Finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Bio
by Andrew LIU
April 2025
Is Compound’s token economics (Tokenomics) and financial model sustainable in the long term?
Compared to Aave, what advantages does Compound hold, and what are its shortcomings?
In the current market environment, which protocol has greater growth potential?
Several thousand years ago in ancient Greece, people (including Aristotle) considered charging interest on loans to be sordid and contrary to the will of the gods. But just a few hundred years later, people broke through this restriction and accepted the existence of loan interest.
Lending relationships initially occurred between individuals, inherently decentralized. With the emergence of governments and banks, centralized lending correspondingly arose. The primary advantage of centralized lending lies in the ability of a third party, outside the borrowing and lending parties, to handle default situations based on fair and just rules, but this is not the reason for its long-term existence.
The foundation for the long-term existence of centralized lending is precisely due to the “inabilities” in people’s original decentralized lending relationships:
The borrower has a relatively high probability of being unable to strictly adhere to the contract, such as willingly transferring collateral to the lender;
The weaker lender has a relatively high probability of being unable to take effective action to protect their own interests;
Even if one party takes action, both parties are unable to ensure whether that action is fair and just.
DeFi lending technology has disrupted the above foundation, making the return of lending relationships to decentralization a highly probable event.
From an underlying logic perspective, DeFi lending can be divided into two forms: the first is the original purely decentralized lending method (this report temporarily refers to it as basic DeFi P2P), and the second is decentralized lending platforms (DeFi Lending Platforms). Through the comparison in the table below, we can see that DeFi Lending Platforms have greater potential for long-term development.
The business model of DeFi lending platforms is essentially the same as that of traditional centralized banks, with revenue primarily derived from interest and service fees; however, because they are based on blockchain and smart contracts, their operational costs are significantly lower than those of traditional centralized banks. Therefore, the emergence of DeFi lending platforms is historically inevitable.
This report selects two currently influential DeFi platforms and, through comparative analysis, presents the industry’s development status, competitive landscape, and future directions and opportunities.
According to DeFiLlama data, as of April 7, 2025, the total value locked (TVL) in the Lending sector is $37.5 billion, with Compound and Aave accounting for $2.0 billion and $16.8 billion, representing 5.3% and 44.7% of the Lending sector, respectively.
Other top-ranking participants are shown in the table below:
In addition to TVL, Fees and Revenue are two key metrics, where:
Fees: Reflect the cost of protocol usage and user activity; higher Fees indicate stronger borrowing demand.
Revenue: Reflects the protocol’s own profitability, typically a portion of Fees.
According to DeFiLlama data, the 30-day Revenue-to-Fees ratio in the Lending sector is 19%, meaning that over 80% of the Fees collected by DeFi platforms are distributed to depositors or used for other purposes.
In contrast, the Revenue-to-Fees ratio for Compound and Aave is lower, at 17% and 14% respectively, demonstrating that major platforms indeed prioritize ecosystem incentives over short-term profits.
Overall, Compound’s development status is unfavorable.
As a veteran project that released its whitepaper as early as 2019, by April 2025, key metrics such as revenue and TVL have been surpassed by other competitors.
From 2022 to 2024, Compound’s Fees have significantly declined for three consecutive years, with Revenue only showing a recovery in 2024, indicating that the project team increased the proportion of Revenue extracted from Fees.
This suggests that Compound is facing development difficulties and has had to focus more on short-term profits.
In contrast, Aave’s situation is noticeably better.
Aave’s Fees surpassed Compound starting in 2022, and despite the same downward trend in the Lending sector, Aave still achieved 2.5x Fees growth and 1.9x Revenue growth in 2024.
In April 2025, the latest market capitalization of the COMP token is approximately $350 million, a decline of over 90% from its peak in 2021, equivalent to 16% of its TVL (approximately $2 billion).
