Compound Reward 'Farming' Results in Six-Fold Increase of Lending Activity


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The COMP reward scheme works by periodically depositing the token to all balances interacting with Compound. This includes the protocol's lenders and, crucially, its borrowers as well.

The sums involved are significant, with the protocol currently distributing 2,880 COMP per day worth about $668,000 as of press time. Over 4 million tokens are left to be distributed from an existing supply of just over 2.5 million.

Meanwhile, the price of the token went on a parabolic rise once it was revealed that Compound investor Coinbase would list COMP on its Pro platform.

Trading is due to be activated on June 23, but that didn't stop traders from raising its price to a maximum of $371, up from just $78 the day before the announcement.

The high issuance and high price, coupled with the way the reward system is designed, led to the emergence of massive "COMP farming." Speculators were incentivized to both borrow and lend money from the protocol on a large scale, leveraging their positions by recursively "lending" the tokens they borrowed.

The annual interest rate on some tokens on Compound, like BAT and wBTC, reached as much as 33% and 27% respectively as of press time. Generally, high interest rates are associated with high COMP yield.

The profit machine appears to be unwinding on Monday, as COMP dropped to a price of $264.

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