When Compound launched its governance token COMP on June 16, few in the crypto space could predict how quickly it would reach the top. As Cointelegraph reported back then It only took one trading day for COMP to become the market leader in decentralized financial ranking. It was a historic moment for every DeFi fan. the first time that Marker Maker (MKR) started from his throne as the DeFi movement was ousted.
The news of being listed on Coinbase Pro only drove the price up. However, since they are inevitably cryptocurrencies, volatility moves in both directions. Just a few days later, COMP prices dropped from their highs of $ 427 to below $ 250 and then rose 25% after Binance suddenly announced that the token was also listed. Some analysts later suggested that the price had been artificially pumped with derivatives.
However, COMP occupies first place in DeFi – at least for the time being. So, So what fuss?
What is COMP?
Compound is a decentralized loan application developed on the Ethereum blockchain. Essentially, Anyone who has a cryptocurrency accepted by the protocol can store it in a composite smart contract by joining a liquidity fund and generating interest. The interest comes from other users who borrow money and pay interest on the loans. However, there is a twist. So far it sounds like how a bank deals with money. Only at a bank do they no longer earn interest after withdrawing the funds.
At Compound, the protocol issues the tokens that are referred to as cTokens when the funds are deposited. So if you store ether (ETH) in the compound, you get an equivalent value of cETH. The cETH can then be used as collateral for a loan, which effectively means that Money can be spent while interest is being earned.
Interest earned is determined by Compound’s underlying smart contracts, which are based on supply and demand. Therefore, when a large number of people loan a certain asset, the smart contract increases the interest rate to attract lenders and increases the cost of granting a loan. Compound currently supports nine assets issued on Ethereum, including Tether (USDT), Dai, Wrapped Bitcoin (WBTC) and Basic Attention Token (BAT).
Despite the popularity of compound in the DeFi area, it has already generated some criticism. Ameen Soleimani, the CEO of SpankChain, wrote a famous post on Medium highlighting the key points of the failure of the compound protocol.
Although compound smart contracts have been reviewed and have proven to be secure, as is the case with many decentralized DeFi applications, see pThere are only a small number of parties responsible for the portfolios that control the deposited assets.. As Soleimani stressed, a malicious party who should gain control over the keys to these purses could devastate Compound users.
Who is involved?
Compound first appeared in 2017, and it’s no wonder that Coinbase Pro has dared to work with a governance token in DeFi as this is worth mentioning Compound was one of the first projects to be funded by Coinbase Ventures. Funding came from a $ 8 million seed round, which also included Andreessen Horowitz, Polychain Capital and Bain Capital Ventures.
As the platform has grown in importance, many other applications have integrated compound into their offerings. Coinbase Custody and Anchorage support COMP and cTokens. Since the COMP token was launched, several other exchanges have listed the token, including Binance, FTX and Poloniex.
Why has a governance token increased so much?
Compound announced that it would begin distributing its compound governance token on June 10 after a community vote. Token prices were not available at launch, so no one could really predict what would happen next.
It can rightly be said that compound has always been very popular in the DeFi area and has received a lot of top-class support. For the moment, The token grants voting rights for issues such as protocol updates or the inclusion of new loan assets on the platform. However, holders can vote to distribute the odds or buy back tokens in the future.
However, COMP tokens do not grant the right to earn interest in the same way as cTokens. So why the frenzy at the start? Vadim Koleoshkin, the chief operating officer of Zerion – an interface provider for DeFi – believes that the current COMP turmoil is due to interest in a new type of stock. In an interview with Cointelegraph, he explained:
“Compound” is one of the first Web 3.0 companies to go public and “COMP” is cooler than traditional stocks because it is programmable. Tokens are below average, but Compound has a chance to become one of the most well-known players in the money market. Therefore, the ability to participate in government can be valuable. “
However, this does not necessarily mean that the price will continue to rise indefinitely. Koleoshkin predicts that volatility will decrease at some point: “With the wider distribution of $ COMP tokens and the introduction of other trading rooms, the market will determine a fair price for it“”
In maker’s eyes?
As the saying goes, a rising tide lifts all boats. Other DeFi DApps have seen similar meteoric increases. When Balancer announced that its own government sign BAL was open to the public, the price rose more than 230%. Tokens like Aaves LEND, Ren’s native token and Synthetix’s SNX boomed after the release of Compound. The Ethereum miners enjoyed the entire rally as gas charges skyrocketed on the network.
Related: bubble in sight? The DeFi sector heats up in June and is cause for concern
All of this will be no consolation to Maker, who still ranks second in the DeFi rankings despite the loss in value of Compound on June 23. What was once the flagship of the DeFi had previously been at the top and in some places achieved 60% dominance over its competitors. After the Black Thursday crisis in March, it even stayed in first place after a market crash settled millions of crypto-secured debts on the platform. However, Koleoshkin believes that the launch of the COMP is only the beginning of a more extensive change in the DeFi area:
“At the moment, many new users are coming to explore what DeFi has to offer. Based on our recent findings, many users see DeFi as a viable alternative to services such as Binance and Coinbase. They will be introduced shortly. Many more governance and DeFi- Tokens as well as retail spaces such as Uniswap, Kyber and Balancer can be marketed. “
With all of this incoming action, it may be the case that another application is moving out of the link and machine to the top of the DeFi. In any case, There is a lot to play in DeFi in the coming months and years.