Aave’s latest market capitalization is approximately $2 billion, a decline of 72% from its peak in 2021, equivalent to 12% of its TVL (approximately $17.8 billion). The other two projects with larger TVL than Compound (JustLend and Morpho) are only 8%.
This also reflects that COMP’s valuation is relatively high.
Tokenomics:
Next, this report analyzes Compound’s Tokenomics from the following four dimensions and compares it with Aave to identify the reasons why Compound’s development lags behind Aave, hoping to provide a reference for the economic model design of new projects.
1. Token Supply and Distribution
The total supply of COMP is 10 million tokens, with an initial distribution rule of 49.95% to project shareholders and the team, and 50.05% to users, showing a less pronounced inclination toward decentralization. Aave’s total supply is 16 million tokens, with 80% allocated to the community, demonstrating a stronger inclination toward decentralization.
2. Incentive Mechanism
According to Compound’s official website, the project team plans to distribute COMP over four years. As of the latest update on April 11, 2025, the daily distribution is 1,723 tokens, 40% faster than the initial rate (1,234 tokens per day).
This reflects that, in a lagging position, Compound’s project team hopes to attract more users by increasing incentive intensity.
However, this has not achieved the expected results because simply increasing the number of tokens distributed does not enhance users’ sense of value; on the contrary, it may make users feel that the token’s value has decreased, i.e., things given away for free are often perceived as worthless.
A truly effective mechanism is to align token distribution with the platform’s development goals, i.e., to give users a reason for receiving tokens, fostering a sense of value&gain.
For example, Aave distributes tokens as staking rewards to liquidity providers, a mechanism that is more conducive to attracting users to provide liquidity to the platform long-term.
3. Value Accrual
Compound’s project team did not fully consider the application scenarios for the token from the outset, as reflected in:
The economic model design prioritizes incentivizing liquidity mining over encouraging COMP holders. This approach may seem reasonable on the surface, as prioritizing revenue distribution to depositors can maintain high TVL, thereby increasing user appeal, but in practice, it has proven counterproductive. The reason is that if users cannot experience the benefits of holding COMP, they will always feel something is missing, and this “wanting it all” mentality is mainstream in today’s era, which project teams must accommodate. At the same time, this design by the project team has initiated a death spiral: low returns from holding COMP harm the project’s reputation, leading to fewer new users, which in turn slows TVL growth.
COMP holders, with access to governance with a high threshold, have almost no eligibility to share in the project’s revenue. From a human nature perspective, for retail investors, so-called governance rights are a relatively abstract concept, far less attractive than tangible profit-sharing. It can be said that the project team made the mistake of prioritizing the abstract over the practical in this regard.
COMP lacks a clear buyback or burn mechanism, meaning the project team did not design a safety net for the token price, leaving almost no contingency measures when the price experiences significant declines.
At the same time, as mentioned earlier, COMP is being distributed at an accelerated rate, which may dilute its value. Aave’s design of token application scenarios is noticeably more robust. AAVE holders can stake in the Safety Module to share project revenue, including lending interest and flash loan fees.
Aave also lacks a clear buyback or burn mechanism, but Aave has had proposals discussing the use of project Revenue to buy back and burn AAVE, indicating that Aave is more likely to implement a buyback or burn mechanism, providing an additional layer of protection for the token price.
4. Governance and Power Distribution
According to the latest Etherscan data on April 11, 2025, the top 10 addresses hold 39.1% of Compound, and the top 23 addresses hold over 50%.
What does this mean?
Since ancient times, the results of purely vote-based decentralized governance have generally been inferior to those of conscientious elite governance, which is why absolute democracy does not exist in the world today.
The former’s advantage is absolute democratic decentralization, but its disadvantage is a heavy reliance on the quality and capability of proposers and the quality of proposals, and it is susceptible to low-quality populist influences that lead to poor decisions ignoring the project’s long-term interests, potentially voting itself into ruin. The latter is more like Plato’s ideal republic, with the advantage that multiple elites balancing each other can ensure a baseline for decision-making, but the disadvantage is the inability to achieve the ideal of decentralization, and multiple elites may collude to harm the interests of the majority.
