Third Time’s the Charm? Questionable Compound Finance Proposal Passes

Compound Finance has allegedly become the victim of a governance attack. On Sunday, July 28, a proposal to allocate 5% of the protocol's treasury

Compound Finance has allegedly fallen victim to a governance attack. On Sunday, July 28, a proposal to allocate 5% of the protocol’s treasury, about 499,000 COMP (roughly $23.4 million at the time of writing), to a goldCOMP yield-bearing protocol by a group called Golden Boys passed with 682,191 votes to 633,636.

Several community members have labeled the proposal’s passing as an attack as the entities behind the proposal had acquired about 325,333 COMP, only 74,667 COMP less than the 400,000 COMP governance quorum threshold, to sway the vote.

The supposed attack, spearheaded by a whale aptly named “Humpy,” began over two months ago with two failed attempts to pass the proposal, kicking off with an initial effort on May 6. This first proposal, however, immediately raised red flags.

Compound Finance DAO Security Advisor Michael Lewellen highlighted the suspicious COMP delegations preceding the proposal, which sought to put a substantial amount of the COMP treasury in a multi-sig wallet out of the DAO’s direct control and had not been put up for discussion on community forums as is the usual practice. The resulting backlash forced Humpy to cancel the proposal days later.

Humpy tried again with another proposal on July 15 after providing more details about the multisig on GitHub. This second proposal, however, failed to reach the quorum.

With the recent passing of the proposal on the third attempt despite the apparent red flags, several questions have been asked of the governance mechanisms of DAOs, especially since Humpy had employed a similar tactic on Balancer two years prior.

The Result of a Faulty Governance Model?

As with many other DeFi protocols, Compound Finance DAO and Balancer DAO use a governance model where voting power is determined by the number of tokens a delegate holds. This method is widely adopted because of its simplicity and alignment with token utility. However, as highlighted by Humpy’s actions, this model is easily exploited by users with significant capital.

Reacting to the alleged Compound Finance attack, Curve Founder Michael Egorov touted Curve’s vote escrow tokenomics (ve-tokenomics), which requires DAO voters to lock up tokens for four years in exchange for voting power, with a high quorum requirement, as the better approach. Egorov stated that the supposed Compound Finance attack could not be replicated on Curve.

However, not everyone agreed with Egorov’s view that the ve-tokenomics model alone was the answer. As Progrmd Capital investor Sonya Kim pointed out, those with significant capital still have an upper hand in the ve-tokenomics model. Kim suggested adopting a dual governance system involving a trusted committee as a last line of defense and clearly defined DAO roles as potential fixes for better governance.

Amid these questions around Compound Finance DAO’s governance mechanism, however, some have suggested that the real culprit is apathy from the Compound Finance team and community members. Summing up this view, prominent DeFi researcher Ignas wrote:

“Only 57 addresses cast their votes for the goldCOMP proposal. Where was everyone else? It seems nobody cares. Barely ~20 addresses typically participate in DAO votes.”

On the Flipside

Why This Matters

DeFi protocols and the DAOs that manage them often control millions and sometimes billions of dollars in funds. How these funds are managed directly impacts the progress of these protocols and the fortune of their users. The governance mechanism of most DAOs, however, leaves much to be desired.

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