Compound Finance faced a governance crisis, where a single actor can sway voting. The potential attack can then redistribute rewards based on wallet size, hurting retail holders.
Compound is still one of the most widely used DeFi hubs with multiple liquidity vaults. The project has a DAO governance model based on community votes, but the voting structure favors whales. This has put Compound at risk for governance attacks, drawing in at-scale actors known from previous governance exploits.
At the end of July, one of the large COMP holders boosted Proposition 289, almost passing a vote. At the head of the proposal was Humpy, a self-professed whale since 2013, who also goes under the handle @Titan_32. The influence of Humpy ended up passing the proposal, but it was canceled after 48 hours of negotiations, to be replaced with a new way of earnings redistribution.
Compound is attractive for redistributing value, as it is one of the most successful fee-generating protocols. July earnings reached $566K, though Compound is more often at a net loss due to the redistribution of incentives.
The actions of Humpy may also have a positive effect on Compound, as they turn COMP into a yield-bearing asset. Instead of the Golden Boys vault, Compound announced the Alpha Growth product.
Since Compound accrues market reserves from fees, the organization will redistribute those assets in proportion to COMP locked for staking. Compound will redistribute 30% of its existing market vault, as well as new inflows into the vault. The staked COMP product will be controlled entirely by the Compound DAO, giving no direct access to smaller communities.
The cancellation of Proposal 289 and the vote on the next product in Proposal 290 also calmed fears of further governance attacks. Humpy has been known to aggressively build up stakes in protocols, creating special-interest communities with more than 51% of the votes.
After the latest involvement of Humpy, COMP rallied to $52.70, from lows around $47. For some, the involvement of Humpy is favorable, ending up with more efficient protocols that also pay the community.
Golden boys proposal was building up for months
A holder or a collective of holders known as Humpy managed to propose a new reward distribution and achieved enough COMP staking to sway the vote. The known wallets of Humpy were enough for swaying the governance of Compound and future votes.
1/ Compound Governance Attack Pt. 2
Humpy’s proposal has passed, and the execution time lock is ticking.
Humpy seemingly controls over 10% of @compoundfinance total supply, with the concern that he can pass any governance proposals that he desires, hurting Compound. pic.twitter.com/2EuNQgNSqS
— omer (@omeragoldberg) July 29, 2024
The Golden Boys proposal, as it was known, was supposed to lock idle COMP into a special vault for yield generation. The proposal would divert $25M of COMP, which in the best-case scenario would be an aggressive way to gain yield. But there was also the risk of a deliberate governance attack.
The first signs of concerted delegation happened in April and May, after which the Humpy social media personality emerged as the leader of the Golden Boys group of COMP holders. The most recent vote of Proposal 289 arrived after a series of attempts to convince the Compound community to transfer funds, which would be held in a multi-sig wallet controlled by the Golden Boys group.
The last proposal of Humpy required five times more COMP compared to the first attempts to vote on fund distribution. A total of 500K COMP, valued at $25M at current prices, would be locked and generate yield for the Golden Boys.
For now, Humpy is still far from having a 51% influence, but has built up a wallet valued at $78M, a sizeable part of the total COMP market capitalization of $435M. Previous records show Humpy has followed a similar attack strategy with votes on SushiSwap and Balancer.
In the case of Balancer, the community had to negotiate the terms of engagement, so a single whale could not grow enough to take away all rewards and harm the protocol.
Humpy took a similar approach with SushiSwap, creating a community of supporters called the Sushi Citizens. The end result was that Humpy had added social media support and more community voices, in addition to an influential whale wallet. The creation of communities and the presence of a whale wallet can lead to radically new ways of extracting value from protocols.
Cryptopolitan reporting by Hristina Vasileva
