Compound Governance Proposal 11: COMP Distribution Patch

This article examines Compound Governance Proposal 11, which revises the COMP token distribution mechanism to address issues arising from liquidity mining. The proposal shifts the allocation basis from interest payments to total borrowed value per market, aiming to mitigate risks and optimize governance. Additionally, it introduces restrictions on smart contract calls. The analysis explores implementation details, potential impacts, and predicts market equilibrium.

Key Issues Addressed

1. Uncontrolled Liquidity Mining

   • COMP's unexpected high value led to excessive liquidity mining, particularly in the BAT market (utilizing nearly 100% of BAT's supply).
   • High market utilization resulted in inflated interest rates and skewed COMP allocation.

2. Flash Loan Exploits

   • Smart contracts could manipulate refreshCompRates by taking flash loans to alter market conditions before rate refreshes, gaining undue COMP benefits.

Proposed Solutions

• Revised COMP Allocation:

  • Allocation now based on total borrowed value (ETH-denominated) per market, replacing interest-based calculations.
  • Maintains 50/50 distribution between lenders and borrowers.

• Smart Contract Restrictions:

  • Disables smart contract calls to refreshCompSpeeds to prevent flash loan exploits.

Implementation Details

1. Code Changes:

   • refreshCompSpeeds now requires msg.sender == tx.origin to block smart contracts.
   • New internal function refreshCompSpeedsInternal handles rate updates for administrative actions (e.g., adding markets).

2. Utility Calculation:

   • Market utility = Total borrowed amount × asset’s ETH price.

3. Simplified Governance Activation:

   • Avoided major logic changes to enable rapid deployment without audits.

Expected Outcomes

• Balanced Interest Rates:

  • COMP incentives will shift away from high-interest markets (e.g., BAT), promoting rate equilibrium across assets.

• Reduced Systemic Risk:

  • Safer market utilization and lower volatility.

Governance Steps

1. Deploy new Comptroller.
2. Activate via governance vote.

👉 Explore Compound’s Governance Proposals

FAQs

Q1: How does the new allocation method reduce risk?
A1: By tying COMP distribution to borrowed value (not interest), it discourages artificial inflation of utilization rates.

Q2: Can flash loans still manipulate COMP rates?
A2: No. Smart contracts are blocked from calling critical rate-refresh functions.

Q3: Which markets will benefit most from this change?
A3: Markets with high borrowing demand but previously low COMP allocations (e.g., ETH, DAI) will see increased incentives.

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