Last week DappRadar reported on huge volume surges being observed in the DEX and DeFi space. In the main, those spikes can be attributed to liquidity pouring into the decentralized finance sector through the addition of the Compound governance token COMP.
The Compound protocol allows anyone to supply or borrow Ethereum tokens through a decentralized market. Suppliers earn interest in the cryptocurrency they supply, borrowers pay interest to borrow it.
Users of the lending protocol recently voted to begin distributing the protocol’s native governance token, and as a result, Compound is now the largest application in DeFi in terms of market capitalization. The COMP token is already up 300% and starts trading on COINBASE Pro on the 23rd of June 2020.
COMP is allocated across all markets relative to the amount of interest being accrued. In other words, the assets bringing in the most interest receive the most COMP.
Tether (USDT) is quickly starting to gain a leadership position in the COMP farming prize. With 10% APY compared to the next highest return of 1% on DAI, USDT is drastically outperforming other supported assets in terms of COMP earned per day.
While the logical next step is to supply USDT to Compound to capture a 10% APY + some of the fastest rising tokens currently available, many hardcore DeFi advocates are taking things even further.
For example, Maker currently lets users borrow DAI with a 0% stability fee. This means that you can lock ETH and receive a loan in DAI with no debt for the time being. Using a liquidity aggregator like Curve, users can then swap that DAI for USDT at minimal prices.
Token distribution
Here’s how the 10M COMP supply is being broken down:
- 42.3% reserved for protocol usage
- 24% to shareholders of Compound Labs, Inc.
- 22.25% to Compound founders & team, subject to 4-year vesting
- 7.75% reserved for future governance participation incentives
- 3.72% to future team members.
The distribution weighting of the tokens means that for possibly the first time users of the protocol will have the power to decide how it evolves.
What is yield farming?
DeFi “yield farming” is the latest trend investors are getting excited about in the cryptocurrency space. Simply put, yield farming is the act of leveraging DeFi protocols and products to generate high rates of return. In some instances reaching over 100% annualized yields.
One of the first mainstream DeFi use cases was high-yield interest income in which users deposited cryptocurrency to earn a high rate of return. Which in some cases was often up to 100 times higher than the % offered by a traditional savings account.
DeFi yield farming takes this basic concept and compounds returns by utilizing leverage to gain additional exposure to various cryptocurrency assets collateralized with USD-backed stablecoins.
For example, according to rates on 22nd June 2020, a user who lent out 1,000 DAI (equivalent to $1,000), and took out a loan for $2,500 worth of the BAT crypto-asset would have generated 77.48% APY in COMP rewards paid out daily, assuming a COMP token price of $360.
Further pointing to the fact that this is really not for novices. Users need to be mindful to maintain the appropriate collateralization ratio to prevent the liquidation of their underlying 1,000 DAI position. Remarkably the COMP rewards exceed the cost of borrowing BAT, making it profitable to borrow cryptocurrency.
This could all be done using InstaDapp’s maximize COMP mining feature.
Yield farming in practice
If you are new to the world of decentralized finance then we would not advise you to participate before educating yourself. Financial investments come with risk and readers should remind themselves that this is not financial advice.
As previously mentioned, InstaDapp’s maximizing COMP tokens guidelines are fast becoming the oracle of information in regards to taking advantage of what is sure to be a limited offer.
As DeFi matures and evolves further there are fresh debates around whether these practices are ethical, or will be required at all in the near future. Ethereum‘s Vitalik Buterin has come forward to voice his concerns over the current bulging DeFi sector having this to say;
“I think we emphasize flashy DeFi things that give you fancy high-interest rates way too much. Interest rates significantly higher than what you can get in traditional finance are inherently either temporary arbitrage opportunities or come with unstated risks attached.” Further adding, “we should be solidifying and improving a few important core building blocks: synthetic tokens for fiat and a few other major assets (aka stablecoins), oracles (for prediction markets, etc), DEXes and privacy.”
In summary, this comment from Vitalik could be read as – if it’s too good to be true, it probably is. As shown with the rollout of Ethereum 2.0 – Vitalik is playing the long game and rarely gets caught up in the hype.
Further learning
For those wanting to learn and explore the decentralized finance world in more detail DeFi Dad’s popular Youtube channel went into full detail on the COMP token. Listing an instructional video titled: How to Maximize Earning $COMP By More Than 5X Using Instadapp.
We will continue watching this space.
