What is ve(3,3) - the latest DeFi project caused Fantom to take off?

TLDR: A new protocol, being built by two of crypto's most well-known developers, aims to change the mold for how DeFi works.

Fantom has grown to become the fifth-largest DeFi chain by TVL on the back of the hype about "ve (3,3)." Here's what the investors need to know about Andre Cronje's latest DeFi experiment.

Andre Cronje and Daniele Sestagalli - Who are they?

Andre Cronje

Andre has been at the forefront of DeFi since it really took off in the summer of 2020. His most successful project, yearn finance, has been a staple of DeFi since its launch in July 2020. Boasting over $4 billion in total value locked and a market cap of over $800 million, the yield optimizer is truly one of the blue-chip DeFi products. Another one of Andre's projects is Keep3r. While Keep3r is a bit more complex than Yearn, it is essentially a protocol that fosters collaboration between protocols and developers. Between Andre's two main projects, Yearn and Keep3r, he has a proven track record of creating successful protocols.

Daniele Sestagalli

If Andre's specialty is coding, then Daniele's specialty is community building. Over the past year, Daniele has built an impressive crypto community known as Frog Nation. It is a group of DeFi projects and protocols that Dani is involved in. The core Frog Nation projects are Abracadabra, Popsicle Finance, and Wonderland. Those are all successful projects.

What is ve(3,3)?

What are VE (Vote Escrowed) tokenomics?

VE just stands for "Vote escrowed," and it was introduced with Curve Finance. The Curve is a DEX that is primarily used for stablecoin swaps. The token behind Curve Finance is CRV.

When you have CRV, you have the option to vote to lock it. By vote-locking CRV, you receive veCRV in return. veCRV gains you two things:

Fee revenues generated by the protocol.
Governance over Curve Finance.

The longer you lock your CRV, the more veCRV you receive. Once you lock your CRV for veCRV, it cannot be reversed before the expiration date, and it cannot be transferred.

So using ve-tokenomics is a mechanism to better incentivize long-term believers in a project.

It does this by assigning more rights and benefits for those who lock their tokens for longer periods of time and taking tokens temporarily out of the circulating supply, which effectively reduces selling pressure. It also lowers the liquidity of tokens.

What is 3,3?

(3,3) was introduced by the protocol OlympusDAO. Basically, (3,3) is the way in which OlympusDAO baked in an element of game theory into the tokenomics of their protocol.

For example, there are only 2 participants in this game involving OHM, the native token of Olympus. They have the option of staking, bonding, or selling:

In order to stake, the participant increases the price of OHM because they must purchase the OHM off the market. By staking, the participant passively increases their OHM exposure through auto-compounding. That is beneficial for the protocol and the participants and assigned a value of (+2).
By bonding, a participant exchanges a certain amount of assets, typically stablecoins or LP tokens, for discounted OHM from OlympusDAO that vests over time. In theory, this shouldn't affect the market price of OHM. However, it is beneficial to the protocol, so it is assigned a value of (+1).
Lastly, by selling, the participant decreases the price of OHM. This is negative for both the participant and the protocol, as the value of OHM is now decreased. We assign this a value of (-2).

A table combining 4 rows and 4 columns about the v3(v3,3) model matrix — A matrix provided by the Olympus FAQ

Based on this, both participants are the best off if they both stake, while they are the worst off if they both sell. This game with only 2 participants involved is obviously a gross oversimplification of how the OHM market works practically. Although in theory (3,3)/staking is the best option for participants, that is not always the case for a game that involves thousands, millions of participants.

And the combination of them - ve(3,3)

As a result, ve(3,3) combines ve and (3,3). But more than that, Ve(3,3) hopes to pass them and solve the problem of token distribution and management of DeFi applications.

Users will be able to deposit a base token in return for a non-transferable token, which will be locked in the protocol. In return, they will receive transferable incentive tokens as a reward.

Current problems and new solutions for Defi

First problem: DAO attack

On November 11, 2021, Mochi formally announced themselves as a new player in the Curve Wars, writing that "Curve is the backbone of DeFi, and Convex is the kingmaker of Curve."

