Compound Platform Passes Vote To Fix The COMP Distribution.
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Compound Platform Passes Vote To Fix The COMP Distribution.

By noBeans | noBeans - Crypto | 1 Jul 2020


We all know how a huge portion of BAT's liquidity is being supplied into the compound platform due to the high interest rate available on compound.finance. 

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That is about to change as a vote to alter the way COMP is being distributed amongst the users has passed. Until now COMP was being distributed in a way so that the users lending or borrowing the asset with the highest interest rate were being given higher percentage of COMP. This turned out in 80% of BAT's liquidity being supplied into compound platform.

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The vote article also says that there is quite a demand of other assets like wbtc and dai but since BAT has the highest interest rates no one is supplying other assets.

This article clearly states the below.

DeFi users are “yield farming” in whichever money market has the highest interest rate, ultimately driving Compound to soak up over 80% of BAT’s liquid supply ($319M of the $391M in liquid supply). This is a rather risky situation as there’s a substantial lack of available BAT to recapitalize the system in the instance of a worst-case scenario situation.

To counter this risky situation where in yield farming is happening by locking most of BAT's liquidity into one platform, COMP distribution rate will be altered.

Instead, the protocol will allocate COMP proportional to borrowing demand. Most Compound yield farmers will be affected by the second piece of this proposal as the protocol will now calculate COMP distributions based on the total amount borrowed from the market while continuing to distribute COMP 50/50 to both lenders and borrowers in each market.

This will result in people supplying assets with highest interest rates and borrowing the ones with the lowest interest rates, ultimately creating an equilibrium of sorts. Whereas before, since COMP was being distributed according to interest rates so the highest COMP was going to people supplying and borrowing asset with the highest interest (which was BAT).

This will also help with the fact that it will help release the liquidity of BAT. Imagine a crypto with a fixed supply and all of that is being used to farm COMP then that will become its primary use-case while the actual use-case will be sidelined.

You can see how BAT interest rates have down from 30% APY to 13%.

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This may also result in BAT declining which it has been since 2-3 days now. Whether BAT will hold its current position and stabilize or decline further, remains to be seen.


noBeans
noBeans

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noBeans - Crypto
noBeans - Crypto

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