Decentralized finance (DeFi) lending protocol Compound recently passed Proposal 11 by a strong majority, marking a pivotal shift in how its governance token, COMP, is distributed. This strategic update aims to correct growing imbalances in the platform’s liquidity mining incentives — particularly the disproportionate dominance of BAT (Basic Attention Token) whales.
The change comes amid rising concerns over centralization risks and inefficient capital allocation within DeFi protocols, as a small group of users exploited COMP's original reward mechanism for maximum yield, often at the expense of broader ecosystem health.
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Original COMP Distribution Mechanism
Under the previous model, Compound distributed approximately 2,880 COMP tokens per day across eight supported markets:
- ETH
- DAI
- USDC
- USDT
- BAT
- REP
- WBTC
- ZRX
Rewards were split evenly: 50% to lenders, 50% to borrowers. The allocation to each market was proportional to the accrued interest generated within that market. In theory, this design encouraged active participation from users who genuinely used Compound for borrowing or lending — aligning economic incentives with protocol usage.
As Robert Leshner, Compound’s founder, once explained:
"If you're paying a lot of interest or earning a lot of interest, your incentives are aligned with the health of the protocol."
This model aimed to reward real economic activity — not just speculative capital deployment.
How BAT Whales Gamed the System
Despite its elegant design, the original mechanism had a critical flaw: it didn’t account for asset volatility or artificial demand manipulation.
Enter the BAT whales.
A small group of seven large holders deposited around $170 million worth of BAT into Compound — representing roughly 70% of total BAT deposits on the platform. With BAT’s lending rate spiking to 25.65% APR, these users triggered massive COMP mining yields.
But they didn’t stop there.
Using a leveraged loop strategy, they:
- Deposited BAT as collateral
- Borrowed against it using other assets
- Re-deposited those borrowed assets to increase borrowing power
- Eventually withdrew nearly all their original BAT holdings
This circular process allowed them to earn COMP rewards on both supplied and borrowed assets, while maintaining near-full exposure to their initial holdings.
Result? An astonishing 88.71% capital utilization rate for BAT on Compound.
In just weeks, BAT’s total supply on Compound surged from $2 million on June 15** to over **$333 million — a growth of more than 16,000%.
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Consequences: Incentive Distortion & Market Imbalance
This concentration created serious side effects:
- Mainstream assets like DAI and USDC were starved of COMP rewards, discouraging liquidity provision.
- The system favored self-referential trading loops rather than genuine credit demand.
- Critics labeled it "decentralized finance controlled by centralized whales."
- Questions arose about whether DeFi protocols could resist manipulation by deep-pocketed actors.
Essentially, the very mechanism meant to decentralize governance ended up amplifying power in the hands of a few.
The Fix: New COMP Allocation Rules
To restore balance, Proposal 11 introduces a fundamental change:
COMP rewards will now be based on the dollar-denominated value of supplied or borrowed assets — not interest accrued.
While the daily issuance of 2,880 COMP tokens remains unchanged, the distribution logic shifts dramatically. Now, users earn COMP relative to how much USD value they’ve locked in the system — regardless of the underlying asset’s interest rate.
This adjustment effectively removes the incentive to exploit high-yield, low-liquidity pools like BAT or ZRX.
For example:
- Supplying $10,000 of stablecoins will earn roughly the same COMP as supplying $10,000 of BAT.
- But without outsized interest rates to amplify returns, there’s little reason to engage in complex looping strategies.
As Brendan Forster, head of Dharma — a company offering Compound-integrated savings accounts — noted:
“By decoupling rewards from interest accrual, the motivation to self-trade in niche asset pools is greatly reduced. We’re likely to see significant outflows — especially from the BAT market.”
What This Means for Users & Markets
With the new rules in place, expect:
✅ A Shift Toward Stablecoins
Users will increasingly favor DAI, USDC, and USDT — not only for their stability but also for predictable COMP yields. These assets are expected to absorb much of the redistributed rewards.
❌ Reduced Appeal of High-Risk Tokens
Assets like BAT, ZRX, and REP, which previously offered inflated yields due to thin markets, will likely see declining deposits unless fundamental demand increases.
🔄 More Balanced Liquidity Distribution
By neutralizing interest-rate-driven distortions, Compound promotes healthier capital allocation across its markets.
🔐 Stronger Protocol Alignment
The update reinforces the principle that real usage, not synthetic yield farming tricks, should drive governance rewards.
Frequently Asked Questions (FAQ)
Q: Why did BAT dominate COMP mining in the first place?
A: Because COMP rewards were tied to interest generated. BAT had an extremely high lending rate due to concentrated supply and borrowing demand from yield farmers — creating a feedback loop that favored large depositors.
Q: Does this mean COMP mining is less profitable now?
A: Not necessarily. Total daily COMP issuance hasn’t changed. However, profits are now more evenly distributed across major assets rather than being captured by niche strategies involving volatile tokens.
Q: Will BAT disappear from Compound entirely?
A: Unlikely. There will still be some demand for BAT as collateral or for specific trading strategies. But its dominance is expected to drop significantly under the new model.
Q: How does this affect COMP token holders?
A: It strengthens long-term confidence in Compound’s governance by reducing manipulation risks. A fairer distribution system can lead to more sustainable participation and improved decentralization.
Q: Is this kind of fix common in DeFi?
A: Yes. Many DeFi protocols undergo iterative improvements. Examples include Uniswap adjusting UNI emissions and Aave refining its safety modules. Governance allows communities to respond dynamically to emerging issues.
Q: When did the new distribution go live?
A: The proposal passed in early 2025 and was implemented shortly after. All COMP rewards are now calculated based on USD value rather than interest accrual.
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Final Thoughts
Compound’s decision to revise its COMP distribution reflects a maturing DeFi ecosystem — one that learns from unintended consequences and adapts quickly.
While early liquidity mining models prioritized growth and user acquisition, the next phase demands sustainability, fairness, and resilience against exploitation.
By shifting from interest-based to value-based reward distribution, Compound takes a bold step toward aligning incentives with real economic activity — reinforcing its role as a foundational pillar in decentralized lending.
As DeFi continues to evolve, expect more protocols to follow suit, fine-tuning their models to resist gaming and promote genuine utility.
Core Keywords:
Compound, COMP mining, BAT whale, DeFi lending, token distribution, liquidity mining, governance token, decentralized finance