Curve and veToken Economics

The rise of crypto and tokenization has blown the design space for protocol economics wide open, allowing projects to incentivize specific behaviors. Yet, many DeFi protocols reward all token holders equally, independent of the value they add to the project. More often than not, this involves little to no lockups in exchange for receiving governance power and protocol revenues. We believe the optimal design aims to dilute mercenary capital and speculators, while rewarding value additive and long-term oriented participants.

One such model we feel encourages this behavior is the vote-escrowed implementation introduced by Curve. This model allows CRV holders to lock up their tokens as vote-escrowed CRV (veCRV) for up to 4 years. The longer a user locks their CRV for, the more veCRV they receive. In exchange for taking on liquidity risk and removing CRV supply from the market (showing their long-term commitment to the platform), veCRV holders are entitled to 3 main benefits:

A prorated share of fees generated by Curve.
Boosted CRV rewards on liquidity provider positions (up to 2.5x).
Governance and gauge weight voting power. Importantly, the gauge weight dictates how Curve’s future emissions are distributed.

The above set of incentives generates a positive flywheel. The more long-term oriented a user is (measured by their veCRV), the more rewards they will receive. This flywheel is one of the most important dynamics of the veToken model and will be explored in detail in the next section.

The long-term value proposition of Curve is for it to be the deepest, most liquid place to trade stable assets. The goal isn’t necessarily to be the main DEX for everyday swaps, but to empower stablecoin projects to build large liquidity reserves. This means their main users on the supply side are liquidity providers.

Many failed yield farming schemes have blown up due to unsustainable token emissions and the proliferation of mercenary capital. The following is an example of what veToken economics aim to avoid:

An initial liquidity mining program is kicked off and mercenary capital deposits large amounts of money for the sole purpose of farming and dumping rewards.
Initially, this has reflexivity to the upside. As TVL and “hype” surrounding the project increases, it causes the token price to appreciate. This can further increase the yields offered on deposits given yields are paid in the native token, thus continuing the cycle.
Eventually, an inflection point is reached where token incentives begin decreasing, all the while mercenary capital continues to sell their farmed tokens. This selling alongside token emissions dropping off results in reduced yields for liquidity providers.
A reflexive loop to the downside begins to take hold, as liquidity exiting the DEX makes it fundamentally less valuable. Lower liquidity means the DEX can’t support as much trading volume and thus generates fewer fees. This leads to a further depreciation in fundamentals and a decline in the native token price, further lowering yields for LPs.

The veToken model avoids this by aligning liquidity providers with the long-term interest of the protocol.

For liquidity providers on Curve to capture the 2.5x boost on their rewards, they must hold a certain amount of veCRV relative to their liquidity. This incentivizes LPs not to dump tokens but instead:

Purchase a position of CRV on the open market and lock it.
Lock part or all of the CRV they receive as rewards for providing liquidity.

In turn, this encourages liquidity providers on the Curve platform to become long-term stakeholders and supporters of Curve’s success – as opposed to employing mercenary farm-and-dump strategies.

Furthermore, not only are LPs incentivized to lock up for the 2.5x boost, they are incentivized beyond that to accumulate as much veCRV as possible. This is because veCRV sets the gauge weight, allowing holders to