Compound Finance recently faced a significant challenge in its governance system, as a prominent holder nearly passed a proposal that could have altered the protocol’s reward distribution.
This event underscores ongoing concerns about the influence of large stakeholders, known as “whales,” in decentralized finance (DeFi) platforms.
Governance vulnerability exposed
In late July, a noteworthy event occurred within Compound Finance’s governance structure when a large holder of COMP tokens, known as Humpy and online as @Titan_32, nearly succeeded in passing Proposition 289.
This proposal aimed to redistribute staking rewards based on wallet size, potentially disadvantaging smaller holders. Despite Humpy’s influence, the proposition was withdrawn after 48 hours due to intense negotiations, leading to the development of a new earnings distribution method.
The episode has highlighted a critical vulnerability in Compound’s decentralized autonomous organization (DAO) model. The governance system, designed to be driven by community votes, disproportionately favours more oversized holders, presenting risks of governance attacks by individuals or groups with substantial stakes.
Shifts in reward distribution
Despite the challenges, the situation with Humpy also brought to light the potential for positive developments within Compound’s ecosystem. The withdrawn proposal was quickly replaced with a new initiative to redistribute earnings more equitably. The latest approach involves redistributing 30% of Compound’s market reserves from fees to those who have staked COMP tokens, promoting a more balanced reward system.
This change aims to protect the protocol from similar governance issues in the future and enhances COMP’s attractiveness as a yield-bearing asset. For instance, instead of the previously suggested Golden Boys vault, Compound has introduced the Alpha Growth product, designed to further incentivise participation and investment within the platform.
Continuing concerns and community response
The influence of large stakeholders like Humpy is not new to the DeFi space. Known for his past involvement in other protocols such as SushiSwap and Balancer, Humpy has often created specialised communities to secure a majority in governance votes. Although Humpy’s recent actions have led to a temporary increase in COMP’s price, from lows around $47 to $52.70, they also raise concerns about the long-term implications of such significant control over protocol decisions.
The Compound community remains vigilant, with Proposal 290 on the horizon to decide on future products and governance structures. This upcoming vote is crucial as it represents an opportunity to implement safeguards against similar incidents, ensuring that Compound can continue to serve as a leading DeFi hub without undue influence from any single party.
As Compound navigates these governance challenges, the broader DeFi community watches closely. The outcome could set important precedents for how decentralised platforms manage the delicate balance between inclusivity and protection against manipulation.