From this perspective, Compound’s relatively concentrated governance power cannot necessarily be considered a disadvantage, or at least it cannot be seen as the reason for its recent developmental setbacks.
At the same time, when combining Compound’s governance design with the aforementioned value accrual design, the project team’s thinking becomes clearer: since substantive decisions are made by us large holders (with a threshold: holding more than 100,000 COMP to participate in decision-making), and we can certainly share revenue through equity, we may not care as much about whether we and other users can share revenue through the token.
This essentially reflects that Compound’s project team’s considerations may not be comprehensive enough, and it also reflects that its shareholders have not provided good suggestions for the project’s design.
In the DeFi era, technological advancements have made it possible for humanity to return to decentralized lending. Although existing DeFi platforms are not yet perfect, the industry’s ecosystem activity still needs improvement, and various risk events continue to emerge, we should still maintain confidence and attention toward DeFi projects.
The Lending sector appears to be in an overall downturn on the surface, but this is merely normal industry fluctuation. When the overall macroeconomic environment is sluggish, lending activities inevitably decrease, and decentralized lending behaviors naturally follow suit.
During industry troughs, the phenomenon of one dominant player in the Lending sector becomes particularly pronounced.
Compound has fallen behind Aave and several emerging competitors, and considering the flaws in its economic model design, it will be difficult for it to stage a comeback.
The COMP token, compared to Aave, is slightly overvalued, and its price may decline in the future.
The design of a project’s economic model must fully consider human nature to create a win-win, sustainable ecosystem. This is consistent with customer psychology studies in traditional industries. If DeFi lending platforms aim to achieve significant development, they need to drive sustained participation from users and partners in more aspects.
About the author: Andrew LIU is a finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Biotech.
by Andrew LIU
April 2025
Is Compound’s token economics (Tokenomics) and financial model sustainable in the long term?
Compared to Aave, what advantages does Compound hold, and what are its shortcomings?
In the current market environment, which protocol has greater growth potential?
Several thousand years ago in ancient Greece, people (including Aristotle) considered charging interest on loans to be sordid and contrary to the will of the gods. But just a few hundred years later, people broke through this restriction and accepted the existence of loan interest.
Lending relationships initially occurred between individuals, inherently decentralized. With the emergence of governments and banks, centralized lending correspondingly arose. The primary advantage of centralized lending lies in the ability of a third party, outside the borrowing and lending parties, to handle default situations based on fair and just rules, but this is not the reason for its long-term existence.
The foundation for the long-term existence of centralized lending is precisely due to the “inabilities” in people’s original decentralized lending relationships:
The borrower has a relatively high probability of being unable to strictly adhere to the contract, such as willingly transferring collateral to the lender;
The weaker lender has a relatively high probability of being unable to take effective action to protect their own interests;
Even if one party takes action, both parties are unable to ensure whether that action is fair and just.
DeFi lending technology has disrupted the above foundation, making the return of lending relationships to decentralization a highly probable event.
From an underlying logic perspective, DeFi lending can be divided into two forms: the first is the original purely decentralized lending method (this report temporarily refers to it as basic DeFi P2P), and the second is decentralized lending platforms (DeFi Lending Platforms). Through the comparison in the table below, we can see that DeFi Lending Platforms have greater potential for long-term development.
The business model of DeFi lending platforms is essentially the same as that of traditional centralized banks, with revenue primarily derived from interest and service fees; however, because they are based on blockchain and smart contracts, their operational costs are significantly lower than those of traditional centralized banks. Therefore, the emergence of DeFi lending platforms is historically inevitable.
This report selects two currently influential DeFi platforms and, through comparative analysis, presents the industry’s development status, competitive landscape, and future directions and opportunities.
