Understanding Compound's Liquidity Mining
Compound, though recently gaining viral popularity, is not a new project. Established in 2018, it operates as a decentralized lending protocol built on the Ethereum network. What propelled it into the spotlight is its innovative "liquidity mining" mechanism for distributing COMP tokens.
How Does Liquidity Mining Work?
In simple terms, Compound's liquidity mining can be described as "borrow to earn." Early adopters engaged in yield farming by depositing and borrowing assets extensively to maximize COMP rewards. Here's how it functions:
- Deposit-to-Mine: Users supply assets to liquidity pools, enabling borrowers to access loans by collateralizing their holdings.
- COMP Distribution: Both lenders and borrowers receive COMP tokens, split evenly at 50% each. Lenders earn COMP rewards alongside interest income, while borrowers offset interest costs with COMP gains—potentially delaying repayments if rewards exceed expenses.
Market Adoption of COMP
COMP tokens are now listed on 31 exchanges, including OKEx, Poloniex, Coinbase, Binance, and Uniswap. Notably, Coinbase, a major investor in Compound, has played a pivotal role in its growth.
Balancer's Flash Loan Attack and Remediation
Following a flash loan exploit, Balancer announced plans to blacklist deflationary tokens and fully reimburse affected users. The attack unfolded in four stages:
- Flash Loan Execution: The attacker borrowed 104,331 WETH via dYdX.
- Draining STA Reserves: Repeated
swapExactAmountIn()calls depleted Balancer’s STA tokens, leaving a negligible balance. - Exploiting Price Discrepancies: The attacker capitalized on mismatches between STA’s recorded and actual balances, siphoning $523,616.52 from the pool.
- Repayment: The loan was repaid, and profits were withdrawn.
This incident underscores DeFi’s composability risks, highlighting vulnerabilities in interconnected protocols.
Challenges and Reforms in Compound
Compound founder Robert Leshner identified two critical issues as the protocol scaled:
- Extreme Liquidation Risks: BAT and ZRX markets face heightened volatility.
- Inequitable COMP Distribution: Core users received minimal COMP, undermining governance inclusivity.
Proposed Solutions
To address these, four reforms were introduced:
- Reserve Factor Adjustments
- Interest Model Updates
Revised COMP Allocation Formula
- Original Formula: Total borrowed amount × USD value.
- Updated Formula: Total borrowed amount × USD value (simplified).
- Reduced COMP Emission Rates
Community consensus favored the new allocation formula, aiming to better align incentives.
Liquidity Mining vs. Traditional Subsidies
Unlike ride-hailing apps (e.g., Uber, DiDi), where only users benefit from price wars, DeFi protocols like Compound enable participants to generate yield actively. As MakerDAO’s China lead Pan Chao notes:
- High yields correlate with deposited/borrowed asset volumes but come with elevated risks.
FAQ
Q: How does COMP distribution differ for lenders vs. borrowers?
A: Both receive equal 50% shares, but lenders also earn interest.
Q: What caused Balancer’s flash loan attack?
A: Exploitation of STA/STONK pool price imbalances via recursive swaps.
Q: Why revise Compound’s COMP formula?
A: To ensure fairer governance participation and mitigate speculative farming.
Disclaimer: This content reflects the author’s views and does not constitute financial advice. For disputes, contact the respective platforms.