In the most recent Compound study, the topic of liquidity mining is highlighted. According to a new study, one of the industry’s most important DeFi protocols suffers from a lack of motivation. According to Alex Kroeger, an Ethereum scientist, the majority of Compounds’ liquidity miners have little financial interest in the procedure and thus do not participate in its administration.
The analysis looked at the leading 100 accounts in terms of accumulated COMP from liquidity mining in an attempt to illustrate that Compound’s liquidity mining requires of fixing. The Compound was among the earliest protocols to implement liquidity mining, and it rapidly rose to prominence as a DeFi powerhouse. As per Dapp Radar, it’s the fifth-largest DeFi mechanism, with approximately $12 billion in total value locked, or TVL.
It costs money to reward users who provide liquidity to the system with rewards. According to developer Alex Kroeger, liquidity rewards diminish token supply and compensate customers who offer nothing from a protocol’s administration.
Kroeger looked at the leading 100 accounts in terms of accumulated COMP through liquidity mining. He discovered that they had amassed a sum of 808,825 COMP coins, which is almost $270.9 million. These identities account for 69% of any, and all COMP mined, implying that they provide for the vast number of COMP users.
Liquidity Miners own 1% of the Received Comp
Nonetheless, only a small percentage of these accounts really own the tokens. Merely 19% of the accounts held more than 1% of the COMP they received. According to the research, they dumped 99% of their liquidity bonuses on the market. Only 7% of the funds retained more than half of their liquidity rewards.
Only one stands out of the 100 best domains that have ever participated in a policy suggestion. This will paint a far bleaker image when it comes to the participation of all the users in the protocol’s administration.
Liquidity mining projects deserve more consideration in DeFi governance in general. In the instance of Compound, it appears that liquidity mining benefits are an ineffective strategy to convert customers into protocol custodians.
Fortunately, Compound’s predicament has a remedy. To dissuade liquidity miners from cyclical lending and borrowing, Kroeger advocates solely encouraging lending on the system. In the longer term, lenders are more engaged in simply collecting income and engaging in good governance.
The founder also advocates providing a vesting timetable for accumulated tokens to match these liquidity miners’ incentives better. COMP tokens with a vesting timetable can then be decoded and maintain governance privileges. Lastly, as an option to liquidity mining, Compound might restructure its approach to governance mining. In which distributing tokens are depending on contributions rather than users locking up capital in the protocol.
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