ve(3,3) – The Future of Tokenomics?
3月 23, 2022
Ve(3,3) is a new decentralized finance (DeFi) tokenomics design first proposed by Andre Cronje, founder of Yearn Finance.
Ve(3,3) is incorporated in Cronje’s latest project – Solidly Exchange, which continues to operate although Andre Cronje announced that he is leaving DeFi on March 6, 2022. The model combines the (3,3) design behind Olympus DAO and vote escrow tokenomics (“ve”) from protocols such as Curve and Convex.
To explain what ve(3,3) is let’s first look at Olympus DAO and Curve’s protocol designs.
OlympusDAO – “(3,3)”
Olympus DAO, introduced the (3,3) game theory model that represents the set of actions for Olympus users which lead to the most positive outcome for them. On Olympus, users can interact through bonding and staking operations (which are both beneficial for the protocol), but they can also engage in selling operations (which are not beneficial). Staking and selling cause a price movement (i.e. buying OHM from the market is considered a pre-requisite of staking, thus causing the price to move), whereas bonding does not. Bonding refers to the process of exchanging tokens (ex. DAI or Uniswap LP tokens) for below-market-price OHM tokens that are locked for a period of time (minimum one week).
The set of outcomes for users is the following:
- If both stake (3, 3), it is the best action for both users and the protocol (3 + 3 = 6).
- If one stakes and the other one bonds, it is also great because staking takes OHM off the market and puts it into the protocol, while bonding provides liquidity for the treasury (3 + 1 = 4).
- When one of the users sells, it diminishes the effort of the other one who stakes or bonds (1 – 1 = 0).
- When both users sell, it creates the worst outcome for both agents and the protocol (-3 – 3 = -6).
Now that we considered the (3,3) element, let’s have a look at the “ve” part.
Curve – “ve”
Vote escrowed tokens (i.e. veTokens) is a popular tokenomics model in DeFi. It has proven to align the incentives of token holders and liquidity providers which has resulted in, among other things, market outperformance of projects that have incorporated “VeNomics”. Consider this chart by Bankless:
The VeNomics model locks user funds (usually the project’s token, for example CRV) and grants voting rights and trading fees, and other benefits (the veTokens, for example veCRV). The locking period is usually between a week and four years (!). The longer the lock, the higher the rewards and voting power. Curve‘s CRV tokens are governance tokens. Their function is to incentivize liquidity provision on Curve and to involve more users in the governance mechanism.
Liquidity providers on Curve receive CRV tokens rewards in pools that have been selected by veCRV governance. CRV has three main uses: voting, staking and boosting. These three operations require users to first lock (more precisely, “vote lock”) their CRV tokens to acquire veCRV. veCRV (i.e. vote escrowed CRV) are non-transferable tokens representing CRV locked for a period of time in Curve pools. The longer CRV is locked for, the more veCRV a user receives. veCRV tokens enable users to vote in governance, boost their CRV rewards (by multiplying their liquidity up to 2.5x times) and receive trading fees generated in Curve pools. Moreover, veCRV holders are also eligible to receive airdrops.
Existing protocols in DeFi, have been competing to get voting power within Curve’s ecosystem because that enables them to select the liquidity pools towards which CRV token emissions are directed. This competition has been referred to as “Curve Wars“. By redirecting CRV token emissions towards a liquidity pool, liquidity providers (LPs) in that pool receive higher rewards. This attracts more LPs and the liquidity in those pools grows further.
Vote locking might be the biggest innovation introduced by Curve Finance. Because of this feature, vote weights and share of rewards are proportionally assigned in accordance with the locking period. Hence, time locking a token increases the long-term commitment from the holders, reduces circulating supply, and removes potential downward price pressure. Considering staking operations on Curve, it is noticeable that 50% of all trading fees are distributed to veCRV holders. This is to align incentives between liquidity providers and long-term token holders (i.e. veCRV holders). Every time a trade takes place on Curve Finance, 50% of the trading fee is collected by the users who have voted locked their CRV. Every week, fees are collected from the pools, converted, and distributed.
