The decentralized finance (DeFi) sector has experienced a dramatic transformation. Just three months ago, DeFi products were entangled in a collective crisis of confidence: bank runs during the "3.12" crash, cascading liquidations, a congested Ethereum network, and DeFi protocols being hacked one after another.
Unexpectedly, within just three months, the landscape shifted completely. The launch of Compound's governance token, COMP, and its innovative "liquidity mining" model sparked a massive rally. COMP's price soared from its initial listing price of $18.4 to a high of $326.81—a nearly 20x increase—propelling the DeFi sector into an unprecedented spotlight.
On June 24th, the decentralized exchange Balancer followed suit, deploying its governance token, BAL, on Ethereum. BAL's price skyrocketed from its seed round price of $0.6 to a peak of $22, a staggering 40x gain.
The remarkable wealth effect created by Compound and Balancer has inspired a growing number of DeFi projects to embark on their own token issuance journeys.
The New DeFi Token Wave: From Small Ponds to a Blue Ocean
On July 1st, the decentralized stablecoin exchange Curve announced the distribution mechanism for its governance token, CRV, and released a draft for its decentralized autonomous organization, CurveDAO. Curve Finance is a fork of Uniswap specifically optimized for efficient stablecoin trading.
CurveDAO was created using the Aragon framework. Initially, its governance mechanism granted one vote per ANT (Aragon's native token). This has been revised to a time-weighted system based on CRV staking: the longer CRV is locked, the greater the voting weight. It's important to note that tokens must be locked from an externally owned account (a user-controlled wallet) and not a smart contract, unless it's a whitelisted contract like a widely-used multi-signature wallet.
According to the token distribution model published by Curve developers on GitHub, the initial plan is to issue 1 billion CRV tokens, with gradual inflation eventually increasing the total supply to 3.03 billion. The CRV token employs a piecewise linear inflation model, with the inflation rate decreasing by √2 each year. The initial inflation rate is set at 59.5%, which is highly attractive for early participants.
Furthermore, only the Minter smart contract can mint CRV, and it can only do so within the limits of the inflation rate. Each change in the inflation rate signals the start of a new mining frenzy.
Similar to Compound, Curve adopts a liquidity mining model. CRV tokens will be distributed to liquidity providers. Users must lock their LP tokens to claim inflationary rewards. It's worth noting that users must deposit into Curve's sUSD or sBTC pools to receive LP tokens, which represent their share of the pool. More deposits result in more LP tokens and a greater share of the CRV rewards.
The draft proposal also suggests that protocol fees collected by Curve should be redirected to CurveDAO and ultimately used to buy back and burn CRV tokens.
The exact timing for the CRV distribution has not been announced, but many yield farmers are already preparing their funds, waiting for the right moment to act. As the annualized returns from Compound and Balancer have declined, Curve has become the most anticipated DeFi project poised for breakout growth.
Beyond star projects like Compound, Balancer, and Curve, other less prominent DeFi initiatives are also riding this wave to issue tokens and raise funds.
On June 22nd, the DeFi Money Market protocol (DMM) issued its governance token, DMG, selling 15.7 million tokens. DMM is a DeFi lending platform backed by real-world assets (cars) that offers loans in USDC, DAI, and ETH. The DMG public sale netted DMM $6.8 million. Prominent venture capitalist Tim Draper joined the DMM DAO by purchasing its governance tokens.
On June 8th, Oikos, a synthetic asset platform based on Tron founded by Justin Sun, officially launched. Its governance token, OKS, was slated for an Initial Exchange Offering (IEO).
The surge of DeFi token launches was foreshadowed in late May when MakerDAO's governance token, MKR, surged 25%, triggering a collective rally in DeFi tokens. The success of COMP's liquidity mining model provided a beacon of hope for projects in a bear market, directly accelerating the pace of token issuance.
However, some DeFi projects have chosen not to issue tokens. They argue that tokens can complicate the protocol or attract a crowd of speculative traders. Legal concerns also play a role, as some tokens risk being classified as securities.
