By Chainrisk Team
Compound’s governance is centered around the COMP token, an ERC-20 token that enables holders to participate directly in governance. Token holders can propose, vote on, and delegate voting power for changes across the protocol, from smart contract modifications to adjustments in risk parameters. Each token represents one vote, allowing holders to weigh in on everything from setting interest rates to defining market caps for various crypto assets. Compound’s governance model includes the following:
Token Holders and Delegates
Every COMP holder has the option to either vote directly or delegate their votes to others. This allows for more participation and aligns voting power with those who are most knowledgeable or invested in particular aspects of the protocol. Delegates, in turn, can accumulate significant voting power, giving more influence to individuals or entities that represent a larger share of the community.
Governor Bravo Framework.
Compound’s governance relies on the Governor Bravo framework, an advanced governance model that enables the protocol to manage and execute complex governance proposals. Governor Bravo allows token holders to initiate and vote on proposals with detailed structures, such as voting delays, proposal thresholds, and action limits. A proposer must hold at least 25,000 COMP tokens to submit a proposal, and there is a required quorum of votes for a proposal to pass, ensuring that changes are backed by substantial community consensus
The Timelock Contract
Approved proposals are subject to a time delay, enforced by the Timelock contract. Once a proposal passes, there is a two-day waiting period before execution, designed to provide the community time to review and respond to any changes. This mechanism adds an extra layer of security by giving stakeholders a chance to assess and possibly counteract any risky or harmful proposals before they take effect.
Compound’s proposals are classified into four main categories: protocol upgrades, protocol improvements, tooling support, and governance adjustments. These categories enable the community to address a range of needs:
Protocol Enhancements
Changes to the underlying smart contracts, risk parameters, and COMP distribution fall into this category. By adjusting risk parameters, the community can control factors like collateral requirements, thereby managing liquidity and safety.
Meta-Process and Governance Improvements
These proposals enhance the way the community itself operates. For example, meta-process proposals can refine how governance is coordinated or improve communication channels, leading to smoother, more efficient decision-making processes.
Tooling and Support Proposals
Off-chain infrastructure, developer tools, and security upgrades often require community backing. These proposals may address improvements in the broader ecosystem that indirectly affect the protocol, such as better tooling for developers, data analytics enhancements, or community-oriented security tools.
Smart Contract Executions
This type involves on-chain actions like setting parameters, executing governance-approved functions, or authorizing changes in administrative functions. This classification ensures that operational and technical adjustments are streamlined, focusing on the protocol’s resilience and adaptability.
Compound V3 governance, introduced in 2022, redefined some elements to streamline and secure the protocol further. The V3 version includes a “Configurator” contract, centralizing all governance activities into a single smart contract. This approach simplifies the voting and implementation process by consolidating changes within the protocol, providing greater transparency and reducing the complexity of managing different contract layers.
In V3, governance also controls the “Comet Factory,” an advanced architecture allowing the protocol to manage multiple instances of its markets. This innovation facilitates upgrades by allowing new deployments or market parameter adjustments to be implemented via governance approval, thus ensuring a higher degree of security and flexibility. Furthermore, Compound V3 introduced a business license for its codebase, requiring governance approval for any modifications or forks, which protects against unauthorized duplications and helps the community retain control over the protocol’s integrity.
Governance Extractable Value (GEV) refers to the profits or benefits that individuals or groups can obtain by controlling or influencing the governance mechanisms of decentralized protocols. Similar to Miner Extractable Value (MEV) in mining, GEV is realized when token holders, delegates, or participants with significant voting power manipulate decisions to their advantage, often through buying votes, proposing self-serving changes, or exploiting loopholes in governance models.
Governance attacks present a unique threat to decentralized protocols like Compound Finance, where power rests in the hands of token holders who vote on important decisions. Governance models in DeFi platforms aim to decentralize control, but they are susceptible to attacks when a small group amasses enough voting power to sway outcomes in their favor.
A notable example recently occurred with Compound Finance. In July 2024, a proposal (Proposal 289) by a group known as the "Golden Boys," led by an individual nicknamed "Humpy," successfully passed, which aimed to allocate approximately $24 million in COMP tokens to a yield-bearing protocol called "goldCOMP." This protocol, designed and controlled by the Golden Boys, would have taken a significant portion of Compound’s treasury funds. The proposal narrowly passed, sparking accusations of a governance attack as critics pointed out that Humpy’s group had acquired a substantial quantity of COMP tokens just below the quorum threshold. This led to concerns that the vote was manipulated rather than reflecting the community's broader interests.