【ChainNews Highlights】Compound governance token distribution officially begins, complete guide to participating in "borrowing is mining"

Compound has officially launched the "Borrow and Mine" distribution activity for its governance token COMP, which will last for 4 years. Users only need to participate in borrowing within the protocol to receive COMP tokens and subsequently participate in the protocol's governance. This move by Compound aims to transform real users of the protocol into stakeholders, collectively promoting the development of the protocol.

By: Donnager

Compound is a DeFi protocol based on Ethereum, primarily focusing on "collateralized borrowing," where users can collateralize their assets in the protocol to earn annualized returns, while the borrowing party needs to pay corresponding interest.

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For more information on Compound's governance token COMP distribution plan, you can start by reading here.

We believe there are still many questions regarding Compound's token distribution strategy, and ChainNews has compiled some possible questions about the COMP distribution process for your reference.

COMP is a governance token with voting rights for the Compound protocol, but it has not been publicly disclosed whether there is a mechanism for dividends or buyback and burn.

Functionally, it is somewhat similar to Maker's governance token MKR, although MKR has never been distributed in any form of "mining." The design of these governance tokens may be aimed at avoiding regulation by the U.S. Securities and Exchange Commission (SEC). One notable signal is that the U.S. compliant exchange Coinbase has listed MKR.

The distribution of COMP will begin around 2:20 AM Beijing time on June 16. So by participating in the corresponding lending before this time, you can start receiving COMP from the beginning of the distribution.

Based on a total of 4.23 million COMP tokens distributed at a rate of 0.5 COMP per block, the entire distribution process will take about 4 years. The potential issue this may bring is that Compound may only be able to add new business during these 4 years, making it difficult to adjust the business model of this part of the business. If there are any economic loopholes in this whole "lending is mining" process, it will affect the business and business model of the entire project.

For users familiar with DeFi, simply use the Compound protocol directly within commonly used cryptocurrency wallets to participate in "mining," such as popular decentralized wallets like Trust, AlphaWallet, imToken, MetaMask, Bitpie, TokenPocket, Math Wallet. Smart wallets like Argent and MYKEY should also support these routine smart contract operations.

Additionally, MYKEY has deeply integrated the collection of COMP.

After visiting the Compound website, first-time users need to select the deposit function and provide the supported assets by the system. For users who have deposited funds, they can use the lending function to further increase the amount of COMP they can obtain.

Compound has stated that third-party applications built using Compound can also earn corresponding COMP tokens based on user usage. However, the current level of support has not been extensively surveyed, with at least PoolTogether publicly stating that it does not currently support it.

PoolTogether is a no-loss lottery platform built using the Compound protocol, where users' capital contributions will be placed into Compound's asset pool, and each period will draw one lucky user to enjoy the earnings. Therefore, participants in the PoolTogether application should be able to share COMP tokens, but their current smart contracts do not support it. However, they have indicated that support for COMP distribution will be added in the V3 update by August.

For other third-party applications, it is best to confirm with the official source before deciding whether to participate.

You can check the overall distribution of COMP on the protocol's dashboard here.

The quantity of COMP in each user's COMP wallet and the amount available can be viewed on the voting page here.

COMP is not actively sent to users; the protocol will hold it for users to save Ethereum chain computing resources, as continuous distribution is not cost-effective.

Only when users interact with the Compound protocol (e.g., execute borrowing, lending, repayment operations, etc.) and the withdrawable amount is greater than 0.001 COMP, will the Compound protocol automatically transfer the corresponding amount of COMP to the user.

In simple terms, users do not need to worry about how to get COMP; with each use of Compound, the COMP tokens will be automatically transferred to the user.

Of course, if users wish to actively claim COMP, they can do so manually by initiating an on-chain transaction (the "Collect" button in the screenshot above). The act of withdrawing smaller amounts of COMP may not be cost-effective, as the cost of on-chain transactions on the Ethereum chain (Gas fees) is currently and will likely remain high for a long time, potentially exceeding the value of 0.001 COMP.

In reality, Compound's "lending is mining" is not entirely free and comes with some hidden costs.

• For suppliers of funds, they are essentially exchanging the potential profits of their capital for COMP, as perhaps placing the same amount of assets in other protocols could yield more profit. However, because the COMP distribution logic incentivizes both borrowers and lenders, early fund suppliers may also have decent annualized returns.
• For borrowers, they are essentially converting the interest they have to pay into COMP. This may create a balance where, once the price of COMP is established, the interest paid may be close to or slightly less than the value of COMP obtained. Otherwise, the borrower would incur losses. That is, when "COMP earnings ≥ interest paid," borrowers can choose to arbitrage.

Both of these actions can be carried out simultaneously. If a user wants to maximize COMP income, they should participate in both lending and borrowing.

The fastest way is to try this calculator, submit specific quantities, and calculate the approximate annualized COMP income and cost at the current scale.

Example: Borrowing 1000 USDT, the production cost of each COMP is $2.5

However, as more participants join, various parameters will undergo significant changes, gradually achieving a balance, such as the production cost of COMP approaching the cost of "mining."

There are some more intuitive conclusions to consider:

• Avoid selecting assets that are less popular and have lower borrowing frequencies, as the total COMP distributed for these assets will be minimal due to lower overall borrowing income.
• If not considering costs, borrowers of the same asset can earn more COMP than fund providers, but they also bear more risks and costs.
• To maximize COMP income, one should participate in both lending and borrowing.

Compound is currently the project that has implemented the "lending is mining" token distribution earliest among lending protocols, making it a milestone for the entire DeFi ecosystem and a new experiment. However, these "XX is mining" projects may likely have unknown risks, especially financial risks, particularly considering the unsustainability discovered during FCoin's "trading is mining" experiment two years ago. Therefore, users looking to invest in mining COMP need to carefully consider various potential risks.

For existing Compound users, simply continue using as before, as long as the borrowing rate is within an acceptable range. If COMP is just an additional reward, there should be no need to worry too much.

This article is authorized by ChainNews for reposting, article source: ChainNews (ID: chainnewscom)