DeFi Ethereum

Navigating DeFi: Compound Launches COMP Governance Token

The team behind Compound announced it had formally replaced the admin rights of its smart contracts with community governance, namely via the COMP governance token.
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Managing governance is no small problem in Ethereum’s rising decentralized finance sector. Projects that fully tilt toward decentralization have their own unique advantages, to be sure, and one of Ethereum’s top DeFi projects just notably went all-in on decentralization accordingly.

On Thursday, April 16th, the team behind Compound, currently the third-largest DeFi dApp atop Ethereum, announced it had formally replaced the admin rights of its smart contracts with community governance, namely via the COMP governance token.

Why the transition? Hitherto, through admin rights it would’ve been possible for Compound’s leadership — whether under duress or otherwise — to manipulate, or even drain, the lending dApp’s funds.

Having such admin rights in place arguably makes sense for younger DeFi projects, though as time goes on stakeholders in these projects expect decentralization to be decisively worked toward. That’s why it didn’t necessarily come as a surprise back in February 2020 when the Compound team first unveiled the COMP governance token system.

Governance Is a Big Deal

The largest DeFi project to date has been MakerDAO, which like Compound, is a lending dApp. With that said, some of DeFi’s biggest headlines to date have centered around MakerDAO governance votes, which are facilitated by the MKR governance token and the holders thereof.

Now, the specter of community governance votes has arrived in the Compound community, too, which means the promising dApp is being angled toward its true potential in being handed off from its builders to its users.

“From this point forward, all changes (from supported assets, to system parameters) will originate from COMP token-holders — fulfilling our vision of an open protocol that can evolve in entirely new ways,” the Compound team said on Thursday.

On the Distribution

To start, the COMP token has been distributed to some of Compound’s most pivotal early stakeholders. Those stakeholders, and their approximate allocations, are as follows:

  • Nearly 2.4 million COMP to Compound Labs, the actual builders of the Compound project’s protocol
  • Nearly 2.23 million COMP to Compound’s founders
  • Almost 375,000 COMP will go to future Compound team members that the project hires going forward
  • More than 5 million COMP will be allocated to Compound’s users at a later date

Altogether, the 10 million outstanding COMP will be used, like MKR is used within MakerDAO, by voters to steer the future roadmap of Compound. The new decentralized governance setup is naturally a far cry from having one small centralized team capable of dominating the protocol.

As things stand, Compound’s admins will still have the ability to “disable community voting in an emergency” in the short-term if an acute crisis arises. However, as the project’s governance system matures, the plan is to eventually remove this last failsafe measure and distribute “the remaining COMP to Compound protocol users.”

What About Value?

One major question surrounding the COMP token is the question of value. Of course, the Compound team has been explicit since the get-go that COMP “isn’t a fundraising device or investment opportunity.”

More simply put, Compound has rolled out COMP in its initial stage as purely a governance token — to start, the token is only meant for deciding matters within the Compound ecosystem.

That model can be contrasted with the MKR token, which currently trades for around $300 each and can even be auctioned off to raise funds during emergencies. However, it’s entirely possible that the COMP token does accrue value over time, too.

In other words, there’s nothing stopping COMP voters from voting in some sort of value capture system for the governance token at a later date when Compound is decisively out of the direct control its builders. Until then, these builders will likely play things conservatively in order to avoid the perception that they domineered such a large change for their own direct gain.


William M. Peaster is a professional writer and editor who specializes in the Ethereum, Dai, and Bitcoin beats in the cryptoeconomy. He's appeared in Blockonomi, Binance Academy, Bitsonline, and more. He enjoys tracking smart contracts, DAOs, dApps, and the Lightning Network. He's learning Solidity, too! Contact him on Telegram at @wmpeaster

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