Contents
Key Insights
This article delves into the ever-evolving landscape of Decentralized Exchanges (DEXs), particularly those deploying the ve(3,3) model. We aim to clarify the commercial prospects and challenges integral to this model, providing insights into the potential long-term path of DEXs.
As frontrunners in the DeFi race, DEXs and lending protocols have successfully attained a desirable Product-Market Fit. They boast a robust user base and trade volume, serving as the foundational pillars of the flourishing Value Internet metropolis.
Given their pivotal role, DEXs are continually at the heart of fierce competition and innovative advancement. Entities in this field aim to outshine their counterparts by rapidly enhancing their products, economic frameworks, and ecosystem alliances. Among myriad strategies in this field, the ve(3,3) model, introduced by Andre Cronje in early 2022, stands out.
This research delves into the ve(3,3) paradigm, serving as a crucible for critical inquiries:
- Understanding ve(3,3): What constitutes the core elements of the ve(3,3) framework? What challenges is it engineered to overcome?
- ve(3,3) In Practice: How have the standard-bearers of ve(3,3) performed in the DeFi arena? What enhancements have these trailblazers integrated into the foundational ve(3,3) blueprint, and how are they valued within the ecosystem?
- Sustainability: Does ve(3,3) possess the resilience to establish a sustainable niche for future DEXs?
The subsequent report contains the author’s perspective on the ve(3,3) model and the projects deploying it as of the publication date. Please be aware that the information presented may contain inaccuracies or biases and should not be used as an investment guide. We appreciate and encourage constructive criticism and corrections.
For a beneficial understanding of this article, a basic knowledge of the ve model and Curve, a project closely associated with it, would be advantageous. For a comprehensive understanding of Curve, you might refer to:
- A Deep Dive into the Leading AMM Platform: Curve Finance
- CRV under the attack of Uni V3: In-depth analysis of Curve’s business model, competition status, and current valuation
Defining the ve(3,3) Model and Its Value
The ve(3,3) model, rather than being a specific project, embodies a methodology for the construction and operation of Decentralized Exchanges (Dex) and liquidity protocols. The ‘ve’ stands for ‘vote escrowed’, which is derived from the veNomics proposed by Curve. The essence of this component is the fostering of an alignment of long-term interests between participants and the protocol, achieved through a staking-based voting mechanism.
The “(3,3)” component originates from the game theory of OlympusDAO, an interpretation of the Nash equilibrium theory. The basic principle is that OlympusDAO sells its native token, OHM, to users at a below-market price through bonds. In return, Olympus receives assets like USDC and ETH from its users, thereby establishing a value-supported treasury. The treasury then generates OHM to be disseminated through the Rebase mechanism to OHM stakers. In the event of increased market demand for OHM tokens, the treasury initiates a larger issuance of OHM tokens to stakers. This action catalyzes a virtuous cycle of high Annual Percentage Rate (APR) for stakers, contingent on a consistent increase in the OHM price. The underlying assumption here is that market participants will opt for continued staking rather than selling their OHM tokens. This phenomenon, known as ‘Stake, Stake’ or ‘(3,3)’, motivates users to persistently partake in staking, hence enabling them to reap the benefits of continuous OHM token issuance while concurrently reducing the risk of token dilution.
If the intricacies of the (3,3) mechanism seem complex, it can be simplified as a strategic game model as follows:
- A project is powered by its network effect. The larger the bilateral or multilateral scale of its user base and the involved funds, the more daunting the competitive barrier. As such, there’s an ongoing imperative to broaden its scale to establish an unbeatable network effect barrier.
- The project introduces a mechanism that incentivizes all token holders to collectively stake and reinvest their tokens (or undertake any other action that the protocol encourages). This concerted action enables the protocol to continually expand in size and strengthen its network effect until it establishes a robust competitive barrier capable of capturing monopoly profits within its sector. As a ‘shareholder’ of the project, a user’s ownership value will naturally increase in line with the project’s expansion in size and monopoly, as long as the user maintains their share of the total project tokens. This scenario culminates in a ‘win-win’ situation, enhancing the value of individual ownership while contributing to the project’s growth.
