On Thursday, a Compound Finance governance proposal to remove the protocol’s user incentives was rejected, despite strong backing from venture capital company Andreessen Horowitz (a16z).
Only 492,678 people voted in favour of the proposition, while 499,849 people voted against it (where votes equal tokens). However, the proposal was defeated by more than twice that number of crypto addresses, implying that a big number of COMP token holders were opposed to it.
Compound, a protocol for lending and borrowing, now operates as follows. A mechanism called “liquidity mining” is used to distribute COMP tokens among users of its platform. Token payouts like this are offered as a return to Compound users who have locked-in money.
However, there are those contributors and investors in the protocol who think that the incentives are a problem.
TylerEther, a Compound developer, proposed on Compound’s governance forum that these awards should be slashed to zero. User COMP rewards, he contended, don’t create value since the prizes are sold as soon as they are given out.
COMP helped the system get started in its early stages by rewarding early adopters, but now they’ve grown to be “extremely troublesome.”
“As a result of the present incentives scheme, existing users and token holders are harmed to the point of ruin. In order to make a profit through COMP farming, Tyler’s plan called for a reduction in their protocol share.
An overwhelming majority of the votes were cast in favour of the proposal by a16z. The statistics reveal that a16z received more than half of the positive votes (492,678).
Compound and other prominent Ethereum Defi protocols have been heavily invested in by a16z, which runs a $4.5 billion crypto-focused firm. When a16z has invested in certain Defi protocols, it has been attacked for voting with significant numbers of governance tokens purchased straight from the protocol creators, which has been a common practice.
“Recursive positions,” according to Jeff Amico, a partner at a16z Crypto and director of network operations, are not a good use of the restricted amount of tokens under Compound’s present incentive scheme. “
Depositing cash into a lending system like Compound and using the collateral to borrow more of the same asset is known as a recursive position, which allows users to earn additional COMP tokens by increasing the size of their position. An estimated $60 million a year is spent by the Compound protocol on these bonuses.
Co-founder Geoffrey Hayes, who voted against the idea, said that it may have undermined Compound’s degree of decentralisation. Token incentives are thought to aid decentralisation as well as the liquidity of a system. Because tokens are distributed among many people, it reduces the likelihood that the ownership is concentrated in a small group of people.
According to Hayes, “I want to be very clear: decentralisation of the protocol has been and should continue to be, the fundamental aim of governance. According to him, the procedure should not be rushed through, and its repercussions should be carefully considered. In the opinion of Hayes, discontinuing the incentives might cause the protocol’s health to deteriorate.
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