I wanted to open a discussion about the COMP token drop, but also about liquidity mining more broadly. Given the high level of rewards offered, liquidity mining programs can cause considerable changes in capital allocation and user behavior.
Compound’s COMP token is currently trading over $200, implying a $2B fully diluted market cap. Roughly half of the token is circulating, but largely in the hands of large investors and insiders so not really representative of free float.
The explainer about how COMP is distributed can be found here, and Compound has a distribution dashboard as well. Currently, 2828 out of 2880 COMP per day (~98%) is being distributed to the borrowers and lenders in the USDT market.
Because half of the COMP is paid out to borrowers in proportion to the dollar value of interest paid, it can partially or completely offset the cost of borrowing depending on
COMP price and
total interest paid per day. This can be computed as a
discount percentage, with all values over 100% indicating an effective negative interest rate:
(1440 * COMP price) / total interest paid per day = discount percentage
Using current values of
(1440 * $220) / $71500 = 443%, all compound markets are offering borrowers negative effective rates (paying borrowers to borrow) equal to over 3x the stated APR. While I imagine the price of COMP will come down gradually as supply is released on the market, this is currently a huge competitive advantage for borrowing with Compound versus other platforms.
This pull of assets (particularly USDT and stablecoins) to Compound has been felt over at Aave, where interest rates for USDT and TUSD both topped 30%. Deposit interest rates on WBTC have also risen above 4% on Aave, likely due to Curve’s new sBTC pool which is currently generating ~25% APY in SNX/REN (with CRV and BAL coming soon) on top of normal swap fees.
A substantial amount of ETH has flowed into Compound in the last few days, and millions of dollars worth of WBTC have also been deposited (probably in expectation that Compound may accept WBTC as collateral). This could affect Maker both by increasing overall crypto leverage and risk, as well as by increasing competition among platforms to retain borrowers.
Do we need to do anything to ensure we remain competitive? Any idea of how the risk landscape is changing because of these programs?