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Ve Tokenomics - A DeFi Renaissance In The Making Or Another Ponzi Trick?

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@jerrythefarmer
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You can smell it in the air. Ve tokenomics are spreading like wildfire and creating a new spark in the DeFi ecosystem that could breath new life in the zombie that DeFi has become. Crypto investors are waking up from their long slumber and realizing the obvious - without revenue, your protocols are worth nothing.

Ve What?

I know it seems like ages ago but this concept has indeed been around for a long time in crypto.

Remember Curve finance? Remember Convex and OlympusDAO?

All of them incorporated Ve tokenomics since day one and while the concept was rather interesting it didn't really take off until Andre Cronje, the lead developer of Fantom, introduced Solidly where the term ve(3,3) was coined after he combined the 3,3 model from Olympus and the ve concept from Curve. He added a twist on top of an existing system that failed on its first attempt but is taking off like never before almost a year later.

If you have been following the development of Cub Kingdoms you encountered a similar model. Lock your tokens - earn an APY boost. The longer the lock the higher the boost. Solidly was basically this but you also get voting rights that determine the weekly emissions of Solid, the native token. The screenshot below is from another project but it will give you a good idea of the whole concept.

In simple terms, imagine that there is 100 SOLID tokens to be distributed every week. All wallets that locked SOLID can vote on the liquidity pools and the final result will determine which pool gets what percentage of the weekly emissions. On top of that, other projects can come and bribe you to vote for them. They can add a bunch of their tokens to a liquidity pool they want to boost and if you vote on it you get a share of their tokens as well.

If you really want to dig into the Ve tokenomics model check this article out.

On paper, it all sounds great but I like poking at concepts just to see if they have some flaws and this one sure does seem like the perfect suspect.

How Much Is a Token Worth?

There are numerous ways in which you can value a cryptocurrency but I always prefer the common sense approach - are emissions coming from protocol revenue or are they printed out of thin air? It is really that simple.

In the case of CUB finance, they don't directly share revenue with token holders but there is a "buy and burn" mechanism in place which spends the revenue on CUB purchases and those tokens are then sent to a burn address. If you sit down and calculate the yearly revenue, assume some growth factor and put that on a 10-year time frame I'm sure you will find a way to value CUB as an asset. It may not be perfect but is there any other way to do it really?

The masses are slowly waking up to this and the "real yield" narrative I spoke about last week is adding fuel to the fire. Instead of buyback programs protocols are now willing to share revenue with token holders directly. Compared to the state of DeFi during the last bull run, we are lightyears ahead but still not quite there yet.

The Downsides Of Locking Tokens

If you ever wondered why crypto is having a hard time penetrating the retail market look back at the tokens you hold and consider how many times they implemented a change, required you to move from V1 to V2, decommissioned staking pools just to open new ones and so on... If you are a "set and forget" investor you are getting obliterated during these times.

Project owners in crypto still think that people have time to follow their every move and update that is usually published on Twitter or some blogging website. Our targeted demographic already has a job and is looking to escape that hell but we want them to enter a new one and treat their crypto investment like a second job which is kinda insane when you think about it.

This brings us to yet another update that every single DeFi project will soon publish. One of my favorite options trading platforms just did that. Premia Finance is sharing revenue with Premia holders that lock their tokens. A 4 year lock gives you a 4.25x boost which means that for every 100 tokens staked you get 325 extra or 325 more than that guy that bought the token and forgot about it.

On the upside we are seemingly removing Premia tokens from the market which should be good for the price in the long run but what is really happening is this - I, an active crypto participant, am diluting the returns of those that don't have the time or energy to deal with this stuff but still want to invest in it. To make the situation even worse, simply holding tokens won't give you any returns. You need to stake and lock them for at least a week.

Imagine this happening with stocks. lol

The Little Guys Is Screwed Yet Again

To try and complete my case, just remember what we kept telling ourselves about crypto a few years back. It was supposed to bank the unbanked and provide multiple revenue streams to those less fortunate. In theory, you could just put in $10 and see it grow slowly. The growth could double with the "real yield" narrative but instead of letting you keep your assets in a liquid state, I'll force you to say goodbye to them for the foreseeable future.

Now imagine your tokens going up a 100x. The promised opportunity finally became a reality for the little guy and he now owns $1K worth of tokens, a life-chanign amount in many third-world countries, but all he can do with them is watch them sit there and wonder what could have been.

The mob will yell but he is now earning more revenue because his stake is larger and you will laugh because their token amount remains unchanged and the percentage of revenue distribution is exactly the same regardless of the USD value.

The only reason why this locking thing works for now is because most people don't even know that all of DeFi is adopting this new narrative. If we were all up to date we would all be locking our tokens at the same time and even a 100x boost would mean nothing because the percentage of your vote would still be the same and the share of the revenue pie would follow the same pattern.

I am also yet to hear how this helps protocols. What benefits does Premia Finance enjoy when I lock 100 tokens away? They can't use it for liquidity and they will eventually enter the market again. A permanent contraction in supply just makes no sense to me but if you do have a reasonable explanation please share it below.

Real Yield > Ve

To end this debate let's put a real yield model beside a Ve model and see which one is better for the common investor.

To get a share of protocol revenue on a newly-launched perpetual exchange on Matic all I have to do is bring my USDC tokens. As long as I keep my USDC tokens staked on the protocol I earn 48% APR based on the current protocol earnings and liquidity. All of the tokens I staked are put to use. They are used by traders to open/close their positions and most of the revenue then flows back to me. If I find a better opportunity I can just unstake and move while keeping the earnings I accumulated so far.

If we look at Premia which is also sharing revenue with me things get way more complicated. Not only do I need to lock my tokens but I also need to virtually predict the market for the next 4 years if I want the max boost and max earnings.

I have to vote on the pools I want to earn from but their emissions depend on market conditions very tightly. During uptrends, put pools earn a lot more while during downtrends call pools are more lucrative. There is always the option of voting on all pools equally but that is the least profitable option in this case.

From an investor perspective, I see a clear winner here. I would rather put stablecoins to work on decentralized perpetual exchanges than lock speculative assets for 4 years and leave everything to chance.

What about you?

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