Vote Escrowed Tokenomics

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Vote Escrowed Tokenization is the process of locking up the native governance token of the platform for a pre-determined time frame to reap additional benefits.

The benefits include:

  1. Governance Rights: On-chain decisions can only be taken by those who hold governance tokens. For e.g., in the case of Curve (an AMM-based DEX), the veCRV holders decide the APY (Annual Percentage Yield) that each Curve Pool (the liquidity pool for cryptocurrency pairs such as ETH-USDC or ETH-stETH) would receive.
  2. Revenue: All the trading fees that are accrued on the platform are divided between liquidity providers and veTKN holders. In the case of Curve, the trading fees, which are usually 4bps, are split evenly between the LPs and veCRV holders. The veCRV is a non-transferable token and can only be obtained by locking CRV on the Curve platform.
  3. Airdrops: Most of the platforms also reward token holders by airdropping other digital assets in their wallets.
  4. Boosting: Depending upon the time frame for which the token is locked, Vote Escrow token holders receive additional benefits such as a boost on the liquidity provided or discounts on transaction fees. For example, Curve provides a 2.5x liquidity boost for those who lock the token for 4 years.

The veTKN holders receive these benefits for their long-term time commitment to the platform. The staking of the tokens reduces the circulating supply and potentially relieves the selling pressure of the primary token. Protocols implementing vote escrowed Tokenomics now include Curve, Convex, Firebird, Pickle, and Iron. VeTKNs are fast becoming a popular economic model for earning non-linear rewards while securing more voting rights in DeFi Protocols.

veCRV holders determine the APY range for the curve pools. The users’ returns vary on the maturity of the locked tokens.

DeFi Protocols try to increase their voting power within ecosystems such as Curve either by bribing veCRV holders through platforms such as Votium or increasing the protocol’s contribution to the ecosystem’s Total Value Locked (TVL). The more power that the protocols have, the more liquidity they can provide for their tokens. This helps in maintaining a tighter peg for their stablecoins, reduces slippages, and makes transactions cheaper. From the protocol’s perspective, the process of bribing veCRV holders is cheaper than running market campaigns to incentivize liquidity providers.

In the short term, the veTKN model eliminates the reliance of the holders on the price of the underlying token because the holders can’t sell their tokens till a pre-determined time horizon. The only benefit that they can get from the token is through transaction fees and the dividends paid for holding. Based on game theory principles, several additional protocols such as Convex have emerged that streamline the process of automatic bribing to generate even higher returns.

The Vote Escrowed Tokenomics model has the potential for truly realizing the power of blockchain technology by creating long-term, self-perpetuating, fully decentralized applications that return value to the shareholders.