What Happened to Compound’s Crypto‑Lending Empire?
An analysis of the rise, the missteps, and the current state of one of DeFi’s original lending protocols.
Background: From Trailblazer to Standard‑Bearer
When Compound launched in 2018, it offered a novel way for users to earn interest or borrow assets directly on Ethereum without intermediaries. Backed by venture funds such as Andreessen Horowitz, Bain Capital Crypto, Paradigm and Coinbase Ventures, the protocol quickly became the default on‑ramp for decentralized lending.
The introduction of the COMP governance token in 2020 turned passive liquidity providers into active participants, fueling a wave of “yield‑farming” activity that propelled Compound’s total value locked (TVL) to more than $12 billion by November 2021. Major DeFi projects (e.g., Yearn Finance) and centralized exchanges (including Coinbase) integrated Compound, cementing its position as the core infrastructure for crypto credit markets.
The First Shock: Proposal 62 Bug
In October 2021 Compound rolled out “Proposal 62,” intended to recalibrate COMP reward distribution. A coding error caused the protocol to over‑pay users, unintentionally minting tens of millions of dollars’ worth of COMP.
Because Compound’s governance model mandates a timelock for contract upgrades, the team could not halt the bug immediately. While the fix was pending, the excess tokens continued to flow out, eroding confidence among lenders and borrowers.
Robert Leshner, Compound’s founder, publicly asked recipients to return the surplus in exchange for a 10 % bounty, warning that unrecovered tokens would be treated as taxable income and that the addresses were effectively “doxxed.” The tone of the request generated swift backlash, and Leshner later described the post as “bone‑headed,” but the episode had already underscored a governance vulnerability.
Impact:
- An estimated $30‑$40 million of COMP left the protocol in the weeks after the bug surfaced.
- Media coverage highlighted the risk of over‑reliance on automated reward mechanisms.
Market Headwinds and Shifting Liquidity
The bug hit at an inopportune moment. By December 2021, Bitcoin slipped from its $69,000 peak, ushering in a prolonged bear market. Falling asset prices reduced borrowing demand across DeFi, and liquidity began to retreat from pooled markets like Compound’s.
Unlike Aave or Maker, whose risk models rely on more isolated or adaptive collateral structures, Compound’s pooled‑liquidity design proved more susceptible to mass withdrawals. As the 2022 “crypto winter” deepened—exacerbated by the Terra collapse, the FTX implosion, and failures of several centralized lenders—users grew increasingly risk‑averse, favoring protocols perceived as better insulated from systemic shocks.
Leadership Turnover and New Directions
Amid the liquidity strain, Compound’s leadership underwent a transition. Leshner gradually stepped back from day‑to‑day operations and, in mid‑2023, departed to launch Superstate, a platform that tokenizes public equities for on‑chain trading. The change left Compound without its original visionary at the helm, contributing to a perception of reduced strategic focus.
Where Compound Stands Today
- TVL: From a high of $12 billion in November 2021, the protocol’s locked value fell to roughly $2.2 billion by November 2022 and has since stabilized around $1.4 billion, positioning it as the seventh‑largest DeFi lender, well behind Aave’s ~$27 billion.
- Revenue: Monthly fees peaked at nearly $47 million in 2021. In 2024, the highest monthly revenue recorded was $888 k, while the latest figures hover near $3.5 million—a dramatic contraction.
- Market Perception: Compound is still regarded as a foundational DeFi component, but its role has shifted from market‑leader to one of several competing lending options.
Compound declined comment on this analysis.
Key Takeaways
| Issue | What Happened | Why It Matters |
|---|---|---|
| Proposal 62 bug | Over‑payment of COMP rewards due to a contract error. | Highlighted the risks of automated incentive structures and the limits of timelocked governance. |
| Timing | Bug coincided with the onset of a bear market. | Liquidity outflows were amplified by falling crypto prices, accelerating TVL decline. |
| Risk model | Pooled‑liquidity design less resilient than isolated‑collateral models. | Borrower pull‑backs impacted Compound more severely than rivals like Aave. |
| Leadership change | Founder exited, shifting focus to new ventures. | Reduced continuity may have slowed strategic responses to market stress. |
| Current position | TVL ≈ $1.4 B, 7th‑largest lender; revenue an order of magnitude lower than peak. | Compound remains relevant but is no longer the de‑facto standard for DeFi lending. |
Outlook
Compound’s future will likely depend on three factors:
- Governance Evolution: Streamlining upgrade pathways while preserving security could mitigate future reward‑distribution glitches.
- Product Innovation: Introducing more flexible collateral options or integrating with emerging layer‑2 solutions may help recapture liquidity.
- Community Re‑engagement: Rebuilding trust through transparent communication and rewarding responsible participants could stabilize user confidence.
While the protocol may never reclaim its 2021 dominance, its continued presence within the DeFi ecosystem suggests a potential for a steady, if modest, role in the evolving landscape of crypto credit markets.
Source: https://thedefiant.io/news/defi/what-happened-to-compound-defi-lender
