The decentralized finance (DeFi) pioneer Compound, credited with launching the 2020 liquidity mining boom, is now taking deliberate steps to scale back its long-standing token incentive program. This strategic shift reflects a broader industry realization: while liquidity rewards initially fueled rapid growth, they often attracted short-term speculators rather than genuine users—ultimately undermining protocol sustainability.
👉 Discover how DeFi leaders are redefining user incentives for long-term growth.
The End of an Era: Halving COMP Rewards
On March 27, 2025, Compound implemented Proposal #92, introduced by community member Tyler Loewen, which successfully passed governance voting. The proposal cuts daily COMP token emissions by 50%, reducing the release from 2,312 COMP per day to 1,156. This marks the first major step toward phasing out broad-based liquidity mining rewards that have defined the platform since its explosive growth in 2020.
Originally designed to distribute governance tokens to early adopters and incentivize participation in lending and borrowing markets, the COMP reward system played a pivotal role in kickstarting the DeFi movement. However, as the ecosystem matured, so did concerns about its unintended consequences.
Why Reduce Incentives? Addressing Short-Term Speculation
The core motivation behind the reduction lies in combating speculative behavior. Many participants joined Compound not to use its lending infrastructure, but solely to farm COMP tokens and immediately sell them on the open market. This "yield farming" cycle led to continuous selling pressure, diluting value for long-term holders and active users.
As Tyler Loewen noted in his governance proposal:
“While COMP farming was effective for initial distribution, it has increasingly become a mechanism that benefits short-term profit seekers at the expense of real protocol users and token holders.”
With over 880,000 COMP votes in favor and strong support from major stakeholders like Polychain Capital, Pantera Capital, and GFX Labs, the community signaled a clear consensus: it’s time to transition from artificial growth driven by token emissions to organic usage driven by utility.
Preparing for a Post-Rewards Future
Loewen plans to go further. On April 15, he intends to submit another proposal aimed at eliminating all existing liquidity rewards entirely. If passed, this would mark the official end of the COMP farming era—one built on speculative yield chasing—and the beginning of a new phase focused on sustainable economic design.
But removing incentives without offering alternatives risks driving away liquidity. To counter this, Loewen proposes replacing blanket rewards with a targeted mechanism called the "Kickstart Reward" program.
Introducing Kickstart Rewards: Incentivizing Real Market Needs
Rather than rewarding all deposits and borrows equally, the Kickstart Reward model focuses on boosting specific assets that lack sufficient liquidity. The idea is simple: temporarily increase the deposit yield for a particular asset (e.g., APE Coin) to attract capital, helping it reach a target market size within a set timeframe.
For example:
- Target: $10 million in APE Coin deposits
- Incentive: Offer an elevated 8% annual yield for three months
- Outcome: Once liquidity reaches critical mass, borrowing interest rates naturally decline, encouraging more borrowers and creating a self-sustaining market
This approach aligns incentives directly with protocol health and user demand, rather than generic activity. It allows Compound to strategically expand into new markets without flooding the ecosystem with inflationary tokens.
Optimizing Interest Models for Sustainable Growth
Beyond changing reward structures, Loewen emphasizes the need to improve Compound’s underlying interest rate models. Currently, yields on popular assets lag behind competitors:
USDT:
- Aave: 4.89% APY
- dForce: 6.41% APY
- Compound: 3.55% APY
ETH:
- Aave: 0.39% APY
- dForce: 1.02% APY
- Compound: 0.07% APY
These suboptimal rates contribute to Compound’s declining position in total value locked (TVL). As of March 29, its TVL stood at $7.28 billion, ranking it 8th among DeFi protocols—behind leaders like Lido, MakerDAO, and Aave.
By refining dynamic pricing algorithms based on real-time supply and demand, Compound aims to maintain competitive yields without relying on external token incentives.
👉 See how next-gen DeFi platforms are optimizing yield mechanisms.
Broader Implications for the DeFi Ecosystem
Compound’s pivot sends a powerful signal across decentralized finance. While most DeFi protocols still rely heavily on liquidity mining to boost TVL and user numbers, the limitations are becoming evident:
- Incentives often attract "mercenary capital" that leaves as soon as rewards dry up.
- High turnover undermines community trust and long-term engagement.
- Real adoption requires solving actual financial needs—not just offering short-term yields.
As one DeFi analyst observed:
“When incentives are tied to business fundamentals—like launching new markets or reducing trading slippage—they create lasting value. Chasing vanity metrics only leads to boom-and-bust cycles.”
Uniswap’s decision to stop distributing UNI rewards for certain pools highlights a growing trend: mature protocols are shifting from growth-at-all-costs to sustainable utility-driven models.
Frequently Asked Questions (FAQ)
Q: Why is Compound reducing COMP rewards now?
A: To discourage speculative yield farmers who don’t actively use the protocol and instead dump tokens immediately after claiming rewards. This harms long-term users and token holders.
Q: Will reducing rewards cause liquidity to drop?
A: There’s a risk, but Compound aims to offset this by improving interest rate models and introducing targeted Kickstart Rewards that attract capital where it's most needed.
Q: What is the Kickstart Reward program?
A: A temporary, high-yield incentive for specific undercapitalized assets (e.g., APE Coin), designed to build deep liquidity quickly so borrowing becomes cheaper and more attractive.
Q: How does this affect COMP token holders?
A: Reducing emissions slows inflation, potentially increasing scarcity and supporting price stability—benefiting long-term investors.
Q: Is Compound completely ending token rewards?
A: Not yet. The current step is a 50% cut. A future proposal will seek to eliminate general rewards entirely, replacing them with targeted incentives.
Q: What lessons can other DeFi projects learn from this move?
A: That sustainable growth comes from aligning incentives with real usage—not just maximizing short-term TVL through inflationary rewards.
👉 Learn how leading DeFi protocols are building sustainable economies.
Conclusion: Toward a More Mature DeFi Economy
Compound’s move to reduce liquidity mining rewards represents a maturation of the DeFi space. By prioritizing real usage over artificial growth, refining economic models, and introducing demand-driven incentives, it sets a precedent for what sustainable decentralized finance can look like.
The days of indiscriminate yield farming may be waning—but in their place emerges a more resilient vision: one where protocols grow not because they pay users to show up, but because they solve real problems efficiently and fairly.
As the ecosystem evolves, protocols that adapt—by rewarding utility over speculation—will be best positioned for long-term success.