More and more DeFi protocols have recently announced a move to the veTokenomics model: Yearn Finance, Synthetix, Pancakeswap, and the Perpetual protocol.
In this article, I try to understand why veTokenomics works, how it works, and what makes it special.
The analysis covers more than 20 voting escrow (ve) ecosystem protocols.
I analyze the protocol by veTokenomics type, TVL, locked supply percentage, APR, average locked time, and unique features/changes made to the original Curve veToken model.
Please note that TVL, APR, etc. fluctuate constantly and are for reference only.
Why choose veTokenomics?
Compound Finance launched Liquidity Mining (LM) and started the DeFi bull market.
Millions of dollars flowed into Compound smart contracts. Liquidity Providers (LPs) borrow to maximize returns, then borrow the same asset and lend it again.
Balancer was followed by the BAL LM campaign. Andre Cronje is giving away YFI as a fair start. The fork of Uniswap V2 showed attractive high-yield LPs, which eventually led to the Sushiswap vampire attacking Uniswap.
The goal here is to farm as many coins as possible and then dump them for compound returns.
The prices of these DeFi tokens plummeted. Deposit yields fall and LPs leave. It’s a death spiral.
After 2 years, Compound finally cut the reward by 50%, acknowledging that the distributed COMP was “sold immediately”, so token holders were “diluted and just planted COMP for profit”.
However, Curve Finance handles liquidity mining differently:
- First, in order to get higher rewards, LPs need to lock CRV for up to 4 years. The longer you lock in, the more vote escrow CRV (veCRV) you earn.
- Second, the lock is irreversible and the tokens are not transferable.
- Third, CRV lockers receive part of the protocol revenue.
Main goal: How to increase TVL without over-inflating circulating CRV supply. Only 11.8% of CRV is currently in circulation, with $6 million flowing into the market every week. Even the airdropped CRV is locked for one year.
Result: The lock and release of Curve buys time for the protocol, adoption, and revenue to grow. Success means that the CRV’s value proposition should be attractive enough that it won’t sell at all after unlocking the CRV.
And more – impact on CRV release
Curve is an AMM for highly correlated assets, with a strong impact on which assets attract the most liquidity based on the direction of CRV rewards.
Which pools (and how much) get CRV allocations are decided by veCRV holders voting in what is known as a weight meter.
For example, if you’re building a protocol-owned stablecoin, you need it to be liquid, and Curve is the AMM. Therefore, you need veCRV to vote on the weight counter in order for your stablecoin pool to receive CRV rewards.
Another option is to get other people to vote for you by bribing them with other tokens. In this way, it increases the demand for CRV and the production of veCRV.
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These 4 properties are the basis of what we call veTokenomics.
Game Theory with veTokenomics
Curve veTokenomics changes the liquidity mining game theory.
The best strategy for Compound and other protocols is to farm free tokens and sell for compound interest. The dollar value of your deposit is the only criterion compared to others. If you believe in Compound’s future, it’s best to wait until it reaches an inflection point where token prices are low enough relative to adoption.
In veTokenomics, you can see the protocol succeed in the game:
- To get boost rewards, you need to lock CRV;
- If you choose to farm and sell CRV, you will be betting on your CRV position;
- However, your boost will decrease as other LPs farm and regain CRV;
- You receive a portion of the protocol revenue and rewards from the bribe.
At the time of writing, 53.3% of all circulating CRV supply is locked, yielding 5.63% of veCRV.
Advantages of veTokenomics
To sum up, veTokenomics has 5 main advantages:
- Long-term holding is encouraged.
- Reward distribution is more efficient and transparent. No DAO proposal is required.
- Token investors are incentivized to become liquidity providers and vice versa.
- Income streams incentivize teams without selling tokens.
Attract other protocols to build on this to increase rewards and make bribes more efficient. (more on that later).
The focus on long-term holdings has attracted more protocols to adapt to veTokenomics. Quite a few protocols modified the original curve model to suit their needs.
The 6 most important changes
1. Use LP tokens for voting escrow.
In Curve, you lock the CRV to receive veCRV. In Balancer, however, you lock 80% BAL and 20% ETH LP tokens to receive veBAL.
Ref Finance has two token models: veLPT and LOVE, where veLPT consists of REF and NEAR.
Interestingly, the maximum lock-up period chosen by both protocols is 1 year.
2. Platypus financial model.
Trader Joe and Yeti Finance employ a platypus model where tokens are staked and veTokens accumulate over time. The higher the veToken balance, the higher the yield.
There is no lock-up period, and users can withdraw at any time, but will lose the revenue boost.
