What is veToken model and why should you use it for your token?

@thedefiedge?and?@milesdeutscher?wrote some amazing pieces on Tokenomics. They however, mostly focus on investment perspective - what to be aware of when choosing a project to invest in.

But let’s say you are building a project and you plan to release an ecosystem token. Why choose veToken model?

Scroll down to explore the incentives and benefits as well as drawbacks of using the new veToken model.

You want your token to remain valuable right? So how do you achieve that.

As?@thedefiedge?briefly summarized token prices mostly reflects?utility, speculation and supply/demand mechanism. We will focus on the latter two as the speculation aspect is not a part of this topic.

Firstly let’s discuss the main drawback of the traditional token models.

A vast majority of released tokens have no utility whatsoever. In the long run this results in no underlying demand for the token, with potentially inflating supply the price slowly converges to 0.?veToken?model aims to solve these issues.

Secondly, what the hell is the veToken model you may ask.

To explain very briefly explain, veToken model was introduced by Curve in 2021 but gained popularity only recently. It enables governance, reward maximization, and liquidity. ve in veToken denotes vote-escrow which are two of the key incentives the model incorporates.

For more curious readers check the veToken Finance website.

Ok, got it. Now back to bringing the value to your token. How is the veToken model better than traditional token?models?

Key improvements and incentives can be grouped in a few main categories.

Token Locking

With locking the tokens (lock period is usually from 7 days up to 4 years), protocol users will be long term believers in the project as they cannot unlock their tokens prematurely. This leads to lower sell pressure.

But why would anyone lock the tokens for so long?

Yield Boosting

There is also an incentive alignment across protocol participants. If a user locks his/her tokens a higher/boosted yield is received (e.g. Curve LP yield is 2.5x higher if the tokens are locked).

Voting

Once users vote-lock their veTokens, they can start voting on various DAO proposals and pool parameters. This is applicable even to the protocol settings as such.

A better Supply-Demand Mechanism

veToken model improves supply and demand mechanism. vote-locking serves as a mechanism to remove tokens from the open market (e.g. CRV has 51% of supply locked, CVX has 75% of supply locked). This helps to offset high emissions that some of the protocols produce.

Too get a clearer view on the benefits veToken model brings, see below the example of $CRV token rights under veToken model. Incentives are clearly there.

But all models have drawbacks, right?

Yes, and veToken model is no exception.

Two potential issues might be a lack of liquidity — mainly through the risk of high ownership concentration. Second key risk pertains to vote selling and bribes. However, this risk is limited to specific protocols. More on these in another article.

Are there any upgrades of the veToken model?yet?

A future emission based token model was in fact presented by Andre Cronje — the so called ve(3,3). It is still mostly a theoretical contribution.

But there are 3 key improvements from the classic veToken model.

1. Weekly emissions are adjusted as a percentage of circulating supply.
2. ve-lockers increase their holdings proportional to the weekly emission.
3. ve-locks are NFTs.

I won’t go into details here, but feel free to check his original article below.

Lastly. There is a way to publicly offer your veTokens. Why IDO when you can?veIDO?

The veIDO mechanism was pioneered by LIFINITY Protocol. Original idea that will certainly find its place in the future of Tokenomics.

Very briefly, in a veIDO, the more USDC you invest and the longer you lock your tokens, the more vote-escrowed tokens you receive. Check the LIFINITY Protocol veIDO article below if you are interested in more details.

Conclusion

That’s it for now! In the next thread we will focus on applying and designing veToken model for your project.

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