Since different DeFi protocols compete to gain control over Curve by accumulating CRV tokens that are later turned into veCRV, many have started to offer CRV holders lucrative returns on staking them on their own platforms (known as “bribing”). One such protocol is Convex Finance. It is built on top of Curve and allows Curve LPs and CRV stakers to earn additional yields without having to lock up CRV tokens for lengthy periods. Convex Finance, which accounts for 47% of veCRV’s total circulating supply, was offering an APR of 48.43% on staked CRV. This is way higher than the average APRs offered by competing protocols. CRV holders staking their coins on Convex Finance receive cvxCRV tokens as deposit receipts. These coins are freely tradable on other platforms, unlike veCRV, which are non-transferable. cvxCRV holders receive a share in Curve’s trading fees and boosted CRV rewards and earn Convex’s governance token CVX.
In this way, Curve’s LPs earn extra CVX token rewards without having to lock their tokens in Curve. Locking CVX allows greater voting power on Convex, when deciding how the platform’s veCRV voting power should be allocated (which Curve pools will receive CRV issuance). As Convex grows in voting power, different platforms may then want to start accumulating CVX in order to influence rewards emissions on Curve.
Considering all this, Andre Cronje’s proposed ve(3,3) design aims at combining these two powerful tokenomics concepts to address the issues related to liquidity mining, the liquidity bootstrapping mechanism employed by the majority of DeFi projects that led to the 2020/2021 DeFi boom (and bust). According to Bankless:
As we know, much of DeFi’s growth over the past year and a half has been fueled by liquidity mining. While it’s often done at the product level, such as with a DEX or money market, many protocols have also incentivized liquidity for their native token through token emissions. While it’s important for a token to have deep liquidity, these programs have often been taken to the extreme to attract yield farmers, resulting in inflation rates that would make Jay Powell blush, and leading to perpetual sell-pressure on the underlying token.
It doesn’t take a PhD in economics to see why DeFi tokens would underperform: They have a massively inflating supply with no demand to help offset this.
The goal of ve(3,3) is to better align emission of tokens to beneficial actions and solve the problem with current AMM designs where liquidity provision is temporarily subsidized while fees generation, the more sustainable incentives-generating mechanism, is not.
Existing autonomous market makers (AMMs) are primarily designed for LPs and incentivize liquidity depositing into the protocols’ liquidity pools in order to receive a temporary emission of free tokens. Following Cronje Medium articles, “current AMMs need a few modifications to make it easy for protocols to leverage them:
- Must be able to easily add token incentives to your liquidity.
- Must be able to easily bribe token emissions onto your liquidity.
- Must be able to accrue fees from liquidity you incentivize.
- Must be able to permissionlessly deploy your liquidity.”
According to Cronje’ Medium post, ve(3,3) will introduce a new AMM design. This new design will feature:
- Natively supports swaps between closely correlated assets via a new curve (stable swaps)
- Natively supports swaps between uncorrelated assets
- Fees are paid out in base assets, not converted
- Uniswap v2 compatible interfaces (which allows for support for all existing analytics tools and interfaces)
- Permissionless creation of pools
- Permissionless support for Gauges & BribesEmission incentivizes fees instead of liquidity
- Native support for adding third-party tokens and incentives
- ve(3,3) lockers accumulate all fees for pools they vote emission on
- ve(3,3) lockers increase holdings proportional to emission, no dilution
- ve(3,3) lockers vote on emissions with circulating supply decay, read more
- ve(3,3) natively supports delegation
- ve(3,3) locks are represented as non-fungible tokens to allow capital efficiency of locks
- No DAO
Through the ve(3,3) model, Cronje suggests a token ecosystem that is more efficient and which ensures the totality of fees will be paid to users locking in their assets in the protocol, ensuring a higher level of structural sustainability over time.
The reasoning behind ve(3,3) is to encourage users to lock up their governance tokens and obtain veTokens with an aggressive inflation model to ensure that locker’s rights are not diluted.
To encourage locking and voting, Solidly will compensate users for the inflation risk brought by locking up, and give lockers the share of additional tokens issued in emission according to the corresponding total circulation share to ensure that the corresponding equity share of veToken will not be diluted.