Protocols like Uniswap and dYdX, whose smart contracts hold significant value, demonstrate that building useful products on the blockchain does not necessarily require a native token.
So, when is a token necessary? A clear example is for large-scale networks, like Ethereum, where ETH is used for ICOs, as collateral in DeFi, and as gas fees. These are all instances of Ether supporting and securing the Ethereum network.
Calculating COMP Mining Returns
For individual investors, the question isn't just "does the project need a token?" but more importantly, "is the token a good investment?"
For those who didn't participate in COMP's early private rounds, the only options are mining or buying on the secondary market. Is mining a viable option for the average retail investor?
Let's calculate the current returns from COMP mining. To date, 54,332 COMP have been distributed to 2,890 users. During this period, the total value locked (TVL) in Compound soared from $90 million to $624 million.
Based on Uniswap data where 1 COMP = 187.96 USDT, the COMP yield per dollar invested is calculated as: (54,332 * 187.96) / (624 million - 90 million) = approximately $0.019. Furthermore, the "liquidity mining" frenzy has caused Ethereum gas fees to skyrocket. Many retail investors have concluded that mining COMP is less profitable than simply dollar-cost averaging into major cryptocurrencies like Bitcoin.
Data from PeckShield's analytics platform shows that Ethereum's gas consumption saturation has remained above 90% for the past two months. While gas consumption leaders still include Ponzi schemes like MMM and easy Club, DeFi platforms like Uniswap, 1inch, and Kyber are now prominently featured on the list.
Additionally, the TVL in Compound has begun to show signs of a slight decrease.
On-chain data also reveals that a significant portion of the COMP mined by participants is flowing into Uniswap and exchanges like FTX. While it's unclear if these tokens are being immediately sold, some large holders have expressed concerns. One whale told reporters that two recent hacker attacks on Balancer made them uneasy about the platform's security, prompting them to move their tokens to Uniswap or centralized exchanges for safekeeping.
Are "Whales" Dominating Liquidity Mining?
If COMP mining isn't as lucrative as imagined for the average user, who is actually mining these DeFi tokens? What do they do with the tokens they earn, and do they genuinely participate in the governance of these DeFi projects?
Taking Compound as an example, data from TokenTerminal shows that approximately $340 million flowed in and out of Compound's pools over a two-week period. Interestingly, the majority of the borrowers appear to be institutional participants. The launch of COMP attracted only about 800 new borrowers and just over 5,000 new depositors.
Moreover, the mined COMP is heavily concentrated in the hands of "whales." TokenTerminal data indicates that about 20 addresses received half of all COMP mining rewards. The median number of tokens received per wallet was a mere 0.07 COMP, worth about $20 at the time.
Centralized platforms like NEXO have also engaged in arbitrage activities on Compound. Data from DeBank shows that on June 18th, NEXO deposited 20 million USDT into Compound; on June 19th, they deposited another 28 million USDT. They continued these operations, depositing a total of around 60 million USDT for mining and arbitrage.
A week prior, large holders of Basic Attention Token (BAT) nearly monopolized COMP mining. Seven major BAT holders deposited $170 million worth of BAT into Compound, representing 70% of all BAT deposits, which currently offer a 25.65% annual deposit rate. A higher deposit rate translates to more efficient COMP mining.
Simply depositing more BAT doesn't single-handedly raise the interest rate; the borrowing ratio is the direct factor. These BAT whales deposited other assets into their accounts to increase their collateral, allowing them to borrow out the BAT they had deposited. The largest BAT holder, address 0x3ba21..., deposited $50 million worth of BAT and then borrowed an equivalent amount. By paying interest with one hand and receiving it with the other, they achieved an astonishing 88.71% capital utilization rate for BAT on Compound.
When whales monopolize a lending market, mainstream assets get marginalized and miss out on incentives. By exploiting imperfections in Compound's mechanism, these large holders further monopolized the distribution of COMP. This manipulation reveals a fragility in the current DeFi experiment.
