Pantera Partner: Why has COMP token become the new unicorn in the crypto industry?

Compound has become the "DeFi King" largely due to its unique decentralized governance approach.

Author: Paul Veradittakit
Translator: Lu Jiangfei

• Compound is an algorithmic DeFi protocol that allows users to borrow and lend cryptocurrencies at algorithmically set interest rates. This crypto lending feature is integrated with decentralized applications (DApps) and other services. Compound utilizes a native token called "cToken" that can be exchanged with other assets, providing users with an efficient, secure, and optimal crypto lending and borrowing experience.
• In terms of total locked value, Compound has now become the largest decentralized finance protocol globally, with a collateral value of $915 million, surpassing MakerDAO, which previously led the decentralized finance space with a collateral value of approximately $470 million. Overall, Compound protocol accounts for about 38% of the total locked value in the decentralized finance space.
• The success of the Compound protocol is largely attributed to its unique decentralized governance approach. Compound distributes its native token, COMP, to the community, giving COMP token holders the right to propose and delegate votes, thereby "controlling" the operation of the Compound network, such as adjusting interest rates and collateral ratios. The ultimate goal of Compound's governance model is to empower the community to manage the Compound network entirely, rather than handing over governance to a centralized entity like the Compound team. Compound has allocated 10 million COMP tokens, with 4.2 million tokens yet to be distributed. So far, most tokens have been allocated to initial shareholders and team members.
• In mid-June, Compound approved a proposal to distribute COMP tokens to ordinary borrowers and lenders on the platform. As many users desire voting rights and hold high expectations for the future financial value of COMP tokens, more assets are being "pooled" into the Compound protocol, leading to a fivefold increase in the total locked value—this is a significant factor in Compound surpassing MakerDAO. As a tradable crypto asset, COMP tokens have captured users' attention. At the time of writing, CoinMarketCap data shows that the price of COMP tokens has reached $219.09, with a market capitalization of approximately $2.8 billion, while MKR (MakerDAO protocol token) has a market capitalization of "only" $500 million.
• Compound's recent strong growth not only demonstrates the robustness of a crypto lending platform but also proves that fully implementing decentralized governance in a crypto network is feasible. Market demand surrounding the COMP token largely stems from the rapid development of the Compound protocol. As the "DeFi King," Compound believes that people highly value decentralized governance, and "decentralized governance" may well become an industry standard in the future.

In the third week of June 2020, the algorithm-based crypto lending platform Compound surpassed MakerDAO to become the largest decentralized financial protocol in terms of locked value. Compound's locked value was $579 million, while Maker's was $470 million. The difference between Compound and Maker may actually be greater than the locked value comparison suggests, as a significant portion of Compound's collateral is borrowed from "others." Currently, Compound has collateral worth up to $915 million (with $330 million borrowed), while Maker has collateral worth $470 million (with $128 million borrowed).

Since the DeFi craze began, Maker has been a leader in the field. The DeFi data aggregator DeFi Pulse even had an indicator called "Maker Dominance," specifically reporting the share of Maker's total locked value in the DeFi market to highlight Maker's overwhelming dominance. Now, DeFi Pulse has renamed this indicator to "Compound Dominance" because Compound's locked value now accounts for 38% of the entire DeFi industry. Yes, Compound has easily ascended to the DeFi throne in less than three years.

Compound is an algorithm-based DeFi protocol that allows users to borrow and lend cryptocurrencies at rates determined by algorithms. Users can lock popular crypto assets (such as ETH or USDC) into the protocol to receive Compound's native token - cToken. These cToken tokens can then be used in the lending market, all done through smart contracts.

cTokens are versatile and easily transferable, quickly becoming an essential part of many decentralized applications. For example, TokenSet, a decentralized application built on the Compound protocol, uses USDC cTokens to help users automate and optimize crypto trading. Currently, cTokens can be minted using Ethereum wallets like MetaMask, making these tokens a key component in decentralized applications that offer crypto lending services, seamlessly integrating with Compound.

