Compound was once the default answer for crypto lending in decentralized finance. Launched in 2018 by Robert Leshner and Geoffrey Hayes, the protocol lets users earn interest or borrow assets directly on Ethereum, in a fully decentralized manner, without banks or brokers.

For early DeFi users, it felt obvious. The project raised millions in backing from Andreessen Horowitz, Bain Capital Crypto, Paradigm, and Coinbase Ventures.

Compound also helped popularize yield farming, especially after launching its governance token, COMP, in 2020, which turned passive users into active participants.

By 2021, Compound was the core infrastructure for crypto lending. Billions of dollars sat in its smart contracts. Other protocols like Yearn Finance and exchanges like Coinbase also integrated it, cementing the protocol’s dominance in the space.

That changed in October 2021, when the protocol’s liquidity began to thin quickly.

The decline is evident in Compound’s total value locked (TVL), which fell sharply from a November 2021 peak of $12 billion to just $2.2 billion by November 2022, per data from DefiLlama.

Value Leak

The problems began when a protocol update called “Proposal 62,” intended to adjust COMP rewards, went live with a bug. As a result, the protocol began overpaying rewards, leaking tens of millions of dollars’ worth of COMP to users.

Because of how Compound governance worked, the team couldn’t immediately stop it. The fix had to wait through a mandatory timelock. In the meantime, tokens kept flowing out, and confidence in the protocol’s stability went with them.

In an X post on Sept. 30, 2021 Leshner asked recipients who received excess COMP to return it and offered a 10% reward for whitehat returns.

He added that “otherwise, it’s being reported as income to the IRS, and most of you are doxxed.” The threat sparked swift backlash from the crypto community, and Leshner later called it a bone-headed post and walked it back.

But funds continued to leave, and tens of millions of dollars flowed out of the protocol in the weeks after the bug was discovered. Even though the issue was fixed, the incident was enough to shake confidence.

Bad Timing

It’s hard to say if the October 2021 bug alone ended Compound’s dominance, but it clearly left the protocol vulnerable at a bad time. By December 2021, Bitcoin had started falling from its $69,000 all-time high, signaling the start of a multi‑year crypto bear market.

As crypto prices fell, lending activity slowed across DeFi as borrowers began pulling funds. For Compound, which relied heavily on pooled liquidity markets, those outflows hit harder than rivals like Aave and Maker, which were built around isolated or more flexible risk models.

The contrast became clearer as the 2022 crypto winter came in. After Terra’s multi-billion dollar collapse, the implosion of FTX, and a string of centralized lender failures, the crypto community grew more sensitive to systemic risk.

Behind the scenes, leadership was changing too. Leshner stepped back from day-to-day involvement, and by June 2023, he left Compound and founded Superstate, a tokenization platform that allows companies to issue and trade their public shares on blockchain.

As a result, today Compound looks markedly different from its peak, when crypto lending was still taking off. Today, Compound’s once double-digit TVL sits at just below $1.4 billion. That makes it the 7th largest lending protocol in DeFi by TVL, where Aave dominates with a TVL of nearly $27 billion.

Monthly fees have dropped from a 2021 peak of nearly $47 million to about $3.5 million, while the protocol’s highest monthly revenue since the start of 2025 was $888,666, down from an all-time high of $5.14 million in April 2021.

Compound declined The Defiant’s request for comment for this story.

Bitcoin price is attempting another breakout toward $70,000 after weeks of choppy consolidation. BTC trades at $69,815 at publication, sitting just below the $70,610 resistance level. The largest cryptocurrency is trying to recover recent losses, yet mixed on-chain and derivatives signals present an uncertain short-term outlook.

Market participants are closely watching this psychological threshold. A sustained move above $70,000 could shift sentiment decisively. However, persistent bearish positioning suggests that volatility may intensify before a clear trend emerges.

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Bitcoin Shorts Resemble The Past

Aggregated funding rate data across major crypto exchanges shows an extreme surge in short positioning. Current negative funding levels are the deepest since August 2024. That period ultimately marked a significant Bitcoin bottom.

In August 2024, traders crowded into downside bets as funding rates plunged. Instead of continuing lower, Bitcoin reversed sharply. The reversal triggered widespread short liquidations and fueled an approximately 83% rally over the following four months.

Want more token insights like this? Sign up for Editor Harsh Notariya’s Daily Crypto Newsletter here.

Deeply negative funding rates signal heavy bearish positioning and widespread fear, uncertainty, and doubt (FUD). While this setup does not guarantee immediate upside, it creates a fragile structure. If price rises, forced short-covering could amplify volatility and accelerate upward momentum.

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Bitcoin Towards Capitulation

The Net Unrealized Profit and Loss, or NUPL, indicator has returned to the Hope/Fear zone near 0.18. This reading shows that profit cushions among holders are thin. When NUPL enters this regime, market behavior tends to become reactive.

Historically, declines into this zone often preceded extended weakness. Panic selling typically intensifies before a durable bottom forms. Unless capitulation resets sentiment, Bitcoin may remain vulnerable to deeper pullbacks before stabilizing.

