Compound encountered a governance attack, who is the mastermind behind it?

Original authors: @StableScarab, @t__norm

Original compilation: Peisen, BlockBeats

Editor's Note:

On July 29, the recently passed proposal by the DeFi lending protocol Compound sparked accusations of governance attacks among community members. Proposal 289 allocates 5% of Compound's funds (approximately $24 million worth of 499,000 COMP tokens) to a yield protocol designed by the "Golden Boys" for a duration of one year.

The proposal barely passed with 682,191 votes to 633,636 votes, but community members claim that a small group was able to force the proposal through the approval process after purchasing large amounts of tokens on the open market. Compound Finance security advisor Michael Lewellen stated that several accounts hoarding COMP tokens on the open market are related to proposals that allocated COMP to a product called goldCOMP created by an organization named Golden Boys.

@t__norm pointed out that this is not the first time Golden Boys has acted; as early as 2022, they attacked Balancer using similar tactics, leading to an "arms race" between Balancer stakeholders, Humpy, and community stakeholders like Aura.

The Compound treasury has just exited $25 million, which is referred to as a governance attack.

Who is the mastermind?

You may have never heard of one of the most significant whales in DeFi—Humpy (@Titanium_32). His story spans several years, multiple DeFi protocols, and millions of dollars.

Humpy is not your typical whale. He is a major player in multiple protocols, cleverly leveraging incentive designs to earn a substantial amount of governance tokens. His tactics have allowed him to accumulate wealth and controversial control, most notably in his takeover of Balancer in 2022.

The Balancer Crisis Two Years Ago

Over the course of eight months in 2022, Balancer quietly experienced one of the most controversial (and enlightening) governance legends of the year.

The launch of veBAL was intended to align token holders with the DAO's goals and protocol revenues. But what happens when the incentive system produces unintended consequences?

Balancer has struggled to align its system with the activities of a specific veBAL whale named Humpy. When incentives fail, Balancer becomes embroiled in a cat-and-mouse game to control the profit-seeking behavior of the whale through governance.

Humpy's strategy is simple: dominate the liquidity of mining pools, vote actively on gauges, and collect BAL emissions. The only problem is that the gauges he uses generate very little revenue for Balancer.

Humpy's strategy was adjusted by Balancer to prevent them from farming low-revenue pools. Humpy would discover new loopholes every time the incentive metric framework was updated.

Unfortunately, Humpy accidentally trapped their capital in the illiquid tetuBAL pool, forcing them to double down on their position at all costs to protect their gauge strategy.

The events that transpired can only be described as an arms race, as Balancer stakeholders, Humpy, and community stakeholders like Aura fought for enough governance power to defend their interests.

As Humpy's governance activities escalated, tensions boiled over, making it difficult for the DAO to compete with his voting power, leading to multiple proposals being re-voted and resulting in a controversial strategy to reduce the friction of unlocking Aura's total governance power.

Fortunately, the DAO was able to reach an agreement with the whale in today's concluded voting on the peace treaty proposal.

If you are interested in DAO governance and incentive design, or want to hear a captivating story about power and money, check out the latest Governor Note, which delves into this legendary story, its implications, and outcomes.

Where is the way out for decentralized governance?

In the latest governance attack, Humpy used his voting power to directly transfer $25 million from the Compound treasury into his own gold COMP treasury. This allows users to earn yields on their COMP while enhancing Humpy's influence. While it is legal, it raises questions about decentralized governance.

Humpy's influence extends beyond governance. He has his own token for his "Golden Boys" community. After today's Compound event, its value doubled as speculators bet on Humpy's ability to continue finding "high-profit" governance or farming strategies.

This event highlights a key issue in DAOs and DeFi protocols: how decentralized are they when a whale can influence significant decisions in their favor? Humpy's actions serve as a case study in the power dynamics of decentralized governance and incentive design.

What do you think? Is this a governance attack or within the rules of the game? One thing is for sure, this will not be the last time.