The use cases of Compound's protocol largely mimic traditional financial loan scenarios, but with higher efficiency, transparency, and security due to its decentralized nature. Borrowers can borrow funds for personal expenses or even short assets, while lenders can earn money by lending funds through various methods such as:

1. Simply holding collateral tokens;
2. Issuing stablecoins;
3. Seeking arbitrage opportunities between different tokens.

As the Compound protocol operates on the blockchain, users need not place unnecessary trust in traditional centralized financial services. Furthermore, since applications can directly transfer funds using the Compound protocol, it can easily integrate with other financial technologies, including DApps, eliminating the need for "financial technology intermediaries" like Plaid for bank account services.

Aside from becoming one of the largest crypto lending platforms in terms of locked value, Compound's unique decentralized governance model is another highlight. While many DeFi lending platforms operate on P2P networks or through smart contracts, their interest rate designs and other platform functions are internally managed by a single entity. It's worth noting that when the Compound protocol was initially released, it was "centralized," with the network and protocol operations entirely controlled by the Compound team. However, in 2020, Compound took a significant step by decentralizing its governance power through the COMP governance token, giving Compound users voting and proposal rights. This means that the community will decide how the Compound network operates. It's important to note that each Compound proposal change must be executable code, so even the Compound team cannot confirm if they have control over implementing changes, as all decisions will be made by the entire community.

In short, Compound's network governance has been quite successful!

Since the decentralization of governance, the Compound community has approved some significant proposals, including:

1. Adding support for USDT in the protocol (with a 90% approval rate);
2. Reducing the collateral factor for single collateral Dai or Sai (initially 100% support, but recently reduced to 35% approval rate);
3. Increasing the USDT reserve factor (with a 99% approval rate);
4. Distributing COMP tokens to users (100% approval rate).

In fact, the recent surge in Compound's value can be attributed to the key reasons for COMP tokens being highly valuable to every ordinary user, as COMP tokens serve two crucial functions:

1. Granting token holders network governance privileges;
2. COMP tokens are transferable, allowing them to be traded like any other crypto asset.

The recent vote has been a crucial factor in the substantial increase in Compound's value. COMP tokens have gained significant value due to their utility in maximizing returns for users exploring various DeFi projects, as well as for cashback and incentive measures. In different interest-based crypto lending markets, COMP token returns vary, providing users with interesting arbitrage opportunities. For example, users can borrow tokens like USDT or BAT, convert them to Dai at a 1:1 rate, then use Dai as collateral in Compound. As a collateral exchange, Compound rewards users with COMP tokens. If the investment returns are enough to cover borrowing costs and deduct some fees, users can easily make profits. This arbitrage model is so robust that InstaDapp has even released a COMP token investment tool called "Maximize $COMP Mining" for users. However, Compound's collateral token strategy may have certain risks, as collateral token prices may experience significant fluctuations, potentially leading to substantial losses for users. Currently, most collateral users of the Compound protocol mainly use stablecoins, effectively offsetting the risk of price fluctuations. InstaDapp's "Maximize $COMP Mining" tool even conducts risk assessments specifically for users holding certain positions. If you want to learn more about how to use InstaDApp tools to profit from Compound's lending services and maximize COMP token investment returns, you can watch this video.

In conclusion, Compound's rise exemplifies the power of decentralized governance. With more users utilizing COMP tokens (as proxies for voting rights), the token is bound to gain more substantive value and become a successful example in the decentralized finance space.

Compound has been one of the most significant players in the decentralized finance space, now crowned as the "DeFi New King" - leading the market in terms of token value and total locked value in the protocol. For users looking to borrow and lend crypto or integrate crypto lending functions into higher-level DApps, Compound provides a popular and feature-rich platform.

Undoubtedly, Compound's recent rapid success is closely tied to their decision to distribute COMP tokens to users. However, one thing to understand is that without the innovative idea of decentralized governance, none of this would have happened. The recent price performance of COMP tokens clearly shows that users are highly interested in decentralized governance, as voting rights are a valuable asset, even tradable.

Compound has showcased a promising "typical case" for the entire crypto industry, proving that crypto lending business can thrive in a decentralized environment. It's certain that in the future, we will rely less on third-party operators.

This article is authorized for reposting by ChainNews and originally sourced from ChainNews (ID: chainnewscom)