This model rewards early users the most.
3. Early unlock will be punished.
Ribbon Finance allows vRBN to be unlocked before the lock expires with a penalty. That is, locking for 2 years and unlocking when there is 1 year left will result in a 50% penalty.
Yearn Finance uses the same logic. In both protocols, penalties are redistributed to veToken holders.
DODO’s vDODO has a very different ve model, but allows DODO to be redeemed by incurring variable exit fees.
I would like to add here that Ribbon’s Bribes Boosting Delegation is interesting (additional rewards without identity and LP), and Yearn’s YFI will not be inflationary, so the rewards will come from already prepared 800 YFI repurchase!
4. Three-token model.
Pancakeswap uses Trader Joe’s model with 3 locked tokens.
Each has a locking mechanism for token sales and another for increasing farm output, but Pancakeswap will soon launch Weighted Voting Tokens (vCAKE), while JOE is expected to launch at a later date .
5. Velodrome – DEX, Yield Farm and Bribery Protocol all in one.
Velodrome is an improved version of Andre Cronje’s failed Solidly project.
By staking VELO for up to 4 years, users can earn veVELO: an ERC-721 governance token in the form of an NFT that uses a ve (3,3) rebase mechanism.
veLO voting power decreases over time, so after each rebase, you should claim and re-stake VELO to restore voting power.
veVELO weighted voting encourages bribes to distribute VELO rewards. For example, just last week, the L2 DAO bribed OP tokens to give veVELO holders an additional 120% APY.
Rational veUser Theory
veTokenomics requires a lot of effort to plan and actively manage to maximize returns. For both: token investors and yield farmers.
Most importantly, you need to consider:
- As an LP, how much CRV do you need to lock up and for how long to get the most bang for your buck.
- Whether to claim and sell CRV rewards or restake.
- The frequency of compounding returns that take into account gas fees.
- Weight meter to vote, especially if your LP goes into multiple pools.
- Find out who offered the best bribes and vote for them…
Most of us have limited resources, hence the emergence of yield maximizing protocols built on veTokens – yield/governance aggregators.
The mission of veAggregators is to minimize investment strategy work and maximize returns.
In this research, I cover 4 veAggregators:
- CRV and FXS of Convex Finance.
- Aura Finance：BAL
- Vector Finance: PTP and JOE.
- StakeDAO: CRV, FXS, ANGLE and BAL.
Convex is by far the largest with a TVL of $4.42 billion and controls 77% of all circulating CRV. Even Yearn now uses Convex vaults. In contrast, Aura controls 27% of veBAL’s share.
Despite some differences, they perform the following tasks:
- Convert veTokens to transferable tokens and receive veToken rewards, airdrops and additional rewards from veAggregator. For example, depositing CRV into cvxCRV yields an APY of 18%, compared to 5.6% for veCRV.
- Boost and compound LP’s revenue returns and provide additional rewards using veAggregator tokens.
- Collective voting determines weights. Voting rights are passed from veTokens to holders of tokens locked by veAggregator voting. For example, locking CVX for 16 weeks produces vlCVX. Weight meter does not work with platypus-style veTokenomics.
- Receive bribe rewards and redistribute to vlAggregator token holders.
However, to maximize bribery returns, investors need to be actively involved. Solution: Delegate vlAggregator tokens to another platform that evaluates the best incentives “so you can sit back and enjoy the rewards without doing any work.”
For vlCVX holders, Votium does the heavy lifting.
The complexity of veTokenomics opens up opportunities for more protocols. For example, Paladin’s Warden app allows veCRV holders to sell their earnings boost to Curve LP. In this case, LP can optimize Curve returns without veAggregator.
ve game of thrones
veTokenomics is not a perfect solution for every project. They are under high inflation pressure and only CRV has outperformed ETH over the past year.
However, more projects are turning to veTokenomics. YFI, SNX, PERP, and CAKE are just a few of my introductions. I expect more protocols to follow suit as there is currently no better alternative to high inflation tokens in the DeFi market.
veToken holders are incentivized to participate in governance thanks to a transparent weighted voting and bribery system. Protocols seeking to increase the liquidity of vePlatform require bribes to compete for limited token emissions, leading to a curve war for CRV emissions.
As more and more protocols migrate to veTokenomics, liquidity will become a commodity in high demand. Emerging protocols seeking rapid growth will need to assess where liquidity is cheapest and suitable for their growth needs. While it was previously up to the team to release, veToken holders can expect to profit from the liquidity game.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/analyze-20-vetoken-ecosystem-protocols-why-is-this-token-model-popular/
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