What Is Compound Governance Token?
Compound Governance Token (COMP) is the native governance token of the Compound Protocol, which is powered by incentivizing its users to use the platform’s services to receive it as a reward, allowing them to participate in the decision-making process that decides the platform’s future.
Compound Governance Token is a Decentralized Finance (DeFi) protocol founded by Robert Leshner and Geoffrey Hayes back in 2018. The project raised $8.2 million in funding from venture capital firms and an additional $25 million in 2019 in a funding round that saw new investors join in.
The project quickly became one of the most influential protocols in the development of the DeFi movement and the gaining traction it experienced in 2020, closing the gap between consumers and digital finance by removing the need for intermediaries. This change created a new level of accessibility.
During the DeFi boom, Compound lead the charge for investors who were taking advantage of the yield farming strategy, which allowed the protocol to reach the $1 billion in total assets borrowed by July of 2020, $2 billion by December of 2020, and $3 billion in January of 2021.
What is the Purpose of COMP?
COMP was designed to be the governance token of the Compound protocol, allowing its holders to participate in the governance of the platform by voting on and proposing changes to every aspect of the platform.
The token also works as an incentive by being given as a reward for every interaction with Compound, which adds a benefit to the services the protocol already offers.
Compound was launched with a single purpose in mind: Giving its users the capability to trade the time value of assets. This means creating an ecosystem that allows the harvesting of the earning potential of a user’s cryptocurrency holdings.
As there is no need for paperwork, Know Your Customer (KYC) checks, credit scores, location, and other requirements to access the platform, anyone can deposit crypto into a lending pool and immediately start gaining interest from users who borrow the funds. The opposite is also true for those looking to borrow funds by providing collateral.
At the time of Compound’s creation, the team behind it identified to major flows experienced by crypto assets: Not only were borrowing mechanisms were extremely limited, but crypto assets had a negative yield when taking into consideration the storage costs and risks associated with them.
With the inception of the protocol, crypto investors had a new decentralized, trustless system that allowed them to borrow Ethereum tokens frictionlessly and generate gains by putting their assets to work for the benefit of the whole crypto ecosystem.
How Does COMP Work?
By obtaining COMP for interacting with the platform, investors are not only benefiting from the borrowing or lending of their crypto assets but also the value the token has in the platform as other investors might want to acquire it.
If COMP owners want to hold their tokens but are not sure about their expertise to participate in the governance, they can assign their voting rights to a third party that can then vote on their behalf, making the protocol highly democratic.
Compound uses smart contracts running on the Ethereum network to automatically connect lenders and borrowers while rewarding both parties with a certain number of COMP tokens for every transaction they complete.
A lender’s supplied cryptocurrency is registered using ERC-20 tokens native to Compound called cTokens, which represent the lender’s rights to the tokens they deposited in the pool. These tokens can be later redeemed by the holder to recover their original assets from the pool but will stop them from receiving rewards from that pool.
Compound reduces the risk for lenders by ensuring that a borrower’s position is liquidated by consuming the collateral if the value of the asset becomes more valuable than a certain threshold, which is one of the reasons why over-collateralization is required.