According to DeFiLlama data, as of April 7, 2025, the total value locked (TVL) in the Lending sector is $37.5 billion, with Compound and Aave accounting for $2.0 billion and $16.8 billion, representing 5.3% and 44.7% of the Lending sector, respectively.
Other top-ranking participants are shown in the table below:
In addition to TVL, Fees and Revenue are two key metrics, where:
Fees: Reflect the cost of protocol usage and user activity; higher Fees indicate stronger borrowing demand.
Revenue: Reflects the protocol’s own profitability, typically a portion of Fees.
According to DeFiLlama data, the 30-day Revenue-to-Fees ratio in the Lending sector is 19%, meaning that over 80% of the Fees collected by DeFi platforms are distributed to depositors or used for other purposes.
In contrast, the Revenue-to-Fees ratio for Compound and Aave is lower, at 17% and 14% respectively, demonstrating that major platforms indeed prioritize ecosystem incentives over short-term profits.
Overall, Compound’s development status is unfavorable.
As a veteran project that released its whitepaper as early as 2019, by April 2025, key metrics such as revenue and TVL have been surpassed by other competitors.
From 2022 to 2024, Compound’s Fees have significantly declined for three consecutive years, with Revenue only showing a recovery in 2024, indicating that the project team increased the proportion of Revenue extracted from Fees.
This suggests that Compound is facing development difficulties and has had to focus more on short-term profits.
In contrast, Aave’s situation is noticeably better.
Aave’s Fees surpassed Compound starting in 2022, and despite the same downward trend in the Lending sector, Aave still achieved 2.5x Fees growth and 1.9x Revenue growth in 2024.
In April 2025, the latest market capitalization of the COMP token is approximately $350 million, a decline of over 90% from its peak in 2021, equivalent to 16% of its TVL (approximately $2 billion).
Aave’s latest market capitalization is approximately $2 billion, a decline of 72% from its peak in 2021, equivalent to 12% of its TVL (approximately $17.8 billion). The other two projects with larger TVL than Compound (JustLend and Morpho) are only 8%.
This also reflects that COMP’s valuation is relatively high.
Tokenomics:
Next, this report analyzes Compound’s Tokenomics from the following four dimensions and compares it with Aave to identify the reasons why Compound’s development lags behind Aave, hoping to provide a reference for the economic model design of new projects.
1. Token Supply and Distribution
The total supply of COMP is 10 million tokens, with an initial distribution rule of 49.95% to project shareholders and the team, and 50.05% to users, showing a less pronounced inclination toward decentralization. Aave’s total supply is 16 million tokens, with 80% allocated to the community, demonstrating a stronger inclination toward decentralization.
2. Incentive Mechanism
According to Compound’s official website, the project team plans to distribute COMP over four years. As of the latest update on April 11, 2025, the daily distribution is 1,723 tokens, 40% faster than the initial rate (1,234 tokens per day).
This reflects that, in a lagging position, Compound’s project team hopes to attract more users by increasing incentive intensity.
However, this has not achieved the expected results because simply increasing the number of tokens distributed does not enhance users’ sense of value; on the contrary, it may make users feel that the token’s value has decreased, i.e., things given away for free are often perceived as worthless.
A truly effective mechanism is to align token distribution with the platform’s development goals, i.e., to give users a reason for receiving tokens, fostering a sense of value&gain.
For example, Aave distributes tokens as staking rewards to liquidity providers, a mechanism that is more conducive to attracting users to provide liquidity to the platform long-term.
3. Value Accrual
Compound’s project team did not fully consider the application scenarios for the token from the outset, as reflected in:
The economic model design prioritizes incentivizing liquidity mining over encouraging COMP holders. This approach may seem reasonable on the surface, as prioritizing revenue distribution to depositors can maintain high TVL, thereby increasing user appeal, but in practice, it has proven counterproductive. The reason is that if users cannot experience the benefits of holding COMP, they will always feel something is missing, and this “wanting it all” mentality is mainstream in today’s era, which project teams must accommodate. At the same time, this design by the project team has initiated a death spiral: low returns from holding COMP harm the project’s reputation, leading to fewer new users, which in turn slows TVL growth.
