Compound '5x Overvalued' as COMP Farming Accounts for 88% of Its Assets

Cointelegraph spoke with Pankaj Balani, the CEO of derivatives platform Delta Exchange, to learn more about his company's research exercise in trying to give a fair value to the Compound protocol token.

The monetary value of governanceThe researchers initially focused on assigning a monetary value to the ability of governing the protocol.

The researchers assumed that 20% of its value lies in governance to account for what they believe is higher freedom in decision-making.

While Compound is not a bank, the protocol functions in a similar way and can be imagined to be capturing the same value that a bank would in its place.

Traditional banks are valued at about two or three times their book value.

For COMP, researchers multiplied the book value five times to account for future growth.

That still resulted in a "Fair value" of $40, compared to its current price of $173. Researchers used a book value of $400 million, which was equal to the assets borrowed from the protocol in early July, according to DeBank data.

Is the valuation fair?The team noted that the valuation method rests on some key assumptions - notably the multiplier for the book value.

Compound's market capitalization is now about half the total value borrowed on the protocol - but there is a very important caveat to this as well.

A similar story happened with USDC, where the value jumped from $30 million to about $180 million virtually overnight.