- The project sets forth a mechanism that encourages all token holders to collectively pledge and reinvest their tokens (or execute any other action that the protocol advocates). This unified action empowers the protocol to continuously expand in size and intensify its network effect until it forms a solid competitive barrier capable of securing monopoly profits in its domain. As a ‘shareholder’ in the project, a user’s stake value will naturally escalate in conjunction with the project’s growth in size and monopoly, provided the user retains their share of the total project tokens. This situation manifests in a ‘win-win’ outcome, bolstering the value of individual stakes while fueling the project’s expansion.
- The vulnerability of this mechanism becomes apparent when users choose to adopt opposing actions, such as unstaking and opting to sell their tokens in the market. Such an action could gradually create a ripple effect, leading to a decrease in token prices and mass exodus of users, thereby initiating a downward spiral that could result in project failure.
In the context of OHM’s stablecoin project, the pursued network effect is that the larger the network of the stablecoin, with more use cases and users, the harder it becomes for subsequent players to compete. In the case of the Dex project represented by Solidly, the network effect pursued lies in the mutual amplification among Dex’s Liquidity Providers (LP), veToken stakers, and traders. The larger its market share in trading, the more challenging it becomes for later entrants to catch up. Therefore, the primary objective of the (3,3) mechanism in the DeFi space is to aid projects in expanding their network effect and establishing competitive barriers at a specific phase of their development.
Additionally, the ve(3,3) Dex introduces novel strategies during the project’s initial phase and the composability of governance credentials, augmenting the foundational ve model and (3,3). By integrating these design elements, it strives to establish a superior Dex model.
When considering the specific attributes of ve(3,3) category Dex projects, the following key features are notable:
- Primarily, such projects adopt Curve’s veNomics as their main framework, which implies:
- The project not only operates as a Dex but also functions as a liquidity aggregator and liquidity marketplace. The project’s equity tokens serve as the procurement currency for the platform’s liquidity.
- Equity tokens must be staked to gain governance rights and receive dividends from revenues (inclusive of fees and bribes). For stakeholders to derive value from the platform, they must commit to its long-term evolution.
- There are two key points of distinction between ve(3,3) projects and Curve: one is that while Curve distributes all transaction fees from all pools to veToken stakers, ve(3,3) projects only allocate transaction fees from the pools voted on by the veToken stakers. On the other hand, the Liquidity Providers (LPs) of ve(3,3) projects receive only equity tokens as rewards for market making, while all transaction fees are directed to veToken stakers. Unlike Curve, which relies on an external platform (like Votium or Votemarket) for its bribe module, ve(3,3) projects integrate their own bribe module. This design allows for more straightforward short-term liquidity acquisition.
- Learning from Olympus (3,3) game mechanism in the context of ve(3,3) projects suggests the following:
- There is an encouragement for users to stake equity tokens in exchange for veTokens and for a proportional token incentive emission amongst veToken holders. This approach aims to prevent dilution of holders’ token ratios, motivating users to stake actively.
- An increase in staking ratio lessens the selling pressure on the token, thereby boosting the token price. This price increase results in a higher APR for market-making, attracting further liquidity, enhancing trading depth, and increasing trading volume, thereby creating a self-reinforcing business cycle.
- During the initial phase or ‘cold start’, the first veTokens are typically airdropped to top projects in the ecosystem (usually referring to the underlying public blockchain), recognized for their business impact and influence. This strategy aims to attract the initial business audiences to its liquidity marketplace, much like an internet product issuing “free-try coupons” to its customers. Here, ‘try’ equates to the project’s “liquidity buying service.”
- The staked voucher of the equity tokens have been changed from veToken to veNFT. Unlike veTokens, which are non-transferable, veNFTs can be transferred, allowing users to resell or restake their veTokens, thereby improving capital efficiency.
In essence, ve(3,3) projects represent an advancement of the Curve model, primarily targeting improvements in three key areas:
- Enhanced User Incentives: These projects aim to increase users’ inclination towards acquiring veTokens, thereby aligning the interests and actions of token holders more closely with the protocol.
- Fee-Driven Incentives: The model operates on a principle where pool fees are allocated only to those who vote for a particular pool. This system indirectly incentivizes transaction volume, as better liquidity attracts more transactions, leading to an increase in fee generation.
- Business-Oriented Strategy: ve(3,3) projects strive to provide an improved liquidity purchasing experience for token issuers while offering higher initial incentives to actively engage the business audience.
Hence, when assessing the performance of ve(3,3) projects, our analysis will center on these three critical elements.
