A number of analysts have suggested the meteoric price performance of the Compound Governance Token (COMP) may have been orchestrated using derivatives.

After initially changing hands for approximately $80 each upon its June 18 listing on Poloniex, COMP quickly rallied 500% to post highs above $380 June 21 as news of a Coinbase listing appeared to entice buyers.

COMP/USDT on Poloniex, 1hr chart: TradingView

Since the high, COMP has shed 34% of its value and is currently trading for $253. 

Was COMP’s rally driven by organic demand?

In a June 25 article, independent crypto blogger and Decentraland product lead Tony Sheng noted that many traders over the past week or so believed that triple-figure priced COMP was extremely overvalued, resulting in bears paying from 5% to 10% in daily fees to short the asset using derivatives.

Despite this bearish sentiment and the fact that COMP tokens can be earned through yield farming, COMP prices continued to rally aggressively, with Sheng suggesting that disproportionate volume on FTX’s derivatives largely fuelled the rally.

While spot listings on FTX and Poloniex generated $1.5 million in 24-hour volume leading up to COMP’s Coinbase listing, more than $6 million worth of perpetual swap contracts were traded on FTX over the same period.

With COMP comprising a highly illiquid market upon launch, the article suggests that traders may have been able to drive up spot prices with relatively small buy orders to ensure profits on much larger long positions taken using FTX’s contracts:

“The long and short of it (haha) is that because of the relatively large size of the COMP Perpetual Swap market, it would be profitable to buy the Perp and then buy spot in significant enough size to move the price, amplifying gains in the Perp and squeezing the shorts.”

On June 24, the founder of crypto asset manager Carbono, Raul Marcos, tweeted:

“Trading $COMP futures right now is a masterclass on market manipulation.”

Derivatives incentivize manipulating illiquid markets

While Sheng notes that “it’s not even clear whether anybody actually manipulated the market,” he asserts that COMP’s price action offers “a very clear warning of what’s to come if teams continue to release tokens ‘Compound style’ with an illiquid AMM listing [...] combined with yield farming.”

“Then other teams have an incentive to release derivatives products to capture some of that attention,” he added.

.Balancer has just released its governance token BAL, which followed the model used by COMP and has seen similarly violent price action driven by both bullish and bearish momentum.

Centralized governance?

Compound has also come under fire for the highly centralized current distribution of its governance tokens, which heavily favors the project’s founders and the venture capital firms that invested in Compound’s $25 million Series A in November 2019.

The votes of just three entities — Polychain Capital, A16Z , and Compound CEO Robert Leshner — are equal to roughly 130% of the combined votes of all other COMP holders.