Compound (COMP) Bug Causes $90M Accidental Payout

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In Brief
  • Compound, a DeFi protocol recently lost $90M worth of tokens due to a “one-letter software bug”

  • Founder urges return of money, in a tweet, which was later retracted

  • No supplied or borrowed funds were at risk

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Staking protocol Compound, the world’s fifth-largest DeFi protocol, has accidentally dropped $90M into users’ hands after a buggy software upgrade.

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Users of COMP tokens were unexpectedly awarded $90M worth of COMP tokens after a failed software upgrade. Compound is a decentralized finance (DeFi) autonomous interest rate protocol, which uses self-executing smart contracts on top of a blockchain. Normally, users would provide their cryptocurrency to borrowers at a set interest rate, which is quantified as Annual Percentage Yield (APY). Hence, the payout of $29 million worth of COMP tokens to one user, and 70 million to another was far beyond what would normally be expected. At the same time, the founder of Compound, Robert Leshner, pled for the return of the COMP tokens, even threatening via a tweet that the company would make public private information about its users, as well as reporting recipients to the Internal Revenue Service. Leshner later retracted the tweet.

Pay IRS vs pay Compound

It is not possible for the company to reclaim its money without rolling back the [block]chain, according to Bitcoin developer Ben Carman, and no one is obliged by law to pay Compound back its money. If users choose to keep 10% and return the rest of the erroneously awarded tokens, then they would effectively not have to report the returned coins as income to the IRS. If they choose to keep all the tokens, then they would be required to pay income tax on the collective token value at the time of receipt, should Compound report them to the IRS. A DeFi protocol called Alchemix recently underwent a similar loss, and the majority of users who erroneously received extra rewards returned them.

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However, Alchemix just lost $4.8M, compared to $90M lost by Compound. To Compound’s credit, however, no supplied or borrowed funds could were at risk. It does, however, raise questions as to whether this incident could happen again.

The DeFi space is accruing investor interest

San Francisco-based Compound is one of several DeFi protocols, which use smart contracts on the blockchain to recreate traditional financial institutions. They are the world’s fifth-largest protocol, worth $9.65B, and raised $25M in Series A funding from venture capital firm Andreessen Horowitz.  The founder Robert Leshner is a former economist, who felt that the cryptocurrency world was stuck operating in a zero-interest environment, and was thus inspired to start Compound.

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