Storia crypto
2020: liquidity mining turns usage into a token reward
Compound's distribution helped popularise an incentive model that made activity and sustainable demand harder to separate.
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Paying people to use a protocol
Compound began distributing COMP to users in June 2020. The contemporary governance announcement and launch reporting document the transition. Supplying or borrowing could now produce governance-token rewards alongside the lending position's ordinary interest economics.
That created a reason to enter a transaction even when its standalone borrowing and lending spread was unattractive. A user could accept a financing cost if the distributed token was worth more. Other participants could repeat or combine positions to maximise rewards, increasing reported activity without an equivalent increase in final demand for useful credit.
The accounting problem
Suppose a position earns $20 in borrower interest, receives $80 in newly issued reward tokens and pays $30 in costs. Its current profit is $70 if the rewards can be sold at that value. Only $20 came from borrower interest. If the token reward ends or its price falls, the advertised return can disappear while the same smart contracts keep operating.
This is why a history of DeFi needs both engineering and token distribution. Yield sources, reused collateral and governance concentration explain different consequences of the same incentive structure. High usage during a subsidy period does not settle what remains after the subsidy.