In this way, users who lock their positions do not have to worry about inflation affecting the value of the tokens in their accounts, while those who do not lock their positions will bear the downside risk of token inflation.
ve(3,3) Example – Solidly
Solidly is a DEX on Fantom that allows low-cost, near 0 slippage trades on uncorrelated or tightly correlated assets. Perhaps the most important innovation in Solidly is that the protocol incentivizes fees instead of liquidity.
Users can interact with Solidly thanks to two types of tokens within the protocol:
- a standard ERC-20 token (i.e. base token) named SOLID, which is also the platform governance token that users can trade in the exchanges.
- a ve(3,3) token that is an NFT – veSOLID that can also be traded
Users need to stake the SOLID tokens to get the ve(3,3) NFT tokens – veSOLID.
Compared with the non-transferable feature of veCRV tokens on Curve, veSOLID in the form of NFT adds another form of liquidity property. Users can directly trade these NFT on secondary marketplaces enabling the transfer of the corresponding platform rights and benefits.
A Solidly user can:
1. Provide liquidity in a whitelisted Solidly pool -> receive SOLID tokens (no voting power or trading fees)
2. Vote escrow SOLID (AKA “vote lock”) -> between 1 month and 4 years -> receive veSOLID (NFT) (voting power, trading fees, and part of the SOLID emission)
1 SOLID locked for four years = 1 veSOLID
1 SOLID locked for two years = 0.5 veSOLID
1 SOLID locked for six months = 0.125 veSOLID
One important innovation here is that veSOLID holders receive trading fess ONLY from the liquidity pools (AKA gauges) they have voted for. This is a modification to the Curve mechanism in which users holding veCRV receive fees from the entire protocol itself. In the case of veSOLID tokens voting, users will vote for pools which generate the most trading fees. That should have the positive effect of also increasing the liquidity in that pool, potentially leading to an increase in the volume of generated trading fees as a consequence of a better trading experience (i.e. better liquidity, low slippage on trades, lower price impact…). A virtuous cycle.
Another innovation is that veSOLID holders also receive a share of SOLID emissions based on the circulating supply. According to Solidex this creates some interesting game theory as more people vote locking will reduce the amount of SOLID given to liquidity providers in any given week. Anytime circulation supply increases through rewards, the same percentage increase will be attributed to veSOLID holders. This makes the value proposition of locking very attractive as your lock does not get diluted by new SOLID emissions.
As veSOLID tokens can be traded, a different user from the one who provided liquidity in the first place can hold them to benefit. If this user is a protocol (e.g. Convex), it could try to attract (or “bribe”) more veSOLID-generated voting power to direct SOLID emissions to its own liquidity pool.
Unlike many existing NFTs, veSOLID tokens have an intrinsic value. They can be redeemed for SOLID tokens, generate yield, and can be used for governance. veSOLID tokens were initially distributed through an airdrop to the top 25 projects by TVL on Fantom. Only 25 veSOLID tokens were initially issued to control the protocol. The Snapshot for this airdrop was done on January 23, 2022. The airdropped veSOLID tokens are not tradeable so as to prevent dumping and the projects can then decide how to use the tokens.
The ve(3,3) tokenomics design should help protocols decrease their dependency on large liquidity providers which was common during the first development phase of DeFi. Unlike the majority of protocols’ designs nowadays, ve(3,3) should incentivize both liquidity provision and fee generation. This approach aims at creating an optimized system where the incentives of a protocol’s users and its tokenholders are better aligned. That could be incredibly valuable because the two groups often have competing interests.
We are confident that ve(3,3)nomics is the next evolutionary step in DeFi tokenomics development and are currently looking for ways to implement it in Mettalex.
The Mettalex Research blog post series dives deeper into the latest innovations in DeFi. Check out our analyses on DeFi 2.0 principles with focus on the MetaversePro implementation, on the different uses of NFTs as collateral in DeFi (Part I), (Part II), (Part III), and on The 8 Hottest DeFi Trends in 2022 with Part I exploring Regulations.
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