Compound Proposal 022: Systematically Reduce Emission Quantity

Proposals
21

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
22

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
23

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
24

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
25

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

26

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.

27

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!

28

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.

29

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