Compound Lowers Interest Rates Amid Yield Farming Frenzy

Compound has introduced a change that will even out its different markets.

Compound Lowers Interest Rates Amid Yield Farming Frenzy

Key Takeaways

  • A new Compound governance rule will reallocate the platform's COMP token between markets.
  • This will encourage users to choose markets more evenly.
  • Compound is one of many cryptocurrency platforms that offers interest through yield farming.

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Compound users have voted to change the rules around the distribution of the platform’s COMP token, which will ensure that markets are more evenly utilized.

The change is part of Compound’s governance proposal #11.

How Does Compound’s Proposal Work?

Compound allows investors to earn interest by locking up their cryptocurrency in specific markets.

This is partially determined by Compound’s governance token, COMP, which went live last month. Until now, COMP was allocated to different markets based on how much interest each market paid, which naturally drove users to join certain markets en masse.

From now own, COMP will be distributed based on borrowing values rather than interest rates. This will still be split 50/50 between lenders and borrowers.

Why It Matters

The change is necessary because the platform’s governance token gained value more rapidly than expected, according to developer Aryeh Greenberg.

Due to rising token prices, some markets have grown excessively large. For example, Compounds’ Basic Attention Token market has over $319 million worth of BAT. That amount is so large that it could prevent Compound from liquidating the market if it needed to do so.

Under the new rules, users will be incentivized to move out of high-interest markets. Greenberg predicts that interest rates will “almost equalize” between different markets.

The new change will also reduce the risks of flash loans—large cryptocurrency loans that are not backed by collateral but are paid back almost instantly.

Yield Farming

Compound offers yield farming, a type of crypto investment strategy that involves locking cryptocurrency into an interest-bearing DeFi platform.

Other platforms that offer the feature include Synthetix, Balancer, Ampleforth, Uniswap, and Aave. These platforms have experienced a sudden rise in popularity.

Compound’s quick solution to its problems shows that it is possible to overcome unexpected issues fairly quickly, despite the challenges that yield farming platforms may face.

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