Compound (COMP) token outperforms the market as DeFi TVL rises to $14.4B

The price of COMP, the governance token of the decentralized finance (DeFi) giant Compound, has been surging while the wider crypto market has entered a correction. Despite the ongoing cryptocurrency market slump, the token has rallied 56% in the past week.

Unusually low funding rate and spot market accumulation

There are various potential reasons behind the sudden rally of COMP. Traders have pinpointed the unusual market dynamic on futures exchanges, where the token's funding rate remained heavily negative.

The funding rate of an asset in the futures market drops when sellers aggressively short it. But, when the asset’s price increases with a negative funding rate, it opens the door for a short squeeze.

COMP’s recent rally has likely been fueled by a short squeeze across major futures exchanges. This indicates that while the futures market has been betting against the token, traders in the spot market were busy accumulating it.

This trend suggests that some investors might be speculating on a partnership or a major network upgrade in the near term. Otherwise, the futures market heavily shorting COMP while the spot market buys the token would seem unusual.

A pseudonymous trader emphasized that the negative funding rate of COMP caused shorts to pay longs 0.021% of their positions every hour. For context, if a trader had a $100,000 long position on COMP, at that rate, the funding rate would have been $21 per hour. The trader said:

“Funding is insanely negative on $COMP. Shorts are paying longs 0.021% every hour. And did I mention $COMP is up double-digit % today while the rest of the market is dumping? Absolutely unreal.”

So far, Compound has not announced any high-profile partnership but recently Robert Leshner, the founder of the protocol, praised a proposal from a developer named “Gauntlet” and described it as a “significant improvement to Compound.”

The proposal filed by Gauntlet seeks to do three things. First, it removes unused code from the “Comptroller,” which is Compound protocol’s risk management layer. It also adds a “Grant” function that allows the Compound governance community to send COMP for grants. The final part of the proposal adds a “Contributor” function to allow governance to stream COMP to other addresses.

Referring to the proposal from Gauntlet, Leshner said the proposal is exciting and significant for Compound. He said:

“This proposal is exciting for two reasons; Chart with upwards trend It's a significant improvement to Compound Banknote with yen sign The developer ( @gauntletnetwork ) will receive 1000 $COMP (~$170k) for their work on this and upcoming proposals Expanding the protocol is more rewarding than ever”

However, it would be uncommon for a community proposal to cause a massive price spike within merely days for a major DeFi token.

So what's causing the rally?

Based on the market trend, a combination of three factors likely led COMP to rally within a short period.

Many traders in the futures market appeared to have shorted COMP in the past few days. This catalyzed a short squeeze, and as a result, pushed the price of COMP upwards.

The total value locked in DeFi has also surged to $14 billion, and with Compound being the third-largest DeFi protocol, the overall growth of the space could have benefited COMP.

Traders might also expect an announcement or a network upgrade soon, but there are no signs of one just yet.