Compound governance proposal seeks to end COMP yield farming craze

A Compound proposal could put a major dent in the profits for all yield farmers.

A new Compound governance proposal from Gauntlet founder Tarun Chitra would see all future COMP token distributions locked in a vesting schedule.

The proposal was submitted on Wednesday and outlines several ways that the vesting could be implemented. One would involve discrete vesting where the tokens could be claimed at periodic intervals, while another proposes “continuous vesting” that frees tokens gradually as they reach maturity.

Either solution would be in stark contrast to how the reward system is set up right now, where the vesting time is effectively zero. While COMP is not immediately distributed into user wallets, it can be claimed at any point in time either by interacting with the protocol or explicitly calling a claim function. This is mostly a gas saving measure.

With no vesting, yield farmers can simply pool their liquidity to earn COMP and immediately sell it on the market. This has resulted in a somewhat perverted incentive that goes against the stated purpose of the COMP distribution. The idea behind it is to distribute ownership and governance of the platform to its users, but in reality the distribution is currently dominated by whales who are looking for an instant profit. 

Adding vesting would discourage “purely capitalist yield farmers,” as Compound Labs CEO Robert Leshner referred to them, from committing their capital to the protocol for a short-term gain.

If the proposal were to pass, however, it could have a powerful effect on the current DeFi ecosystem.

Cointelegraph previously reported that Compound is by far the largest recipient of DAI minted from MakerDAO (MKR). According to Defipulse data, the protocol currently holds 211 million DAI, which in addition to being over 46% of all current DAI, is also 55% more than its total June 30 market capitalization of $129 million.

The timeframe is crucial as DAI only became the primary yield farming asset on Compound since July 2. Cointelegraph previously reported that DAI’s recent supply surge was largely due to yield farming demand from Compound and other protocols.

While Compound is rarely the most remunerative yield farming protocol, it has been the most stable and high volume source of yield, largely due to its relatively steep distribution curve and high market capitalization. Current base yields amount to about 8% APY, which can be approximately tripled by entering a leveraged DAI position.

Tightening the yield tap through vesting could result in much of the capital unwinding, sending Compound and likely Maker’s total value locked downward. Due to a somewhat widespread belief that TVL reflects the protocol’s success this could result in token prices going down as well. On the other hand, the selling pressure would be lowered significantly, which could have a counterbalancing effect.

Nevertheless, the decision would significantly limit a major portion of total liquidity mining revenue, most likely affecting all other protocols in some way.

Ross Ulbricht Uses Snail Mail to Send Correction for Blog Post on MakerDAO

Getting all the facts right is hard, especially when you don’t have internet access.

Ross Ulbricht, the founder of SilkRoad, has issued a short follow-up to his essay on MakerDAO (MKR) and how it could be redesigned and improved.

The follow-up amounts to a small correction to an assumption he made earlier about the Maker system. In his essay, he was puzzled that the DAI Savings Rate, a reward for “staking” the stablecoin, was higher than what DAI minters paid as interest rate. Indeed this is not the case as the savings rate is obtained from stability fee payments. Raising it above that level would eventually bankrupt the protocol.

“I had received values for the savings rate and stability fee, and they confirmed my hypothesis, but they were values from different days.”

Obtaining information on the outside world is considerably difficult for Ulbricht. He is barred from using any sort of digital communication device and cannot access the internet. He noted that other prisoners may sometimes access “the most mainstream news sources” like CNN or NPR.

Partially due to the nature of Ulbricht’s charges though, he is limited to paper and telephone-based communication, which he uses to interact with the outside world through intermediaries. Both essays were transcribed from handwritten notes sent via mail, according to images provided for proof. Since 2018, he has been running a Twitter account in this indirect manner as well.

Despite these limitations he is said to be “very fortunate to have people willing to do research and work with me through the mail,” adding that he is a “rare exception” among his inmates.

Ulbricht is currently serving a double life sentence plus forty years without parole for a variety of charges related to operating SilkRoad. An organization spearheaded by his mother, Lyn Ulbricht, is fighting to reduce the harshness of the sentence. 

The somewhat unreliable data does not change the core of Ulbricht’s proposal for MakerDAO, he argued. His criticism touched some of the basic tenets of the protocol, notably that the stability fee is never negative.

He compared Dai (DAI) with deposit certificates issued by pre-modern banks in exchange for gold. These acted as a representation of the value held in the bank’s vaults and derived their value from the fact that they could be redeemed for the gold. 

In accordance with this system, Ulbricht argued that it is the vault holders that should be paid for locking their collateral and guaranteeing the value of DAI. The current system treats vault holders as borrowers instead of lenders, which according to him does not make sense when they are “borrowing” an asset that would be otherwise worthless. 

Furthermore, he believes that the ad-hoc interest rates set by the Maker community feel “like a tool a central banker would want so he can imagine he is ‘managing the economy.’”

In his proposal, interest rates would be set by the market in a competitive bidding system.

MakerDAO’s system has largely worked so far, though the March 12 incident and the resulting de-peg of DAI highlighted that it does not always work as intended.

MakerDAO’s battle to keep up with DAI demand

Quick Take

  • The supply of the decentralized stablecoin DAI has grown to 379.1 million, up from 134.7 million on July 1st (a 181.4% increase).
  • New demand for DAI has been primarily driven by liquidity mining on Compound and yEarn. Increased demand has led to DAI consistently trading above its targeted $1 peg.
  • Currently, the focus is on changing the parameters of, and adding new, collateral types to keep up with growing demand.

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