to continue to build things that will increase actual borrowing demand, but changing COMP distribution either way wont make a difference for it. COMP distribution is already set over a long enough time period. If actual borrow demand doesn’t increase to much higher levels in next 2-4 years, slower COMP distribution wont really change much.

A bit late here, but just wanted to share Polychain’s view on this. We voted in favor of this proposal. We see this as doing 3 things:

  1. Reducing some incentive to recursively farm COMP which distorts lending markets & crowds out real borrowing/lending activity. Recursive farming is an unintended consequence of the current levels of COMP distribution, and it’s likely subtracting more value from the protocol than it’s adding.

  2. Ease some of the COMP bleed (i.e. farming COMP and dumping on exchanges). We are convinced the data shows that we aren’t effectively distributing COMP to long-term holders who are adding real value to the protocol (as opposed to ‘wash borrowers’ & farmers who immediately sell out). Lowering COMP distribution certainly doesn’t solve this problem, but it helps for the time being.

  3. Acts as a temporary fix that buys us time to implement bigger, longer-term changes into the protocol like vesting and a more permanent fix to how COMP is distributed. This is the first step because it’s a pretty simple code change.

We find this proposal to be a net-beneficial step on the path to a longer-term solution. Looking forward to seeing vesting/lockups, updated COMP distribution logic that removes the incentive to recursively farm, and other ways to distribute COMP that continue the process of decentralization.

3 Likes

If COMP distribution a process of transferring Compound protocol to decentralised governance than we should abstract from current price valuation, which is just temporary noise. In that perspective, decreasing emission is just a way to preserve current status-quo, delay transition to community governance and hold voting power by initial voters, who probably should vote yes.

This is not strictly about the price and/or valuation but rather about the distribution of the token, especially as there is no vesting period. Without a vesting period, as say Proof of Stake networks have with epoch and withdrawal windows, most of the assets accrete to a small number of market makers and exchanges who have no interest in voting. The Nansen data directly illustrates this. Moreover, spending the entire budget of the protocol on liquidity provision also does not make sense. The protocol has to spend on more than liquidity — it needs to spend on security and adding new features to stay competitive in the evolving DeFi market.

Proposal title suggest decreasing emission by 20%, while proposal itself suggest to decrease from current 0.44 COMP/block to 0.176 COMP/block, which is more like 60%, isnt it? How to understand that?

Currently, the implementation of COMP distribution stores a value equal to half of the COMP issued (e.g. compRate is equal to 2.2e17 in the deployed Comptroller contract). The reason for this is to save gas. Currently, 0.44 COMP / block is distributed with 0.22 COMP / block to suppliers and 0.22 COMP / block to borrowers. Note that 0.176 = 80% of 0.22. The reason for this is that the COMP issuance is computed via two operations, totalSupplied * compRate and totalBorrows * compRate. If the contract stored compRate as 0.44, then we would have to compute totalSupplier * compRate / 2, incurring an extra division step.

I want to remind everybody, that current price valuation of COMP is fueled by yeild farming hype and big bubble. It’s hardly real and hardly sustainable long term, regardless of what would be done with emission. At the same time COMP and Compound itself is one of the few actual products with long-standing and proven value , sitting at the core of it. Extreme care should be taken, as any radical change can be the pin which blow that bubble.

COMP, in many ways, started this bubble as an extension and modification of the pioneering work done by Synthetix. The Compound governance contracts have been used in a large number of yield farming protocols and the safety and convenience that they provide has been assessed by the developer market as a Schelling Point for governance. However, just as the release of COMP caused this bubble, it must also protect itself in the future. If all of the token is spent on liquidity with no vesting and/or lock-up, then the protocol will be bankrupt in the future in terms of a development budget, a security budget, and an insurance budget. The current farming craze has led to most COMP accruing to high-time preference, non-governance participants. While the current distribution isn’t ideal and protocol parameters (e.g. minimum amount of COMP to make a proposal) can be improved, one needs to remember that COMP was the first DeFi token to launch fully automated governance after product-market fit. And mistakes will be made if you are the first! One of the mistakes is the lack of vesting, which leads to the concentration that we see today. And the goal of reduction is to reduce the treasury and short-term behavior now, add in vesting and/or lock-ups, and then increase issuance again, albeit with longer-term lock-ups that encourage governance participation.

