Incentivizing user commitment has long been a challenge for decentralized finance (DeFi) protocols. Many struggle to strike the right balance between rewarding participants and fostering long-term engagement, leading to volatile ecosystems. Enter the vote-escrowed model (veModel) - a tokenomics framework designed to address this issue head-on.

The veModel incentivizes loyalty by rewarding users for locking their tokens and actively participating in governance. In return, protocols gain stability and alignment with their most committed users, fostering a collaborative ecosystem that supports long-term growth. By combining governance, rewards, and time-based commitment, the veModel has become a powerful tool for DeFi protocols aiming to build sustainable communities.

What is a veModel?

The veModel was first introduced by Curve Finance, a leading decentralized exchange focusing on stablecoin swaps. The core idea behind this innovation was simple: encourage users to lock their tokens for a set duration in exchange for additional benefits.

By locking tokens, users received vote-escrowed tokens (veTokens), which granted them:

• Governance Power: A say in the protocol’s decisions, like determining reward distribution.
• Rewards: A share of the protocol's revenue or additional incentives tied to their locked tokens.

This model addressed a major challenge in DeFi: ensuring user commitment while balancing token liquidity and governance efficiency.

How do veModels work?

Here’s a step-by-step breakdown of how a veModel works:

1. Locking Tokens:

• Users deposit their tokens (e.g., the protocol's native token) into a smart contract.
• They choose a lock duration, ranging from a few months to multiple years.
• The longer the lock duration, the more governance power and rewards they receive.

2. Receiving veTokens:

In return for locking their tokens, users receive veTokens. These tokens are:

Non-tradable: Unlike regular tokens, veTokens can’t be sold or transferred. Time-weighted: The longer your lock, the more veTokens you receive.

3. Benefits of veTokens:

• Voting Power: With veTokens, users can vote on protocol proposals, such as deciding which liquidity pools receive rewards.
• Rewards: Users earn a share of the protocol's revenue, often in the form of trading fees or incentive distributions.

4. Time-locked Commitment:

• veTokens gradually lose their value as the lock period ends, motivating users to relock their tokens for continued benefits.
• This ensures that governance power aligns with those most invested in the protocol’s long-term success.

Why do veModels Matter?

For Users:

• They gain influence over how the protocol operates and a direct stake in its financial success.
• The rewards provide an ongoing incentive to remain loyal.

For Protocols:

• Locking tokens stabilizes the token economy, reducing market volatility.
• Aligning governance with long-term stakeholders ensures thoughtful decision-making.

In essence, the veModel bridges the gap between user incentives and protocol sustainability, making it a cornerstone of modern DeFi tokenomics.

The Evolution of veModels

Since its inception, the vote-escrowed model (veModel) has undergone significant advancements, adapting to the evolving needs of DeFi protocols. These iterations build upon the original concept to introduce new functionalities and boost user engagement.

1. Original veModel

The veModel, first introduced by Curve Finance, established a foundational framework for aligning user incentives with protocol growth. Its key features included:

Governance Focus:

• By locking tokens, users gained governance power, enabling them to vote on protocol decisions such as reward distribution and feature upgrades.

Time-locked Rewards:

• Locking tokens for longer durations resulted in greater voting power and higher reward allocations, encouraging long-term commitment to the protocol.

This model effectively incentivized user participation and fostered a stable token economy by reducing speculative token dumping. However, it lacked flexibility, as locked tokens could not be traded or moved.

Curve Finance DAO Page, where users can lock their tokens for voting power (Source)

2. ve(3,3) Model

The ve(3,3) model builds on the original concept by integrating game theory principles, particularly the 3,3 strategy popularized by OlympusDAO. The goal is to maximize cooperation among participants and amplify rewards through collective engagement.

How it Works:

• Users lock tokens to receive veTokens, just like in the original veModel.
• The added innovation lies in fostering cooperation-driven rewards:

1. If most participants lock tokens and vote, the entire protocol grows stronger, resulting in larger rewards for everyone.

