Compound outlines plan for distributing its governance token to DeFi protocol users

Compound, the startup behind the DeFi money market protocol, has revealed new details about the ongoing evolution of the protocol's token-based governance system.

That governance token, which went live in mid-April, will ultimately be held by a mix of stakeholders, team members and community participants. In a Thursday blog post, Compound outlined the process by which tokens will be distributed to those who use the protocol – and how its developers will push the governance process toward being fully decentralized.

"The distribution of COMP will become a core mechanic of the Compound protocol. All users and all applications built on top of Compound will continuously, and automatically receive governance rights, for free— in order to shape the future of the protocol," Compound CEO Robert Leshner wrote.

The blog post explains that 4,229,949 COMP tokens will be placed into a "Reservoir" contract, from which 0.5 COMP will be transferred with each Ethereum block into the protocol to be distributed to users. 

"The distribution is allocated to each market (ETH, USDC, DAI…), proportional to the interest being accrued in the market; as market conditions evolve, the allocation between assets does too," the post explains. "Within each market, 50% of the distribution is earned by suppliers, and 50% by borrowers; in real-time, users earn COMP proportionate to their balance; this is separate from the natural interest rates in the market... Once an address has earned 0.001 COMP, any Compound transaction (e.g. supplying an asset) will automatically transfer COMP to their wallet; for smaller balances, an address can manually collect all earned COMP."

As previously reported, anyone with at least 1 percent of COMP tokens delegated to their token address can propose a governance action. Compound has previously stressed that such proposals should come in the form of executable code, thus raising the bar for any possible changes. From there, proposals undergo a three-day voting process. Proposals that attract overall majority support and at least 400,000 votes in favor can then move toward being implemented.

Compound envisions a four-year distribution cycle for COMP tokens. While currently live on the Kovan test network, the distribution system still needs to be integrated into the live protocol. According to the post, "one of the members of our team will propose a protocol upgrade to support COMP Distribution — this will likely occur next month."

But before that, Compound plans to flip the switch  to fully decentralize the governance process. 

"To begin the transition, we'll first abdicate the Guardian functionality that allows our team to disable Governance in an emergency; once disabled, COMP holders have complete, censorship-resistant control over the protocol," the post explained.