Over the last few years, the growth of Decentralized Finance has been quite spectacular. The space, on the other hand, has been vulnerable to attacks and manipulation since its inception. In fact, even rapid advancements in security protocols over time have not been able to prevent such hacks.
Compound Finance, an autonomous interest rate protocol, is the most recent victim of this. Unusual token distribution activity was observed less than a week ago. A buggy upgrade, as clarified by the protocol’s official Twitter handle, had contributed to the same.
The error was discovered early on. However, Compound’s delay in implementing its novel governance measures fueled an unwelcome impediment.
Simply put, it would still take a few days to correct the error. In fact, Mudit Gupta, one of SushiSwap’s developers, ended up criticizing the use of time-locks in governance. He emphasized that the drip function posed a threat to over 100 people. Unfortunately, due to the time lag in updating the protocol, they were unable to do anything.
In the midst of this new concern, the already deteriorating state of the protocol’s fundamentals appeared to worsen.
Crunch in liquids
Compound relies heavily on aggregate liquidity, owing to the fact that it is a money-market protocol that allows users to earn/borrow assets. According to DeFi Pulse data, the total value locked on Compound has decreased over the last 30 days.
The TVL is a key metric used to assess the overall health of any protocol, and its deterioration usually has an impact on yields and usability.
Looking at the current downtrend on the chart below, it is possible to conclude that swaps have been inefficient. It also suggested that COMP’s lending market was unable to effectively supply liquidity to borrowers.
However, as a recent article pointed out, Compound’s LTV [Loan-To-Value] metric has recently been declining. The loan-to-value (LTV) ratio emphasizes the loan-to-asset value ratio. The risk is determined by the likelihood that liquidity will be available to cover the outstanding balance.
As a result, the greater the LTV, the more risky it is for users/lenders to provide liquidity to the protocol.
The LTV may have dropped from 48 percent to 37 percent in the last month. However, the TVL decline and liquidity crisis, when combined, have the potential to exacerbate the situation. At least in the short term.
Is it worth bothering investors?
Furthermore, the selling pressure was palpable. According to ITB’s trade per side metric, for example, the number of tokens purchased fell far short of the number sold in the previous 12 hours.
If the current trend continues, market participants who choose to hold on to the token will end up losing more money than they make. At least for the time being.
The depreciating value of the COMP token lends credence to the aforementioned narrative. Needless to say, COMP has not had the best of times.