Last time we dropped a primer on the Curve Wars and how the “Curve war” can be described a battle for supremacy between various Decentralized Finance (Defi) protocols that are continuously trying to ensure that their preferred liquidity pools are offering the highest $CRV rewards. As a progression of that story, today we will introduce another novel tokenomics model pioneered by one of the most prolific coders and founders in crypto, Andre Cronje.
The model is known as "ve(3, 3)." If we could describe it in one phrase, it would be "vote escrow and more". It combines the "vote escrow" primitive pioneered by Curve and the "3, 3" staking/rebasing mechanic introduced by Olympus DAO.
Andre Cronje is gearing up to launch a new decentralized exchange employing ve(3, 3) tokenomics on Fantom.
It's an important event, because if the model works, it will change the liquidity sourcing and management game in Defi.
Unlike traditional finance, which tends to work in isolation, DeFi is open and unburdened by patents, copyrights, or trademarks. In other words, stealing superior ideas in DeFi is encouraged. Hence, if Cronje's ve(3,3) model proves superior, many DeFi protocols will be forced to remodel their tokenomics and embrace it to remain competitive.
The thesis of 3, 3
The Prisoner's Dilemma, is a classic case study from the field of game theory, which studies rational agents' strategic interactions in situations where they make interdependent decisions. The interdependence forces each agent to consider the other agent's possible decisions in formulating its strategy.
The simplest way to understand the implications of game theory is through the hypothetical scenario dubbed Prisoner's Dilemma. Imagine that two criminal organization members, Aisha and Femi, are arrested and put in solitary confinement without means of communicating with each other.
The police lacks sufficient evidence to convict both on the principal charge but have enough to convict them on smaller charge. So, they simultaneously offer each prisoner a bargain: either testify against your partner and go home, or stay silent, risk betrayal and go to prison.
The possible outcomes are:
· If Aisha and Femi both snitch, each serves two years in prison.
· If Aisha snitches on Femi but Femi remains quiet, Aisha is set free, and Femi serves three years.
· Vice versa, if Femi snitches on Aisha but Aisha remains silent, Aisha gets three years, and Femi is set free.
· If Aisha and Femi stay quiet, each serves only one year on the lesser charge.
As illustrated in the diagram above, if both prisoners cooperate and stay silent, they will serve the least amount of time in prison. However, from an individual prisoner's point of view, cooperating is a risky strategy because if the other prisoner snitches, they'll do three years of prison time. Thus, snitching or defecting stands out as the best strategy for both players.
Back to 3, 3. OlympusDAO (OHM) pioneered the 3, 3 (cooperate, cooperate) tokenomics model by promoting reciprocity through making the implications of game theory explicit. Unlike the prisoners in our hypothetical game, OHM stakers can communicate, meaning they can theoretically reach consensus and keep cooperating (staking) because that is the most optimal action for everyone to take. By staying staked (3, 3), OHM holders are essentially cooperating to withhold the supply of OHM from the market, therefore raising OHM price and increasing market capitalization.
In summary, the premise of 3, 3 is: If we all cooperate or stake and none of us sell—we all get exponentially richer in theory.
A step further to ve(3,3)
The "vote escrow" primitive pioneered and popularized by Curve is the mechanism of vote-locking tokens for a pre-set period in exchange for pro-rata voting rights, transaction fees, and additional token emissions. The longer the tokens are locked, the more voting power and higher rewards they give.
In Curve, the CRV governance tokens are hard-capped. Projects stand to gain a significant competitive advantage by owning them, but can only acquire so many. This creates a game-theoretical scenario where each project that uses Curve competes for the most amount of CRV, vote-lock it on the exchange for veCRV, leverage its voting power to direct new CRV emissions toward its pools, acquire more CRV and repeat the process all over.
One of the problems for veCRV holders in this model is that the new token emissions are slowly diluting them unless they are the winning bidder to get them. Over time, this tends to concentrate power into the hands of the largest token holders like Convex protocol.
In improving upon and optimizing this model even further, Andre Cronje put Curve's vote escrow primitive on steroids by combining it with a clever iteration of OlympusDAO's (3, 3) mechanism. Thus, the meaning of ve(3, 3) is to encourage users to lock tokens into the pool, and at the same time create a “win-win” value model for those who participate.
With Cronje's new ve(3, 3)-based decentralized exchange called Solidly, liquidity providers will be able to either provide liquidity in exchange for transaction fees or stake their LP tokens in vote escrow for veLP tokens to earn from new tokens emissions.
Notable changes
In the article revealing the model for his new product, Andre outlined three key changes: the emission level changes dynamically on a weekly basis, the benefits for veToken holders, and the NFT application for the veToken locking process.
Flexible emission levels: Emission rate (or the rate at which tokens are released into circulation) is the first change mentioned by Andre. Accordingly, the token distribution rate to the market will be adjusted weekly based on the circulating supply rate.
For example, if 0% is locked, the allocation rate will be 2 million. If 50% is locked, the allocation will be 1 million. And so on, if 100% of the circulating supply is locked to generate veToken, the distribution will gradually decrease to 0.
Benefits for veToken holders: If the total supply is 20 million and the current staked (or locked) amount is 10 million, according to the formula above, the emission rate will be 1 million tokens per week. Thus, 1 million tokens are distributed to the market and will be given to those who lock the tokens. This will create more incentive for users to lock the token. This means that vote escrow stakers won't be diluted like on Curve. If the weekly token emissions increase the total token supply by 5%, vote escrow stakers will have their holdings increased by 5%. Hence, there’s more incentive to vote-lock tokens.
Combined with the rate-balancing mechanism, this will be a reasonable counterweight to managing the locked amount of tokens. If anyone wants to abuse token staking to gain control, they will face the problem that the amount of tokens paid out will be lower, thereby preventing the risks that the current Curve model faces.
veToken is formed as NFT: The third change mentioned by Andre is the ‘NFTization’ of veTokens, making this asset convenient to exchange in the secondary market. If you follow Uniswap V3, you must have heard that the liquidity positions on the V3 platform have also been ‘NFTized’. NFTization of veToken could be the solution to the liquidity problem for veToken. The project will not need to create a liquidity pool for this asset like Convex is doing with cvxCRV:CRV.
These questions remain: what is the most optimal strategy for each player—token holder or liquidity provider—in this game? Stake and hold LP tokens, provide liquidity without staking, simply hold the tokens, or maybe get in early, stake, withdraw initial investment as soon as possible and then let the profits roll until you can cash out a reasonably sized house?
We will see when Solidly launches. Game theory is, after all, a “theory.” Humans aren’t 100% predictable and Solidly will be the proving ground for the new model. We believe this is a development derived from previous changes such as veToken or model (3, 3). Therefore, some of the limitations of the old model will still be somewhat embedded in this new product.
Recent marketing shows that this will most likely be a Fairlaunch project, so it is difficult to avoid the fomo of the community. You need to research carefully if you want to join the project when it launches. Remember, ETH is inherently a place with expensive fees, with a large number of bots, so keep these in mind before you fomo when the project has just launched.
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