The launch of Compound’s native token – COMP – has led to a resurgence in the platform’s usage.
Since August 2019, Compound Finance – DeFi’s leading money markets protocol – has stagnated in growth, hovering around $100M in Total Value Locked (TVL) for nearly a year. But on Monday June 15th, Compound made history by launching liquidity mining for its new governance token.
The introduction of a tokenized incentive to both lend and borrow on the platform has resulted in over $120M in new capital locked, an increase of 134% in less than two days. Adding to frenzy, Compound is currently the most valuable DeFi asset by market capitalization valued at $651M compared to Maker’s $539M.
For those unfamiliar, liquidity mining is an emerging token distribution mechanism for DeFi protocols in which participants earn tokens for providing assets to the network. With Compound, users who borrow and supply capital are eligible to receive COMP tokens, currently set to ~2,880 COMP per day distributed pro-rata to all money markets based on the interest accrued. Equally as important, unlike MKR and KNC, COMP tokens don’t entitle the user to any sort of cash flows – just governance rights (for now at least).
We’ve seen a similar distribution model with the emerging liquidity and asset management protocol, Balancer. The launch of the protocol’s native governance token also resulted in an identical surge in liquidity within days of launch.
The surge in new liquidity comes as a result of yields being extremely high. At current prices, borrowing USDT on Compound actually has a higher return than lending USDT despite the fact that users have to pay a 17% interest on the loan and suppliers are earning interest on top of COMP.
With both protocol’s showing massive success from the introduction of liquidity mining, this may signal a long-term trend with DeFi protocols.
The recent liquidity mining mania has brought back a similar feeling. A 2017 ICO bubble feeling. This was highlighted by Synthetix Founder, Kain Warwick, who – despite being extremely well versed in this incentive model – did not expect such a positive reaction from liquidity mining, especially for tokens that strictly represent governance rights (like COMP and BAL).
When Uniswap Liquidity Mining?
There are still a handful of untokenized, prominent DeFi protocols that may launch something similar in the coming future. Uniswap is the prime example. DeFi’s favorite “Automated Market Maker” (AMM) would massively benefit from implementing a similar liquidity mining mechanism as the returns from “UNI governance tokens” would likely outweigh the potential losses from trading pair volatility (known as impermanent loss).
The implementation would also act as a critical incentive for new liquidity provisions to the protocol as well as an added incentive for migrating your V1 LP tokens over to V2.
Actually, Uniswap has hinted at a native governance token in their V2 announcement in March under “Path to Sustainability”. In case you missed it (a lot of people did), Uniswap V2 includes a small protocol charge mechanism with an on/off switch.
At launch of V2 (which happened in May this year), the protocol fee was set to the default 0% and the liquidity provider fee remained at the normal 0.30%. The caveat is that if the protocol charge is switched “on”, the LP’s cut is reduced to 0.25% and 0.05% is allocated to the protocol.
That protocol fee will be directed via a decentralized governance process. It’s important to note that this could be done with LP tokens as the tokenized assets could effectively act as governance weight.
However, Uniswap has investors. Paradigm, Coinbase, and others have rumored to participate in Uniswap’s seed round. They need an exit. And this is their exit (and likely a profitable one too given the recent trend).
It wouldn’t come as a first either. Compound’s COMP token distribution allocated 23% of the total 10M supply to shareholders of Compound Labs (the protocol’s core developer team). Balancer also allocated 25% of its BAL token to its core team and investors.
While there a certainly questions as to whether liquidity mining can lead to sustained and long-term growth (not just “wash trading” to earn tokens), I have a feeling that liquidity mining isn’t going away anytime soon. It’s likely just getting started.