Mochi's tweet on Nov 21, 2021: "$MOCHI Inu Token launch and Announcing the Arrival of Mochi.fi to the Curve Wars" — Mochi's tweet announcing themselves as a new player in Curve Wars

First, Mochi launched its governance token, MOCHI INU, and incentivized liquidity for its USDM stablecoin. As is customary, DeFi users aped in, and liquidity quickly grew above $100M.

A Mochi team member swapped $46 million in USDM for DAI using the Mochi Curve pool, swapped the DAI for ETH, and used a large portion of that ETH to purchase massive quantities of CVX, which they then locked.

That would have allowed them to vote on additional CRV rewards for the Mochi pool, attracting additional liquidity and allowing them to swap even more USDM for stablecoins to buy more CVX. That ultimately creates a flywheel, tilty CRV rewards in their favor, and attracts huge sums of liquidity to their platform.

Andre Cronje called it "amazingly scammy."

Andre Cronje's tweet "This is amazingly scammy" — Andre Cronje's tweet

The Emergency DAO ultimately elected to cut off the Mochi pool's rewards. However, this attack brought up an issue: KeeperDAO, FRAX, Olympus, CREAM, and other DAO communities are voting or have voted to pursue similar strategies (if at a smaller scale) and is DAO decentralized?

So here is Andre's solution:

Emission rates' flexibility

Emission rates—or the amount of newly created tokens—will be determined by the circulating supply, and rewards will be greater if fewer tokens are locked across the entire protocol.

On the contrary, if anyone wants to abuse token staking to gain control, they will face the problem that the amount of returned tokens will be fewer, thereby preventing the risks that the current DAO model faces.

Second problem: Incentives for lockers

After LPs receive native tokens from liquidity mining, most of them will immediately sell for profits. Their behavior will affect the development of the project.

Emission rates' flexibility

With the above emission rate's flexibility, weekly emissions are adjusted as a percentage of the circulating supply.

If 0%, 50%, and 100% of the token are locked for ve, the weekly emission would be 2,000,000, 1,000,000, and 0, respectively. This solution will make tokens more and more scarce and incentivize lockers to lock their tokens.

ve lockers increase their holdings proportional to the weekly emission

Assume 1,000,000 weekly emissions, a total supply of 20,000,000, and a locked supply of 10,000,000. It would mean that 1,000,000 new tokens are minted and provided as incentives, a 5% supply increase. Our goal is to ensure that ve lockers are never diluted; as such, ve lockers have their holdings increased by 5%.

Ve(3,3) is integrated into NFT

It casts the lock-up certificate into VeNFT, which can be circulated in the secondary market, and users can use it at any time. In addition, it supports VeNFT mortgage, lending, etc., and enjoys voting governance rights.

With those deviations from the standard, tokens will be distributed more efficiently by user activities.

Third problem: Fee Distribution

In the old AMM model, LPs will receive token rewards issued by the application, not generated fees from protocols.

For Curve, veCRV holders receive 50% of fees no matter what gauges they vote for. It can be problematic as someone who owns veCRV could vote for a pool that generates no fees for Curve, yet they still receive 50% of the protocol's aggregate fee revenues. And there is a probability that they will vote for low-fee earning pools. Thus, it is hard for the project to incentivize the high-earning pools.

Ve-lockers have the right to decide whether the pool will be boosted

This approach is more decentralized and can create an AMM war, like Convex and Curve.

Ve-lockers can also earn 100% of all fees generated on only pools they vote for

Participants are incentivized to vote for the pools with the highest fees as that is the only way to receive cash flows from the protocol.

New AMM - The first product of ve(3,3)

Ve(3,3) introduced the first AMM designed with a P2P (protocol-to-protocol) model - Solidly. Solidly will be able to integrate the AMM, and the AMM will also have a Uniswap v2 compatible interface. Therefore, the veNFTs (which represent 25% of the Total Supply) distribution is based on the Total Value Locked (TVL) of the top 25 protocols on Fantom.

Conclusion

Ve(3,3) is an attempt to allow DeFi applications to adjust the inflation rate of native tokens according to the way of community co-governance rather than purely market action. What Andre and Dani are building over at Solidly seems special. There are tons of innovative ideas going into this protocol, and it could truly be a game-changer by being a P2P AMM. I believe that Solidly Exchange could bolster the whole Fantom ecosystem with it. Next time, we will talk about Solidly Exchange in more detail.