‘VeNomics’ Taking Over DeFi as New Model for Earning More Rewards

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In Brief
  • Vote escrowed tokens are fast becoming a popular economic model for earning double the reward while securing more voting rights in DeFi industry, says research analyst Juan Pellicer.

  • The model secures investors' funds and voting rights by locking CRV tokens away for a period of up to four years.

  • DeFi protocols that issue stablecoins have been competing to get voting power within Curve's ecosystem, giving rise to the so-called "Curve Wars".

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Vote escrowed tokens (VeTKN) are fast becoming a popular economic model for earning double the reward while securing more voting rights in decentralized finance (DeFi), according to Juan Pellicer, a research analyst at blockchain intelligence firm IntoTheBlock.

Started by decentralized exchange (Dex) Curve Finance, the model, or VeNomics, has given rise to the so-called “Curve wars”. The model secures investor funds and voting rights by locking the money away in token form for a period of up to four years.

Typically, it is CRV, Curve’s governance token, that is locked, and then converted into veCRV – the vote escrowed token. And because Curve Finance is a community-led stablecoin trading platform, only the holders of CRV get to make the on-chain decisions.

By locking their tokens, holders gain the right to vote on those decisions – meaning the longer CRV is locked, the more voting power holders have. The veCRV is used to earn trading fees, vote in governance, increase governance rewards as well as receive airdrops.

Curve Finance efficiency

DeFi protocols that issue stablecoins have been competing to get voting power within Curve’s ecosystem, now boasting $23.42 billion in total value locked (TVL) – basically the total sum of assets currently managed under the protocol.

Pellicer said the main reason for this is that the technology used by Curve Finance is a lot more efficient, limiting slippage when swapping between stablecoins, which in turn makes transactions cheaper.

“Being able to redirect CRV token emissions towards a pool means that liquidity providers of such pools will receive greater rewards and thus attract more liquidity,” he explains in a blog post published Jan.12.

“Arguably, the biggest innovation they [Curve] introduced is that vote weights and share of rewards are proportional to timelock. This means that those that lock the protocol token for more time will accrue greater rewards, with up to 2.5x rewards boost for those locking for a maximum of 4 years,” he added.

Pellicer, a systems engineer, argues that lock-based voting power works better compared to the existing situation in decentralized finance where one token is equal to one vote. Voting power that comes from vested tokens allows voting periodically where the tokens emissions will be directed. He states:

Time locking a token shows long term commitment from the holders. Furthermore, it reduces circulating supply and thus potential selling pressure over the main token.

Curve Wars intensify as protocols seek control

For those DeFi protocols such as 3pool or Frax with gauge weight allocations from the Curve liquidity pools, “staking rewards do not come from token issuance, but from the trading fees generated”.

Curve directs token issuance towards the liquidity provider (LP), instead. The protocol levies a swap fee of 0.04%, Pellicer says, half of which is shared among LPs and the other 50% is channeled to veCRV holders “by buying the liquidity provider token [say] of 3pool”.

“[This] is an attractive incentive for users to lock their tokens,” said Pellicer, citing the more than $45 million in trading fees generated by Curve as of Jan.11, split in half with the holders of veCRV.

Now, as 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.

For example, yield farming aggregator Convex Finance, which accounts for 47% of veCRV’s total circulating supply, was offering an annual percentage rate (APR) of 48.43% on staked CRV at the time of writing. This is several times bigger than APRs offered by competing protocols (Binance Staking – 13%).

“Understanding these power plays help explain the so-called ‘Curve wars’, where a protocol such as Convex Finance allows users to deposit liquidity provider tokens from Curve that will be maximum locked by Convex,” Pellicer explained.

“This way Curve’s liquidity providers earn extra CVX [Convex token] rewards without having to lock their tokens in Curve. Locking CVX allows greater voting power when deciding how the platform’s veCRV should be allocated, and thus to which Curve pools the CRV issuance will be redirected,” he said.

Pellicer expects that “a similar mechanism will play out” on Convex, which aggregated Frax Finance into its protocol recently. “Using CVX will be incentivized as long as it is cheaper than directly providing liquidity on pools,” he stated.

“Protocols will make use of the bribes on Votium (which allows for anyone to create a bribe for CVX-locked holders for a specific pool) to redirect rewards towards their pools, currently providing ~$0.60 in rewards for each $1 spent.”

Vote escrowed tokens gain traction

Apart from Curve Finance and Frax Finance, both credited as pioneers of the vote escrow token economic model in the multi-billion-dollar DeFi industry, a growing number of protocols are starting to go the same route or have already done so, according to Pellicer.

DeFi architect Andre Cronje, famed for creating Yearn Finance and Keep3rV1, proposed an adaptation of Curve’s model in the Sushiswap forums last year, but it has yet to be approved. Together with Daniele Sesta, Cronje is planning something similar on the Fantom blockchain.

Initially, this will be known as ve(3,3), Pellicer said. With ve(3,3,) “fees of the protocol will be directed by a timelocking governance token. Additionally, it is planned that the ve tokens will be liquid through NFTs.”

Pickle Finance, Hundred Finance and Astroport Finance already make use of vote escrow in their governance tokens while Yearn Finance and Angle Protocol, a foreign exchange-oriented DeFi protocol, are both planning to do so.

“Certainly this model is one of the better choices of tokenomics for protocols based on token emissions that desire having a token with meaningful governing power and utility as value accrual,” Pellicer concluded.

“The vote escrow token model allows periodical and democratic control of token issuance and introduces positive feedback loops that mitigate selling pressure on the main token thanks to timelocks,” he opined.

The CRV token is down 4.7% to $4.62 over the past 24 hours, according to CoinGeckco data. In the past 52 weeks, the asset has reached a low of $1.35 and a high of $6.51 on Jan. 4, as the ‘Curve wars’ intensified.

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Jeffrey Gogo is a Zimbabwean financial journalist with more than 18 years of experience covering local and global financial markets; economic and company news. A climate change enthusiast, Gogo first encountered bitcoin in 2014 and began covering crypto markets in 2017.

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