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. In the digital blockchain world, this symbol becomes Token.
Issuing Governance Token: Cherries are delicious and trees are 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 liquidity mining model provides a good way for the cold start of the project, and solves the problem of liquidity provision.
However, this incentive model is more about attracting and encouraging the short-term participation of liquid miners. Most of these users are not real protocol users and have not formed a sticky symbiotic relationship with the protocol. Many experts now believe that this is the flaw in the design of the early DeFi Token economic model-continuous mining and selling led to a substantial expansion of supply, and eventually the price plummeted. Token is easy to issue, but its economic model design is really difficult.
If there is no value, inject value——veToken
veToken is a major upgrade to the mining, selling and lifting-style liquidity mining model. The first launch of the Ve Token model is now TVLs 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, holders need to lock CRV for up to four years. Locking CRV can obtain veCRV. This is the first veToken. VE is voter Escrowed abbreviation.
veCRV holders have three main rights and interests:
Protocol Governance
Share the transaction fee generated on Curve
And get a higher rate of return when providing liquidity
This last privilege is especially important, as the pool to which Curve rewards is determined by a vote of veCRV holders. As seen in CurveWar, the additional reward of CRV has additional value for protocols issuing Stablecoins.
Advantages and disadvantages of ve mode
The ve pattern encourages long-term oriented decisions
This is because by locking their tokens for a period of time (usually 1-4 years), holders are making a long-term commitment to the protocol. This way, they have an incentive to make decisions that are in the agreed long-term and best interests, rather than their own immediate and short-term interests.
Make the parties to the agreement have greater consistency of interests
Still taking Curve as an example, like other DEXs, Curve uses third-party providers as liquidity sources. The highlight of the ve model is that Curve can motivate LPs to hold CRV instead of selling it in the open market. This is because, if Curves LPs lock their CRV, they will get 2.5 times higher CRV yield than unlocked LPs.
Improve token supply and demand
On the supply side, voting locks serve as a mechanism to remove tokens from the open market. This helps offset the high inflation rate generated by some protocols and reduces the supply of tokens in the secondary market. At the same time, more ve Token privileges will increase the markets demand for Token, improve the relationship between supply and demand, and promote price growth.
Of course, the ve model also has disadvantages such as insufficient liquidity caused by locked positions, and voting rights bribery. Selling voting rights (bribing) is popular in DeFi. For example, platforms such as Votium and Hidden Hand provided tens of millions of bribes for the Curve, Convex and Tokemak ecosystems respectively. While less problematic for Curve and Convex and have proven useful as they do provide protocols with a cheaper than traditional way to attract liquidity, this only guides liquidity without managing risk This approach will undoubtedly introduce new systemic risks and undermine the long-term incentives brought about by voting locks. Given that a money market is only as safe as its weakest collateral, this could also create a situation where extremely illiquid tokens are listed, ultimately undermining overall protocol security, stability, and trust among users.
The future of ve mode
The veToken model is currently in the development stage. 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 between protocol stakeholders. incentives and create more favorable supply and demand dynamics for rising prices. Maybe veTokens can shape the future of DeFi Token economics.
