veToken: not necessarily an antidote but a cure

The fundamental driving force for the continuous progress of human society is the wealth creation mechanism. In social and economic activities, currency, as a symbol of wealth, represents the right to control assets and labor, and in the digital blockchain world, this symbol becomes Token.  

Issuing governance tokens: cherries are delicious and hard to plant  

In the summer of 2020, the liquidity mining of DeFi projects detonated the entire market, making DeFi usher in the first wave of explosive growth. However, after more than a year of development, people have gradually discovered the disadvantages of liquidity mining. Although the mode of liquidity mining provides a good way for the cold start of the project and solves the problem of liquidity provision.

However, this incentive model is more to attract and encourage the short-term participation of liquidity miners. Most of these users are not real protocol users and do not form a sticky symbiotic relationship with the protocol. Many experts now believe that this is precisely the flaw in the design of the early DeFi Token economic model – the continuous mining, selling and raising led to a substantial expansion of the supply, and eventually the price plummeted. Token is good, but its economic model design is really difficult.

If there is no value, inject value – veToken   

veToken: not necessarily an antidote but a cure

veToken is a major upgrade to the liquidity mining model of mining, selling and withdrawal. The first launch of the Ve Token model is TVL’s largest DEX Curve. Curve is managed by its native Token CRV. In order to participate in governance and obtain all the benefits of holding CRV, the holder needs to lock CRV for a maximum of four years, and lock CRV to obtain veCRV. This is the first veToken, and VE is “voter” Abbreviation for “escrowed”.

veCRV holders have three main rights:

  • Governance of the Protocol

  • Share the fees incurred on Curve

  • and earn higher yields while providing liquidity

This last privilege is especially important because which pool of funds Curve rewards to is determined by a vote of veCRV holders. As seen in “CurveWar”, the additional reward of earning CRV has additional value for the protocol issuing Stablecoin.  

Advantages and disadvantages of ve mode   

  • ve mode encourages long-term oriented decision making

This is because by locking their tokens for a certain period of time (usually 1-4 years), holders are making a long-term commitment to the protocol. That way, they are motivated to make decisions that are in the agreed long-term and best interests, rather than decisions that are in their immediate and short-term interests.

  • Make all parties involved in the agreement have greater alignment of interests

Taking Curve as an example, like other DEXs, Curve uses third-party providers as a source of liquidity. The highlight of the ve model is that Curve can incentivize LPs to hold CRV instead of selling it in the open market. This is because, if Curve’s LPs lock their CRV, then they will get 2.5 times higher CRV yield than unlocked LPs.

  • Improve token supply and demand

For the supply side, voting locks serve as a mechanism to remove tokens from the open market. This helps to offset the high inflation rate generated by some protocols and reduce the supply of token secondary market. At the same time, more ve Token privileges will increase the market demand for Token, improve the supply and demand relationship, and promote price growth.

Of course, the ve model also has disadvantages such as lack of liquidity due to lock-up, and vote bribery. Selling votes (voting bribes) is all the rage in DeFi, with platforms like Votium and Hidden Hand offering tens of millions of bribes to the Curve, Convex, and Tokemak ecosystems, respectively. While less of an issue for Curve and Convex, and have also proven useful as they do provide the protocol with a cheaper way to attract liquidity than traditionally, this approach only steers liquidity without managing risk This will undoubtedly introduce new systemic risks and undermine the long-term incentives of voting lock-in. Given that the security of the money market depends on its weakest collateral, this could also create a situation where an extremely illiquid token is listed, ultimately undermining the security, stability, and trust among users of the overall protocol.  

The future of ve mode   

The veToken model is currently in development, and despite the shortcomings mentioned above, veToken has taken a big step forward compared to the previous Token model. It encourages long-term oriented decision-making and adjusts the relationship among protocol stakeholders. incentives and create more favorable supply and demand dynamics for rising prices. Maybe veTokens can shape the future of DeFi token economics.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-02-26 08:03
Next 2022-02-26 08:03

Related articles