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What Does The Short-Term Outlook Look Like?

Short-term technical cues suggest improving momentum. The Chaikin Money Flow, which measures capital inflows and outflows, is approaching the zero line. A confirmed move into positive territory would signal renewed demand for Bitcoin.

Simultaneously, the Moving Average Convergence Divergence indicator is nearing a bullish crossover. A confirmed crossover would indicate a shift from bearish to bullish momentum. However, early signals require validation through sustained price strength.

Even with improving indicators, broader sentiment remains cautious. Shorts are unlikely to close voluntarily under weak conditions. This dynamic increases the probability that a price-driven liquidation event becomes the catalyst for recovery.

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BTC Price Needs a Strong Push

Bitcoin trades at $69,815 and remains capped below $70,610 resistance. The $70,000 level represents a critical psychological barrier. A decisive close above this threshold could trigger renewed bullish momentum and attract fresh capital inflows.

However, bearish pressure persists in derivatives markets. Continued dominance of short contracts could keep BTC below $70,000. A breakdown below $65,156 support may trigger long liquidations and intensify downside volatility.

If Bitcoin secures strong investor support and overcomes selling pressure above $70,000, upside targets emerge. A rally toward $73,499 could develop quickly.

Sustained strength may extend gains toward $76,685, invalidating the bearish thesis and confirming a broader recovery attempt.

Blockchain technology is increasingly being viewed as a practical backbone for distributing social benefits, though regulatory guardrails remain a central challenge for governments testing on-chain tools. In the Marshall Islands, guidance from Guidepost Solutions on regulatory compliance and sanctions framework accompanies the rollout of a tokenized debt instrument known as USDM1, issued by the state and backed 1:1 by short-term U.S. Treasuries. Separately, the country launched a Universal Basic Income (UBI) program in November 2025, delivering quarterly payments directly to citizens via a mobile wallet. As proponents point out, digital delivery can accelerate provisioning and provide auditable trails for expenditures, but the path to widescale adoption is entangled with anti-money laundering (AML) and know-your-customer (KYC) requirements that regulators say are non-negotiable.

Key takeaways

• Tokenized government debt is expanding, with asset-backed bonds that settle rapidly and offer fractional ownership gaining traction in pilots and policy discussions.
• The Marshall Islands’ UBI program, distributed through a digital wallet since November 2025, exemplifies how on-chain tools can reach citizens directly, pending robust AML/KYC controls.
• Regulators view AML and sanctions compliance as the largest risk in issuing on-chain bonds to the public, underscoring the need for rigorous oversight in tokenized finance.
• Data show a sharp rise in tokenized U.S. Treasuries, illustrating growing demand for programmable settlement and auditable fund flows in public debt markets.
• Analysts forecast meaningful growth for the tokenized bond market, with projections pointing to hundreds of billions of dollars by decade’s end, contingent on regulatory clarity.

Market context: The push toward tokenized government debt and on-chain social benefits sits amid a broader push to modernize public finance and expand financial inclusion. Jurisdictions are piloting tokenized instruments to cut settlement times and reduce transaction costs, while also grappling with the necessary compliance architecture. The United Kingdom has taken a parallel step, with HSBC appointed for a tokenized gilt pilot, signaling cross-border interest in the model. Data from Token Terminal indicate the tokenized U.S. Treasury market has grown more than 50-fold since 2024, highlighting the rapid shift toward on-chain finance in a $X trillion debt ecosystem. Analysts, including Lamine Brahimi, co-founder of Taurus SA, project the tokenized bond market could surge to around $300 billion by 2030, a forecast that reflects both demand for digital liquidity tools and the continuing need for robust governance.

Why it matters

The Marshall Islands’ approach illustrates how tokenization can reshape public finance and social programs alike. By backing a debt instrument 1:1 with short-term U.S. Treasuries and tying it to a regulatory framework shaped by a risk-focused compliance firm, the government aims to attract legitimate investment while maintaining guardrails against misuse. The on-chain UBI experiment is a practical testbed for direct-to-citizen distributions, where quarterly payments flow through a digital wallet rather than traditional channels. The potential benefits—faster disbursement, traceable expenditure lines, and a more inclusive financial system—could extend beyond the Marshall Islands, offering a blueprint for other nations seeking to streamline welfare programs and debt issuance through programmable money.

However, the regulatory reality remains central. AML requirements and sanctions screening are highlighted by experts as the most significant obstacles to broad adoption. Governments issuing tokenized bonds must collect know-your-customer information to ensure funds reach the intended beneficiaries, while also ensuring that sanctions regimes are not breached through on-chain channels. The tension between innovation and compliance is not unique to the Marshall Islands; it is echoed in wider discussions about tokenization of public assets and the need for robust, interoperable standards that can scale across borders without compromising security or oversight.