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The Community Confronts Centralization in Governance Tokens
The issue of BAT whales monopolizing COMP mining highlights a critical problem. The distribution of COMP tokens disproportionately benefits those with large amounts of capital. Players with significant resources earn the majority of COMP, planting a potential time bomb for decentralized governance.
Furthermore, a large portion of COMP is still held by the founding team and venture capital firms. Data suggests that nearly 40% of COMP is controlled by investors and the founding team. On Compound's website, the top 10 voting weights are primarily held by early investors and founders.
The Compound community developers recognized this centralization issue. On July 1st, the community passed Governance Proposal 011. This patch proposal aimed to redesign the token distribution mechanism by removing the weight of borrowing interest rates on COMP distribution and reducing griefing risk. It specifically addressed two problems:
- The potential for users to use "flash loans" to temporarily reduce COMP distribution across markets. The upgrade requires an externally owned account (not a smart contract) to trigger the distribution refresh in each market.
- Users naturally gravitate to markets where they can "farm" the most interest. The upgrade changed the distribution speed to be based on the borrowing volume in each market, not the interest paid. This helps eliminate incentives to push markets to extreme利率水平 and discourages users from congregating in a single market (like BAT).
This proposal was praised for making COMP distribution fairer and more dispersed, rewarding real users on both sides of the balance sheet rather than yield farmers chasing high-risk assets, potentially reducing sell pressure from newly minted COMP.
The market exhibits a strong herd effect. After Compound's success, a wave of imitators are rushing to issue their own governance tokens. Compound's locking mechanism and the recently implemented Proposal 011 serve as both a warning and a model for these new projects.
Expectations for the DeFi market are somewhat contradictory: there's a fear of stagnation but also a fear of uncontrollable, explosive growth. Since all DeFi products run on the Ethereum blockchain, an influx of yield farmers inevitably clogs the network, degrading the user experience for everyone—a lesson learned from the FOMO3D game and the FairWin Ponzi scheme in the past.
The cryptocurrency market witnessed the magic of ICOs in 2018 and the frenzy of IEOs in 2019. 2020 might be the year that kicks off the狂潮 of IDO (Initial DEX Offering). ICOs stimulated the market into an unprecedented bull run, and IEOs led a spectacular mini-bull market out of a bear phase. The question remains: what will IDOs bring, and how long will their impact last?
Frequently Asked Questions
What is liquidity mining in DeFi?
Liquidity mining is a process where users supply cryptocurrencies to a DeFi protocol's liquidity pool. In return, they earn rewards, typically in the form of the protocol's native governance token. This mechanism helps bootstrap liquidity and decentralize ownership of the protocol from the start.
Is DeFi mining profitable for small investors?
Profitability for small investors can be limited. High Ethereum gas fees can erode profits from smaller deposits. Furthermore, large investors ("whales") often dominate mining activities due to their significant capital, making it harder for retail participants to compete effectively and earn meaningful rewards.
What are the risks of participating in DeFi?
Key risks include smart contract vulnerabilities that could lead to hacks and fund loss, extreme volatility in token prices, impermanent loss for liquidity providers, and network congestion leading to high transaction fees. It's crucial to conduct thorough research before investing.
What is a governance token?
A governance token gives holders the right to vote on proposals that dictate the future development and changes to a decentralized protocol. This can include adjustments to fees, adding new features, or modifying reward structures, aiming for community-led management.
How does Compound's Proposal 011 improve fairness?
Proposal 011 changed COMP distribution to be based on the dollar amount borrowed in a market rather than the interest paid. This reduces the incentive for whales to manipulate a single, low-liquidity market with high interest rates to hoard all the rewards, leading to a more equitable distribution across all users.
Can DeFi work without a native token?
Yes, absolutely. Protocols like Uniswap and dYdX have demonstrated significant utility and locked value without a native token. A token is not a prerequisite for functionality; it is often introduced to incentivize liquidity, facilitate governance, and distribute ownership.