Yield Farming May Have Led to more DAI on Compound than in Circulation

Compound includes both loans and deposits as part of the supply reflected. Compound COMP tokens no longer have a distribution according to interest rates on loans.

A new chapter in yield farming has emerged through the decentralized finance (DeFI) platform Compound, where there is a paradox that involves the stablecoin DAI.

According to figures from Compound, there is a larger amount of DAI on this platform than the total circulation of this USD-pegged currency. At least, the figures that Compound exhibits easily exceed the total supply that DAI Stats reflects.

There is a very clear difference between the total supply and circulation of the stablecoin. On the platform Compound, DAI reflects a total supply of 541 million coins, whilst the total circulation of the USD-pegged currency is just under 165,600,000 units.

How Compound calculates its supply is what makes this difference possible. An amount of more than 500 million DAI is not on the platform, but Compound includes all loans and deposits as part of the new supply, regardless of whether the coins deposited come from a loan created on the platform itself. In other words, if someone borrows 100,000 DAI and deposits that amount back into Compound, the platform assumes that there are now 200,000 DAI.

In recent days, the Compound community approved an update to the protocol that changed the way of issuing the COMP token. With the new approach, users receive the token according to the total US dollars in the loans. Previously, the token launched in mid-June had a distribution according to the interest percentages for each asset.

Since the implementation of the change, the total supply of DAI on the platform just exceeded 56 million units. This contrasts with the more than 500 million that the platform currently reflects.

When looking at the real liquidity of the DAI market on Compound, it is possible to observe that it barely exceeds 45,000,000 DAI. The most striking about this situation is the movement between loans and deposits that the stablecoin is having on the Compound market.

BAT, Reverse Movement after Change on Compound

Before the upgrade, the COMP governance token had a distribution based on the interest percentages for each asset. This had favored the use of loans in BAT, mainly because it had the most attractive percentage.

However, by reviewing the behavior of BAT after the change in the distribution of COMP, it is possible to see that its behavior has been contrary to that of DAI. Following the boom of yield farming, the supply of BAT on Compound dropped from over USD 300,000,000 to just under the equivalent of USD 30 million.

All this reflects that the users of the protocol have migrated to DAI. Despite its lower interest rate, that aspect no longer marks the distribution of COMP. Users would then be betting on a less volatile asset, as it is pegged to the value of the US dollar. Likewise, it allows access to the benefit of receiving COMP, whose market value exceeds USD 180, at the time of writing this article.

By Alexander Salazar