From an investor and builder perspective, the narrative is equally nuanced. Tokenization promises near-instant settlement and fractional ownership, expanding access to assets that were previously illiquid or inaccessible to ordinary individuals. The growth in the tokenized debt market, as tracked by data platforms like Token Terminal, is often cited as evidence that digital-native debt instruments can coexist with traditional markets while offering new forms of liquidity and programmability. Yet the same data underline that progress hinges on a stable policy environment—one that defines privacy, censorship-resistance, anti-fraud controls, and cross-border enforcement mechanisms. The broader ecosystem’s trajectory will be shaped by how quickly regulators can translate principles into scalable, enforceable rules without stifling innovation.

In parallel, pilots such as the UK gilt initiative and other tokenization efforts illustrate that government-sponsored projects are moving from theory toward real-world applications. The combination of digital governance with financial instrumentation could unlock new funding channels and enable more responsive social programs, provided that the operational and legal frameworks keep pace with technological capability. This synthesis—technological potential matched with disciplined compliance—will determine whether tokenized debt and on-chain welfare tools become enduring components of public finance or remain transient experiments.

What to watch next

• Progress and results from the Marshall Islands’ UBI wallet rollout and any regulatory updates on AML/KYC standards for on-chain benefits.
• Monitoring the UK’s tokenized gilt pilot and any published findings on feasibility, costs, and investor interest.
• Updates to tokenized debt instrument frameworks and sanctions regimes as more governments explore issuance and distribution through blockchain rails.
• New data releases from Token Terminal and other analytics firms tracking growth in tokenized government debt and on-chain settlements.
• Prominent forecasts, such as Taurus SA’s projection of a $300 billion tokenized bond market by 2030, and any revisions based on policy or market developments.

Sources & verification

• Guidance from Guidepost Solutions to the Marshall Islands government on regulatory compliance and sanctions for USDM1 tokenized debt instruments (tokenized debt instrument reference).
• Marshall Islands’ Universal Basic Income program launch in November 2025 via a digital wallet (UBI program reference).
• Analysis and data on the tokenized U.S. Treasuries market growth since 2024 from Token Terminal (growth reference).
• Forecast by Lamine Brahimi, co-founder of Taurus SA, that tokenized bonds could reach $300 billion by 2030 (market forecast reference).
• On-chain debt instrument and tokenized government debt discussions and related policy pilots, including RWA.XYZ and UK gilt pilot context (verification references).

Tokenized debt, digital governance, and the path to inclusive finance

The effort to tokenize government debt and deliver social benefits on-chain sits at the intersection of efficiency, transparency, and risk management. The Marshall Islands’ USDM1 project showcases how a regulatory framework can be crafted to support tokenized debt while maintaining strong sanctions and AML controls. The accompanying UBI initiative demonstrates a pragmatic use case for digital wallets as a means of distributing welfare benefits with auditable spending trails, potentially reducing delays and leakage that can accompany traditional channels. In parallel, the broader market signals—rapid growth in tokenized U.S. Treasuries, governance pilots in the UK, and ambitious market projections—underscore growing institutional and public interest in tokenization as a means to reimagine public finance and social programs. Yet the narrative remains contingent on a reliable compliance scaffold: one that balances innovation with rigorous risk management to safeguard funds and protect citizens. As policymakers, technologists, and financial actors navigate this evolving terrain, the defining question will be whether these on-chain instruments can deliver measurable benefits at scale without compromising the integrity of the financial system.

Blockchain technology is an effective medium for administering social benefit programs, but key compliance challenges remain, according to Julie Myers Wood, CEO of compliance and monitoring consulting firm Guidepost Solutions.

Guidepost Solutions advised the Republic of the Marshall Islands’ government on a regulatory compliance and sanctions framework for its USDM1 bond, a tokenized debt instrument issued by the government, backed 1:1 by short-term US Treasuries.

The Marshall Islands government launched a Universal Basic Income (UBI) program in November 2025 that distributes quarterly benefits to citizens directly through a mobile wallet. Wood told Cointelegraph:

“Any benefit that is currently being distributed through analog means should be explored for a digital delivery option for several reasons. Digital delivery speeds up the process and can provide an auditable trail for provisioning and expenditures.”

Several governments are exploring tokenized debt instruments and administering social benefit programs onchain to eliminate settlement delays and costly transaction fees inherent in traditional finance by disintermediating the issuing and clearing process.

Related: UK government appoints HSBC for tokenized bond pilot

Regulatory compliance and sanctions challenges remain as the tokenized bond market grows

The cost reduction and near-instant settlement times for tokenized bonds and other onchain instruments democratize access to the financial system for individuals who lack access to traditional banking infrastructure.

However, anti-money laundering (AML) requirements and sanctions compliance are two of the biggest regulatory risks for governments issuing onchain bonds to the public, Wood told Cointelegraph.

Governments issuing tokenized bonds must also collect know-your-customer (KYC) information to ensure that funds are directed to the proper recipients, she added.

The tokenized US Treasury market grew by over 50x since 2024, according to data from crypto analysis platform Token Terminal.

The tokenized bond market could surge to $300 billion, according to a forecast from Lamine Brahimi, co-founder of Taurus SA,  an enterprise-focused digital asset services company.

Reduced settlement times, transaction costs and asset fractionalization, which allows individuals to purchase fractions of a financial asset, all expand investor access to the global financial system, Brahimi told Cointelegraph.

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