DeFi 3.0: ve(3,3). The protocol that emerged out of $OHM and $CRV explained.
The 6th of Januari 2022 Andre Cronje (the godfather of DeFi) released a medium article about a new proposed innovation called ve(3,3). In cooperation with Daniele Sestagalli and the Frog Nation army. A protocol that uses aspects of the voting-escrow (ve) mechanism of Curve ($CRV) and the game theory incentives that are aligned with Olympus’ ($OHM) (3,3). It even incorporates NFTs! The reason why these two fine gentleman worked on this proposal is that the previous protocol (such as $OHM or other clones) that partly incorporated (3,3) or ve- fundamentals missed a type of market fit. This can be seen in the Curve-wars where Convex ($CVX) is dominating for the ve-part. Ve(3,3) mainly solves two problems and has three differences in comparison with fundamentals and tokenomics where it is based of; Olympus and Curve. The problems it solves are the following:
- In $OHM there is no incentive to hold or lockup your $OHM tokens for longer timeframes. Meaning that if I were (3,3)’ing for a year. I would get the same rewards as someone who is (3,3)’ ing for 1 hour.
- The emission of the protocol is not protecting the stake % of initial value in the protocol. It gets dilluted, eventhough you will get rewards. As an example: If there were max 10 $OHM, and you provided 1 $OHM at the start to (3,3). Then you would not have 10% of the total stake in the network after a timeperiod X (if not everyone is (3,3)’ing).
I do have to say that $OHM did exactly what it advocated to do. It just had some fundamental flaws, which only became apparent after a certain time period. (3,3) definitely worked, as could be seen by almost 100 projects copying the model and tokenomics of $OHM. $OHM still has value as its treasury is ever increasing and projects still join Olympus Pro. It’s just that the value of $OHM itself can be different based on the market, and there still is risk involved if the premium on $OHM is way higher on open market than it has backed by the treasury of Olympus and while not everyone has (3,3) in their mind.
So what differences does the ve(3,3) bring to the table. To explain this I will use an example of how the emission of the protocol is dynamic and how it affects the total supply of a protocol that incorporates aspects of ve(3,3).
Assume the following:
- Token Ticker: $XYZ (could be anything)
- Initial/circulating supply: 20.000.000 $XYZ
- Weekly emission: 2.000.000 $XYZ
- Decay in weekly emission: 1%/week
The decay in weekly emission is arbitrarily set by me. This could be different or even dynamic in relation to the amount of % that is locked in ve-tokens if they would want to. But in most cases a decay is fixed. This means that for the next week there only is an emission of not 2.000.000 $XYZ but 1.980.000 $XYZ.
- Difference 1: The weekly emissions are adjusted as a percentage of circulating supply.
- If 0% lock $XYZ for veXYZ → weekly emission of 2 million $XYZ.
- If 50% lock $XYZ for veXYZ → weekly emission of 1 million $XYZ.
- If 100% lock $XYZ for veXYZ → weekly emission of 0 $XYZ.
The interaction of Difference 1 is that if more people lock their tokens, the emission becomes lower. Which incentivizes more people to lock their token for veXYZ.
When plotted in a graph you will get the following:
As you can see the more people lock their tokens to veXYZ the lower the emissions will be, which is healthier and more attractive for participants in the protocol.
- Difference 2: People who lock their $XYZ into veXYZ increase their holdings proportional to the weekly emissions.
Meaning that if 50% of the network locks in their token to veXYZ, the weekly emission will be 1.000.000 new $XYZ. Which is a 5% dillution of the total supply. This means every person that locked their $XYZ to veXYZ will receive 5% of the emission to their position that week (apart from getting a certain APY out of the fees that are distributed that the protocol own in revenue and payout to pools). The goal of this difference 2 is to ensure that people who lock for veXYZ are never dilluted by emissions.
- Difference 3: The veXYZ positions are an NFT.
