Currently Compound is blowing up in the DeFi space and their COMP token has a market cap of $550M trading around $182. This raises the question: What is a COMP token worth? Let’s explore…
The COMP token is an asset that people are currently buying for $182. When purchasing an asset, we should always ask ourselves what the utility/benefit of this asset is. A car provides transport, a share may pay dividend. When we translate this utility/benefit into a money amount, we can properly price the asset.
This is just my opinion, not financial advice. I have been wrong before. Always do your own research!
Utility/Benefit of owning COMP tokens
According to the Compound website:
Compound (COMP) is an ERC-20 asset that empowers community governance of the Compound protocol; COMP token-holders and their delegates debate, propose, and vote on all changes to the protocol.
So it seems that currently the only benefit of owning COMP tokens is voting rights on proposed changes to Compound. Here’s an example of such a proposal:
This seems to be the only utility/benefit of holding COMP tokens at this time. To a retail investor there is clearly no benefit at all to owning COMP, so for individuals owning COMP, the fair price would be 0.
Of course only a large amount of COMP could give you a good amount of control over the protocol, which could be worth something.
51% attack
If you owned 51% of all voting COMP, you could make any change and maybe even steal all locked up funds. But when we look at the token distribution here we can see that the team has access to over 1.5M COMP personally and 4.1M COMP in the reservoir. So if someone were to try an attack, surely the team would step in and “veto” any proposal like this.
So only legitimate proposals can be made, most of which are of little value because of they are “good” proposals, they will pass anyway.
Adding fees to compensate COMP holders
One way COMP tokens could become more valuable would be to introduce a fee for using Compound that is paid out to COMP holders. Let’s say that borrowers paid an extra 1% to COMP holders. Before the yield farming spammed Compound, the true value locked in Compound was about $100M. And most of this wasn’t even lend out. But let’s assume all of it was, that would net COMP owners about $1M. There are 10M COMP tokens, so the “dividend” for holding 1 COMP token for one year would be $0.10. That could justify a COMP price of around $2, maybe.
You could argue that Compound will grow to 100x it’s size over the next few years. But as it grows it will face competition. So a 1% will not be realistic in the long run. Even a 0.1% fee would be hard to justify. At a 0.1% fee, Compound would have to lend around $100B to justify it’s current price.
And that assumes that that outcome is certain. If you add discounts for risk and probability that this won’t happen it becomes clear why the current price is simply inflated by speculation of the impossible (due to a lack of understanding and misinformation).
And all this assumes a fee model that doesn’t even exists and might never come because making a copy of Compound and launching a competitor with no or lower fees takes a reasonable coder less than a week.
My Trade
Since COMP is currently trading for $182 and every day yield farmers earn their COMP and probably cash out straight away, I’ve placed a short position on Binance. With 10.000 USDT as collateral I’ve shorted 200 COMP at $189 (yesterday) at 4X. Let’s see how this goes.
And again, this is just my opinion, not financial advice. Always do your own research! And please tell me why I’m wrong… I love to hear other views on this…