[Analysis] Compound governance token distribution plan, how much can you earn by investing $3,000?

The decentralized finance protocol Compound announced its governance token distribution method yesterday, with the official distribution of 42% of the total supply to all platform users through an airdrop. How much profit potential does the airdrop of governance tokens offer to regular users? Let's do the math.

Compound Governance Token Distribution Announcement

The distribution plan of Compound's governance token COMP was released in mid-April, with the tokens being distributed proportionally to stakeholders (venture capitalists), team members, and community participants, rather than through token sales.

Investors and users in the market have been eagerly awaiting the official announcement of the token distribution plan. Finally, in yesterday's official press release, Compound announced the distribution method of the governance token.

To ensure fairness and protect the rights of platform users, Compound will allocate 42% of the total supply to be airdropped to all platform users. Compound's founder, Robert Leshner, stated:

"The issuance of COMP will become the core mechanism of the Compound protocol. All users and applications built on Compound will continuously and automatically receive governance rights for free to shape the future of the protocol."

Specifically, the official will place 4,229,949 COMP tokens into a smart contract called "Reservoir." For every Ethereum block added, 0.5 COMP tokens will be transferred to the protocol from the contract and distributed proportionally to users. Compound expects the distribution of all COMP to take about four years to complete. The press release stated:

"In each lending market, lenders receive 50%, and borrowers receive 50%; in real-time, the COMP earned by users is proportional to their remaining balance; this is separate from the natural interest rates in the market... If a user has accumulated 0.001 COMP, any transaction on the protocol (such as lending) will automatically transfer COMP to their wallet; for addresses with smaller balances, users can also manually withdraw all earned COMP."

Estimation of Participation in Token Distribution Earnings

So, how much profit can you make by participating in the token airdrop? Assuming the total market value of COMP tokens one year later is $70 million (referring to the token LEND of the peer Aave), divided by the total circulating supply of 1,000,000, you can get an estimated token value of $7. The results of the airdrop profit calculation are shown in the following figure:

(Note: The return rate in the figure is purely the token airdrop profit and does not include the interest to be paid on borrowing on the platform or the interest that can be earned on lending.)

On the right is the token airdrop profit that can be obtained as a lender Supplier in Compound. Currently, the total asset value of Compound lenders is approximately $116,738,913. Assuming a user lends $3,000 USDT on the platform (0.00257% of the total assets of the borrower), and if the total asset value of the platform does not change much after a year, they can receive approximately 13.5 COMP tokens after one year.

The left side shows the token airdrop profit that can be obtained as a borrower Borrower on Compound. Currently, the total asset value of Compound borrowers is approximately $17,592,336. Assuming a user borrows $3,000 USDT on the platform (0.017% of the total assets of the borrower), and if the total asset value of the platform does not change much after a year, they can receive approximately 89.6 COMP tokens after one year. Borrowers receive more COMP than lenders because the proportion of assets on both sides of borrowing and lending is different.

It is important to emphasize that these are just speculative calculations based on the current protocol and market conditions, and there are many variables in reality. However, it is certain that for users already using Compound, it is a pretty good additional income.

Additionally, the question of whether the governance token has supply and demand is also a factor to consider. However, based on the comparison with Aave's LEND token, which is currently used for fee discounts and is also planned for governance token functions in the future, this inference seems reasonable for now.