COMP holders, with access to governance with a high threshold, have almost no eligibility to share in the project’s revenue. From a human nature perspective, for retail investors, so-called governance rights are a relatively abstract concept, far less attractive than tangible profit-sharing. It can be said that the project team made the mistake of prioritizing the abstract over the practical in this regard.
COMP lacks a clear buyback or burn mechanism, meaning the project team did not design a safety net for the token price, leaving almost no contingency measures when the price experiences significant declines.
At the same time, as mentioned earlier, COMP is being distributed at an accelerated rate, which may dilute its value. Aave’s design of token application scenarios is noticeably more robust. AAVE holders can stake in the Safety Module to share project revenue, including lending interest and flash loan fees.
Aave also lacks a clear buyback or burn mechanism, but Aave has had proposals discussing the use of project Revenue to buy back and burn AAVE, indicating that Aave is more likely to implement a buyback or burn mechanism, providing an additional layer of protection for the token price.
4. Governance and Power Distribution
According to the latest Etherscan data on April 11, 2025, the top 10 addresses hold 39.1% of Compound, and the top 23 addresses hold over 50%.
What does this mean?
Since ancient times, the results of purely vote-based decentralized governance have generally been inferior to those of conscientious elite governance, which is why absolute democracy does not exist in the world today.
The former’s advantage is absolute democratic decentralization, but its disadvantage is a heavy reliance on the quality and capability of proposers and the quality of proposals, and it is susceptible to low-quality populist influences that lead to poor decisions ignoring the project’s long-term interests, potentially voting itself into ruin. The latter is more like Plato’s ideal republic, with the advantage that multiple elites balancing each other can ensure a baseline for decision-making, but the disadvantage is the inability to achieve the ideal of decentralization, and multiple elites may collude to harm the interests of the majority.
From this perspective, Compound’s relatively concentrated governance power cannot necessarily be considered a disadvantage, or at least it cannot be seen as the reason for its recent developmental setbacks.
At the same time, when combining Compound’s governance design with the aforementioned value accrual design, the project team’s thinking becomes clearer: since substantive decisions are made by us large holders (with a threshold: holding more than 100,000 COMP to participate in decision-making), and we can certainly share revenue through equity, we may not care as much about whether we and other users can share revenue through the token.
This essentially reflects that Compound’s project team’s considerations may not be comprehensive enough, and it also reflects that its shareholders have not provided good suggestions for the project’s design.
In the DeFi era, technological advancements have made it possible for humanity to return to decentralized lending. Although existing DeFi platforms are not yet perfect, the industry’s ecosystem activity still needs improvement, and various risk events continue to emerge, we should still maintain confidence and attention toward DeFi projects.
The Lending sector appears to be in an overall downturn on the surface, but this is merely normal industry fluctuation. When the overall macroeconomic environment is sluggish, lending activities inevitably decrease, and decentralized lending behaviors naturally follow suit.
During industry troughs, the phenomenon of one dominant player in the Lending sector becomes particularly pronounced.
Compound has fallen behind Aave and several emerging competitors, and considering the flaws in its economic model design, it will be difficult for it to stage a comeback.
The COMP token, compared to Aave, is slightly overvalued, and its price may decline in the future.
The design of a project’s economic model must fully consider human nature to create a win-win, sustainable ecosystem. This is consistent with customer psychology studies in traditional industries. If DeFi lending platforms aim to achieve significant development, they need to drive sustained participation from users and partners in more aspects.
About the author: Andrew LIU is a finance leader with CPA & CMA credentials, experienced in Fortune 500 and startups across Internet, Green Energy, Retail, Education, and Biotech.
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