Compound, the Decentralized Finance protocol, reached the $1 billion dollar mark in funds borrowed from its protocol on June 13, with its top three markets being the DAI and USDC stablecoins followed by Ether (ETH).
Currently, MakerDAO’s DAI takes the lead with 79.88% of value borrowed from its protocol. Stablecoins seem to be popular in Compound due to its COMP reward mechanism which gives users COMP tokens according to the dollar value borrowed.
Compound allows users to deposit certain cryptocurrencies to earn interest and to borrow different tokens or stablecoins (useful for short-selling for example), while providing users with COMP token rewards for engaging in both activities.
Over the past few weeks this system has made Compound protocol extremely popular and it currently has $1.6 billion in assets locked to their liquidity pools. At the moment, a number of DeFi protocols are also showing considerable increases in the amount of borrowed and locked funds. For example, Aave currently holds over $250 million in its liquidity pools, according to data from Aavewatch.
DeFi tokens are topping price charts
DeFi has been making huge progress in terms of visibility, especially following the disproportional buzz created by the Coinbase-backed Compound project. At least 10 DeFi-related tokens have seen more than 100% gains and this in part due to the COMP reward mechanism and yield farming which allows users to act both as lenders and borrowers in order to earn COMP tokens for this dual role.
In its first week of trading, COMP rose by 233% and has since been listed on Coinbase and Kraken. Aave’s LEND token has rallied more than 1000% in the last 3 months, from around $0.02 to $0.24.
Not only are the price of DeFi-related tokens rising along with the value locked and borrowed from these protocols, the tokens that are available in these protocols have also been generally performing well.
Coupled with the high interest rates and yield farming possibilities, it’s safe to say that DeFi has been a gift that keeps on giving for early adopters of the platforms and of their respective tokens.
Examples of this include Chainlink (LINK) which is the biggest cryptocurrency on the Aave protocol following the LEND token itself.
The impact of the defi protocols on other tokens was most visible through Basic Attention Token (BAT) which became the most used ERC-20 token in all of DeFi, surpassing even ETH and DAI, for two weeks, before the COMP reward mechanism was updated.
Why are DeFi tokens surging?
While it is easy to understand that DeFi is growing, the price surge in the associated tokens like LEND and COMP is somewhat unrelated. Although tokens like NEXO give users a share in the revenue, LEND and COMP do not.
These tokens, however, give their holders voting rights over the protocol. In other words, they are governance tokens and do not pay any dividends.
While there is no immediate monetary benefit, having a stake in the future of these platforms may hold some unmeasurable value depending on how they scale over time. Moreover, hype and right-out speculation around the DeFi space has surely helped some of these governance-associated tokens.
As the DeFi sector continues to break record numbers in activity and the amount of funds locked and lent increases, it seems possible that DeF tokens will continue to outperform Bitcoin, especially as the digital asset’s volume and volatility continues to dwindle.