I don’t really getting argument about centralised exchanges having big portion of COMP. Centralised exchanges are not the owners, but custodians of the COMP, which is likely in hands of many small owners, who (for reason of point 1) can basically benefit from COMP holding only by price speculation, as votes of single-double-triple digit COMP owners are largely irrelevant in decision making process (and holding COMP isn’t incentivesed in any other way either) , not even talking about those who have less than 1 COMP. Besides, do we know that holdings of centralised exchanges are from COMP distribution and not from initial seeded Uniswap liquidity leaked to that exchanges overtime?

Some of the analysis that Will Price of Flipside has done on COMP distribution at exchanges has shown that the transfers are not really from small holders. For instance, this effective data visualization depicts that a small number of large holders (and presumably market makers) ended up providing most of the liquidity on Coinbase. Compare this distribution to that of the fair YFI launch, where holders are incentivized to hold the asset for cash flows. In the long run, COMP can be the vehicle for redistributing cash flows earned from the protocol (currently in the reserve), but only if there are enough long-term holders who participate in governance.

3 Likes

That all makes sense to me. What is disappointing is the way Compound decided to handle this, which is much more analogous to how elections work in a totalitarian regime than how they should work within a decentralized democratic organization.

Everyone understands that mistakes will be made. That’s fine. But, asking for feedback from the community and then completely disregarding that feedback is only going to alienate your users and destroy the already small community you had.

The better sequencing here would been to:

  1. Present the analysis establishing the issues
  2. Let the community come up with ideas/ options to fix those issues
  3. Analyze the impact of those options
  4. Vote

Compound rather decided to skip 2) and 3), come up with some band-aid solution and then pretend to vote on it.

1 Like

To be frank, problem with COMP being sold right away is not in it’s emmision rate but in the fact that it has no other value (utility) to a holder than speculative. That is the thing that should be fixed not distribution model

1 Like

What is disappointing is the way Compound decided to handle this, which is much more analogous to how elections work in a totalitarian regime than how they should work within a decentralized democratic organization.

I disagree with this characterization. This proposal is clearly initiated by a member of community and are being discussed freely in this forum. I agree that perhaps more input and feedback from the community would be better but this specific proposal does not seem to harm any long term COMP holder.

To be frank, problem with COMP being sold right away is not in it’s emmision rate but in the fact that it has no other value (utility) to a holder than speculative.

Are you saying that COMP should have other utilities other than governance? I would love to see more proposals for this. You should suggest some @adamskrodzki

Governance is not a utility for a holder of a COMP token, it might be for a protocol, but holder need to the work (to make informed decisions) and pay tx fees and got nothing in return, there is more than obvious free rider problem here as well.

One of possible utility would be dividend (it was alredy described already in this forum) maybe others are discounts in borrowing fees for example.

I’ve thought about this proposal (though saw it a little late) and worry that it is misguided. The main issue with COMP distribution, to me, seems to be around the terms under which it is distributed, not how much is distributed. I suspect the primary effect of the current proposal will be to slow the decentralization process vs. correct the distribution mechanics.

Two points to consider here:

  1. Have you thought about the clear consequences for slowing decentralization? My impression was COMP emissions were intended to decentralize the protocol from initial stakeholders. Initial stakeholders still control most COMP, so in effect this proposal is initial stakeholders voting to slow down the decentralization of the protocol. If we like that rationale, perhaps that is fine; there could be good reasons for that. Or maybe the intent is really to open new routes for how COMP is distributed/decentralized, but not changing the net emission. I would suggest this be further clarified and ideally connected with the longer vision for maintaining the decentralization process (worth noting: there is some discussion of this in other comments).

  2. Reduced emission does little to address the stated problem (or at least very much unclear, and may make it worse): holding COMP from rewards is not sticky. This is an interesting and critical question for governance, which we highlighted in our blog post/paper back in June. There are different ways to try to address this that we might expect to have better effect. Some are already discussed in this thread, like vesting. I suggest the primary discussion should be around these vs. emission rate. And ideally, there should be some more formal work (some ideas may just put off the problem, and there are many other dimensions of possibilities–limits on transferability is one that isn’t often discussed).

*Respect to Tarun and Gauntlet. Big fan of their work!

There is discussion but the feedback is not impacting the proposal itself. Voting on this already started (https://compound.finance/governance/proposals/21?target_network=mainnet). Also, the issue here is not that this will harm long term holders, but rather that it doesn’t reflect with what the community wants.

This proposal is not about fixing the issue. As many others have pointed out this does little to encourage long term holding.

Yes, traditional stock equity has worked passably - though crypto can be better.

Users will eventually move to the platform that best benefits them. The current consensus among preminers to act against the interests of users makes them vulnerable to disruption by another platform better incentivized to serve users.

1 Like