The governance token of Compound, COMP, has been proposed as a collateral of the DAI stablecoin.
COMP is a token that was launched recently. It is used in the governance of Compound for transferring the power and management of the network into the hands of users and then allowing them to vote for decisions to be made on protocol changes as well as to propose various solutions and improvements to the protocol. Basically, it is like a utility token used for voting.
Considering how easy it is to get some of these tokens for free by lending or borrowing stablecoins, there has been a significant increase in the price of COMP. The most effective way to get them is to borrow USDT and this can also be seen from the data, as the profit is higher than the cost of paying off the loan.
Given the incredible return on investment and the price that this token is reaching, the community has launched a pre-proposal to decide whether or not to use COMP as collateral to generate the DAI stablecoin and thereby also have this option as well as more liquidity.
In fact, it should not be forgotten that currently the token is traded at over $300 and therefore is very interesting as collateral.
Although it is true that the COMP token is on the crest of the wave and currently has a very tempting price, it is necessary to be cautious because this system of distribution of free tokens has set in motion a mechanism that is not sustainable for long, partly because the tokens are limited to just over 4 million and many people predict that it will lose part of its value after they terminate.
Pros and cons of the collateral for DAI
In this regard, it is important to control the liquidation rate, as the price could fall by up to 90% and therefore close all positions, which is why it is useful to have very high collateral.
However, let’s not forget that the COMP token is designed for voting and actively participating in the governance of the protocol. Consequently, if DAI were to be added as collateral, then COMP holders would have a greater interest in staking in a pool rather than keeping it unproductive.
Another risk to keep in mind is that if the lending of a governance token were to be made possible, nothing would prevent users from borrowing COMP to vote on an update, which could undermine the concept of decentralized governance.
For this reason, at least at the moment, the crypto community is in the position of not wanting to approve this kind of collateral, even though other platforms could implement it, labelling it as high-risk.