New compound research shows 20% of the liquidity miners or less, hold COMP tokens and it shines a light on the problem of liquidity mining as we can see more in our latest altcoin news today.
According to the latest research, one of the biggest Defi protocols of the industry is facing an incentive crisis because the Ethereum researcher Alex Kroeger found that most of the Compound liquidity miners have almost no economic interest in the protocol and do not take part in the protocol’s governance. The report analyzed the top 100 accounts by accrued COMP from the liquidity mining in order to demonstrate the liquidity mining on Compound that needs serious fixing.
The compound was one of the first protocols to introduce liquidity mining and soon became a Defi powerhouse with more than $12 billion in total value locked and also became the fifth-biggest Defi protocol according to Dapp Radar. Playing out the incentives to the users for those that contribute liquidity to the protocol came with a cost as Kroeger argued that the liquidity incentives dilute the token supplies and reward the users with contributing almost nothing to the governance of the protocol.
The Compound analysis and Kroeger also analyzed the top 100 accounts by accrued COMP from the mining and found that they accrued a total of 808,925 COMP tokens that is equivalent to $270 million which represents 69% of the COMP mined and they are the majority of the token holders. A few of these accounts, however, actually hold the tokens. According to the report, about 19% of the accounts kept more than 1% of the COMP coins they claimed and dumped 99% of their liqudity incentives on the market with a 7% portion of the accounts keeping more than 50% of the liquidity incentives.
When it comes to taking part in the protocol’s governance, the numbers paint a bleak picture as out of the 100 addresses, one ever voted on a proposal. The report concluded:
“Liquidity mining programs merit more attention in DeFi governance more broadly–are they achieving their intended objectives? In the case of Compound, it seems clear that liquidity mining incentives are a poor way to turn users into stewards of the protocol.”
4. Give users an explicit voice in governance
An alternative to granting gov. tokens to users is to give users an explicit voice in governance.
A certain amount of voting power (say ⅓) could be reserved for users in proportion to their economic stake (e.g. total value locked).
— DeFiCorgi.eth (@alex_kroeger) November 15, 2021
There’s a solution, however. Kroeger proposed incentivizing lending on the protocol that will discourage the miners from borrowing and lending. Lenders are usually more interested in passive earning yield and taking part in good governance in the long run. To better align the incentives of the liquidity miners, proposed a vesting schedule for the accrued tokens that have a vesting schedule that could be tokenized tokens and retain the governance rights.
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