The problem with veCRV is that it is not “liquid”. They were locked and you could not do anything with it. This was the sole reason Convex ($CVX) was created. There are two different advantages by making an NFT of this locked version of ve-locked tokens.
- Single adresses can own more than 1 veXYZ position. As participants can buy other NFT positions of veXYZ.
- Allows for veXYZ position to be traded on a secondary market. In the future you can also borrow against your locked position through DeFi! This creates more capital efficiency of your positions.
To summarize the advantage of these tokenomics:
- Higher % $XYZ locked into veXYZ = less emissions = incentive to lock more.
- Longer locking of veXYZ yields higher APR = incentive to lock for longer periods.
- Only pays out fees from pools you vote for, optimizing game theory.
veDAO ($WeVe) and 0xDAO
So how can we play into this narrative? To bootstrap and kickstart the ve(3,3) idea. Andre and Daniele et al. will make Solidswap ($ROCK) and will distribute it to the top 20 protocols of TVL (total value locked) on Fantom ($FTM) by the 24th of Januari as an NFT to each protocol. Each protocol can then decide what they want to do with the NFT that represents a share in solidswap’s ecosystem.
One of the market reactions was the initiation of veDAO with its $WeVe token and 0xDAO to combat veDAO. which was a new player in the ecosystem with anon. devs and 10% team allocation. They are currently sitting at the #6 spot and #2 spot of TVL, respectively.
The reason for this is that they made a token $WeVe, which will be a derivative of the underlying $ROCK NFT they will get (if they stay in top 20). The $ROCK NFT gives you voting/governance rights to which pools you want to boost rewards for (increase APY), while also getting fees from the pools you voted for. It’s a complex construction that basically turns the top 20 project of TVL on $FTM in one big hub of protocol owned liquidity, making it sort of a protocol owned AMM. The $WeVe token gives you exposure in a way to this hub of protocol owned liquidity in the Fantom ecosystem and grants you rights to earn fees from this system and controlling voting power. How the protocols decide to use the $ROCK NFT is up to some DAO’s if they have governance rights or up to the team. Options are:
- Fractionalize $ROCK NFTs and distribute to holders (airdrop).
- Hold the $ROCK NFT in the treasury and distribute rewards only to locked-positions of their own protocol (to incentivize long term locking).
- Let DAO decide
- Do nothing
Due to the TVL-war happening on $FTM it might be possible Andre et al. will change the distribution details of the $ROCK NFT. Protocols who have build on $FTM since the early days are getting pushed out by the hype, so this might be something that can be played into.
It will be exciting to see how this new innovation will develop. If successful we will probably see it happening in other ecosystems in crypto. One step closer towards the endgame would be a ve(3,3) protocol for the multichain ecosystem.
Note: This article is part of a big research report (aim: 100+ pages) I am writing which will be an outlook for 2022 of the cryptomarket. As it will be quite large I will distribute it in sections as to not letting the pieces age and get outdated. A list of the topics I will talk about are listed below:
- Research method
- Exhaustion of Bitcoin and Ethereum
- Multichain era
- Quant ($QNT)
- Cosmos ($ATOM)
- DeFi 3.0: ve(3,3)
- veDAO ($WeVe) and 0xDAO
- Avalanche ($AVAX) Native bridge between C-chains and subnets (Q1)
- NFTs (metaverse), e(Gaming/Music/Fashion/Ticketing)
- NiftyX ($SHROOM)
- Chainlink ($LINK) (layer 1 and 2/DeFi infrastructure)
- Pocket Network ($POKT) (RPC-infrastructure)
- Morpheus Network ($MNW) (supply chain logistics infrastructure)
- Year of the DAOs
- Ethereum ($ETH) 2.0 anticipation
- Ethereum Layer 2 (starkware/ZkEVM-endgame)
- Rocketpool ($RPL)
- Concordium ($CCD)
- 5 years tops for global systemic reset; the shift to metaverse from web 2.0 will pop bubble in couple of years.
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