Compound DeFi Protocol Was Nearly Hijacked By Whales: Here’s How A Governance Crisis Was Diffused

Compound, one of the earliest DeFi protocols, was nearly hijacked after whales banded together to pass a controversial proposal.

DeFi has had its ups and downs. At the depth of the bear market of 2021, the total value locked (TVL) shrunk to less than $40 billion, a decimation of unexpected proportions.

As the crypto market recovered, TVL has risen in tandem, now approaching the $100 billion mark.

What’s cool about DeFi solutions is that, like Bitcoin and other crypto protocols, are community-centric.

Compound Shines a Light on DeFi Governance and DAOs

For truly decentralized DeFi protocols, community members and holders of the platform’s native token can vote on proposals.

In Uniswap, UNI serves as a governance token. Holders can vote on proposals to improve the protocol, reject suggestions from community members, or unanimously pass them.

Some protocols, like Maker, have a DAO in place.

The decentralized nature of the governing DAO means only holders of MKR can vote. The more the MKR held, the more the voting power.

However, this can be problematic sometimes.

DAO voting can be hijacked by selfish whales, especially if token ownership is a metric for gauging voter power. That’s not even talking about smart contract flaws and the high fees, especially for voting members.

In cases where whales can sway voting, it won’t be surprising if they choose to vote (and pass) proposals that benefit them directly.

With their substantial voting power, they can ensure these proposals pass.

The Failed Hijacking Of Compound

This is the governance crisis that Compound Finance, one of the first DeFi protocols, recently encountered.

The controversy was after Proposal 289 passed after several whales led by one known as Humpy decided to pass a suggestion that would allocate $24 million worth of COMP, drawn from the Treasury, to a yield-bearing protocol expressly controlled by these whales, dubbed as the “Golden Boys.”  

Interestingly, the proposal narrowly passed after voting ended over the weekend. However, community members would not let the Golden Boys take over.

🏛️ Humpy just cancelled proposal 289 – The Compound Gov Attack Saga

Yesterday, Compound's team sent a forum post – they had been in talks with Humpy, the defi mega whale who passed a controversial proposal to siphon 25M $COMP.

Quick summary of what's going on- who is Humpy? pic.twitter.com/B8v4KFCRiH

— olimpio (@OlimpioCrypto) July 30, 2024

Ordinary COMP holders were outraged, maintaining that the whole voting was a sham and full of manipulation.

They maintain that the so-called “Golden Boys” had artificially inflated their voting power after accumulating COMP.

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The Intervention: COMP Price Recovers

Due to the backlash, Compound responded, and a new proposal was floated to scrap the controversial allocation.

(Source)

Now, instead of the Golden Boys taking charge of the funds, there would be a staking product that would benefit all COMP holders, not just Humpy.  

Observers said the intervention was timely and necessary. If they had not acted, a disaster would have been inevitable.

Of note, there were concerns about the security of the $24 million in COMP and the potential misuse of the allocation. In response to this truce, COMP prices recovered.

(COMPUSDT)

Bulls must clear the resistance level at $53 for the uptrend to continue. If buyers take charge, prices might rise to as high as $65 in a buy trend continuation formation.

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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.