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veTokens

Vote Escrowed tokens (veTokens) are a unique concept in the world of cryptocurrencies, offering token holders the opportunity to lock their tokens for a specific period in exchange for governance rights and additional benefits. Unlike regular tokens, veTokens are often non-transferable and come with exclusive privileges, serving as a solution to address liquidity and engagement challenges faced by protocols.

Protocols strive to attract deep liquidity and establish long-term user engagement. While short-term programs like liquidity mining can attract users temporarily, ensuring their commitment to the protocol's mission and turning them into "sticky liquidity" has proven to be more difficult. This is where veTokens come into play, with VeTokenomics designed to convert users into long-term participants.

The basic veTokenomics model revolves around users locking their tokens and, in return, gaining voting rights and a share of protocol fees. In recent times, revenue sharing has become a fundamental mechanism for value accrual in tokens. Investors now seek governance tokens with economic incentives, as the collapse of value in DeFi 1.0 tokens highlighted the importance of aligning governance with economic benefits. Additionally, veTokens can offer boosted yields to token holders.

By locking their tokens, users not only gain governance rights but also earn a percentage of protocol fees and enhanced rewards within the ecosystem. It's worth noting that veTokens are typically non-transferable and cannot be sold. While variations exist, such as the use of NFTs within Solidly forks, the core concept remains the same.

The driving force behind veTokens lies in addressing two critical issues: liquidity and engagement. This model aims to foster active participants who are aligned with the long-term success of the protocol. When users commit to locking their tokens for extended periods, it demonstrates their belief in the protocol's sustainability and functioning at the redemption date. This alignment of interests creates a sense of ownership and personal investment, transforming mere capital into dedicated protocol supporters.

From a user's perspective, locking tokens allows them to earn a percentage of protocol fees and enjoy boosted yields. It is helpful for users to view locked tokens as an investment for future profits. For instance, Curve Finance offers yield boosts up to 2.5X, incentivizing participants with significant holdings to hold veCRV. Similarly, Solidly and its derivatives direct trading fees and additional incentives to token lockers, encouraging users to lock tokens and unlock higher earning potential.

From a protocol standpoint, restricting governance participation to users with locked tokens encourages a more long-term outlook when considering governance proposals. Users are more likely to consider the long-tail effects of decisions, promoting thoughtful decision-making. Moreover, a lower circulating supply facilitates better price discovery, benefiting the protocol. Price stability and enhanced liquidity are additional advantages for protocols that successfully encourage a large percentage of users to lock their tokens.

Token emissions primarily go to users holding escrowed token versions, promoting responsible profit-taking. In liquidity mining models, users tend to acquire as many tokens as possible and swiftly sell them before moving on to the next opportunity. However, in the veToken model, users who quickly sell their emissions put selling pressure on their own token holdings. This issue has led to various forks proposing minor adjustments to the economic model pioneered by Cronje's Solidly.

In conclusion, vote escrowed tokens (veTokens) offer a compelling solution to enhance liquidity and engagement within protocols. By incentivizing users to lock their tokens, protocols can create a dedicated community of long-term supporters aligned with the protocol's success. Users benefit from governance rights, a share of protocol fees, and enhanced rewards, while protocols enjoy increased stability, price discovery, and responsible profit-taking. The veTokenomics model introduces a novel approach to address the challenges faced by protocols in the ever-evolving cryptocurrency landscape.