Understanding veTokenomics, the new DeFi paradigm
The DeFi world is developing very fast. One of the novelties that is having a lot of success is the veToken model. In this article we will understand how it works and all the details you need to know.
So, what is veTokenomics?
The concept came up with the Curve project, one of the largest decentralized exchanges on the market. Curve’s native Token is CRV. This token is not issued by mining or staking, but by providing liquidity to the exchange’s pools.
For example, if you add DAI and USDC tokens to the DAI-USDC pool, you not only get the swaps fees, but you also get CRV tokens.
But the developers at Curve had an idea: give an extra benefit to those who block CRV tokens.
The longer you leave your tokens locked up without being able to sell them, the more rewards you get by adding liquidity to the pools.
The concept is very simple, you choose the period you want to keep your CRV tokens locked up, minimum is 1 week and maximum is 4 years, and you receive a higher amount of CRV by providing liquidity. This boost, as it is called, can be up to 2.5x.
If you have blocked 4 CRVs for 4 years, you will receive 4 veCRVs in return. This veCRV token is used by the protocol to calculate rewards.
If you blocked 4 CRVs for 1 year, you will receive 1 veCRV.
In other words, the veCRV token represents not only the quantity, but the time commitment you have applied to the protocol, where hodlers benefit the most. And there is a detail: the amount of veCRVs drops over time. So you start, let’s say, with 1000 veCRVs, and after some time you have 800 veCRVs.
In practice, the amount of veCRVs is always recalculated based on how much time is left before your tokens are unlocked. Besides granting a boost in rewards, veCRV tokens also serve for governance, giving you the right to vote on protocol decisions. This is where the name “ve” comes from, which is an abbreviation for “Vote Escrow”.
And there is another benefit for veCRV holders. 50% of all fees captured by the Curve exchange go to veCRV holders, as if they were dividends paid to shareholders.
Congratulations, you now understand the concept of veTokenomics!
So far we have only talked about the DEX Curve, but the concept has already been implemented by several projects.
In short, the dynamic consists of:
The user blocks his tokens, receiving in return veTokens. These veTokens grant a number of benefits such as a boost in rewards, voting rights, and participation in the protocol’s profit distribution.
One question you may be asking yourself is whether it is possible to buy veTokens directly on the market. The answer is no.
The veCRV token is non-transferable and cannot be sold. That token only exists associated with addresses that have blocked tokens in the protocol. But because DeFi is a rapidly expanding and innovating world, the concept of veTokenomics brought consequences.
The first of these was the “Curve Wars,” a battle that is in effect until now. Let’s understand what happened.
Part of the voting right that veCRV holders have is to choose which pools will receive the most CRVs. That is, those who own a lot of veCRVs, besides earning dividends and getting a boost in emissions, can still vote to make their pool the one that issues the most CRVs.
So think a little.
There are protocols called Yield Aggregators, which basically take your tokens and allocate them to the best liquidity pools to get the highest possible returns.
Because these protocols act like investment funds, managing many tokens, they can concentrate large amounts of veCRVs, making their pools get the most benefit. This is how the Curve wars came about, with protocols fighting for veCRV dominance.
Currently, the one who is winning this battle is the Convex protocol, which came up with an innovative idea, bringing benefits to users from a well-designed dynamic, which will be the subject of our next article, where I will explain the Convex protocol in detail.