2. This creates a positive feedback loop, encouraging users to work together rather than act individually. The ve(3,3) model ensures that the benefits of cooperation are distributed equitably while maintaining flexibility and scalability.

3. veNFTs

To address the original model's rigidity, the introduction of vote-escrowed NFTs (veNFTs) brought a new level of flexibility to the veModel. By representing locked positions as NFTs, users can now trade, transfer, or split their locked tokens without losing the benefits associated with them.

How do veNFTs Work?

• When users lock tokens, their position is tokenized into an NFT.
• These NFTs retain the veToken benefits, such as governance rights and reward claims.
• The flexibility to trade or transfer these positions adds liquidity to otherwise locked assets.

Summary of Evolution

1. Original veModel: Groundbreaking in its ability to tie governance power and rewards to long-term token locks.
2. ve(3,3): Increased cooperation and sustainability by combining veTokens with game theory.
3. veNFTs: Introduced liquidity and flexibility, transforming locked positions into tradable assets.

Each iteration of the veModel has added layers of functionality, addressing user demands while maintaining the protocol’s focus on growth and sustainability. These advancements ensure that the veModel remains a cornerstone of modern DeFi tokenomics.

Key Implementations of a veModel

The veModel has been successfully adapted across various DeFi protocols, each introducing unique features that increase functionality, user engagement, and ecosystem sustainability.

Here’s how some of the most notable implementations work:

- Thena

Thena allows users to lock its native token, $THE, to receive veTHE, a governance token that also offers rewards. veTHE positions are represented as veNFTs, making them tradable and providing flexibility. Additionally, Thena introduced theNFT collection, a set of 1,734 NFTs granting holders a share in trading fees and other perks.

theNFT Collection from Thena on the Element Marketplace (Source)

The project gained significant recognition after Binance listed $THE, boosting its visibility and establishing its veModel as an innovative tokenomics approach in DeFi.

- Aerodrome Finance

Aerodrome is a decentralized exchange built on the Base network, designed to serve as a liquidity hub for its ecosystem. It utilizes the ve(3,3) model, where users can lock AERO tokens to receive veAERO NFTs. These NFTs grant governance rights, enable voting on reward distribution, and provide a share of trading fees. Aerodrome incorporates a liquidity incentive engine and vote-lock governance to ensure efficient allocation of rewards and active user participation. Its design focuses on aligning incentives and fostering sustainable growth within the Base network's DeFi ecosystem.

- Thruster

Thruster’s veModel revolves around veTHRUST, obtained by locking THRUST tokens. veTHRUST grants governance rights, allowing users to vote on reward allocation across liquidity pools. This model ensures that active participants in governance are rewarded, aligning incentives between users and the protocol.

- Lynex

Lynex offers veLYNX, an NFT-based representation of locked LYNX tokens. These veLYNX NFTs can be traded, split, or increased, adding flexibility to the traditional veModel. Users gain governance power and reward eligibility, with anti-dilution mechanisms ensuring the value of veLYNX remains protected over time. This approach makes governance participation accessible and adaptable for users.

Each of these protocols highlights how the veModel can be tailored to meet specific goals, from flexibility and tradability in Thena and Lynex to sustainability and governance efficiency in Velodrome and Thruster. These implementations demonstrate the adaptability and long-term potential of the veModel in DeFi ecosystems.

The Future of veModels in DeFi

The veModel is evolving with trends like multi-chain adoption, increased use of NFTs for flexibility, and potential AI-driven reward distribution. These innovations aim to better user experience and optimize governance.

However, challenges remain. Complexity can deter newcomers, and locked token illiquidity - despite veNFTs - needs better solutions. Protocols must also balance rewards to avoid overinflation and ensure sustainability.

As adoption grows, the veModel could become a standard for aligning user incentives with protocol goals, solidifying its role in DeFi’s future. The veModel has transformed DeFi by combining governance, rewards, and long-term commitment. From Curve Finance’s origins to innovations like ve(3,3) and veNFTs, it has proven versatile and impactful.