The lead-up to a be-all-end-all experiment In game theory, the Nash Equilibrium determines the optimal solution in a non-cooperative game in which each player lacks the incentive to change his/her initial strategy. With the beginning of DeFi Summer in 2020 and the advent of succulent, yet imaginary yields coming out of the juiciest fruit coin around, liquidity mining programs became the de-facto standard for DeFi protocols to bootstrap their liquidity. At first, this method seemed to be very efficient. However, its weaknesses started to show up over time, as more and more protocols imitated the model. One farm after the other, native token issuance started to be perceived by investors as a cost-efficient manner to incentivize liquidity providers. Rushed by FOMO, retail participants also chased their piece of the pie and started to engage more actively in protocol governance and operations. Subsequently, so many protocols blindly followed the narrative without giving any further thought to the secondary effects that would later show up. Among the unintended consequences, which started to become more and more obvious, the emission of inflationary assets from a protocol treasury is the one that stood out the most, up to the point that some external actors referred to this activity as “magic internet money printing”. However, even with this magic, most protocols could not avoid the inherent selling pressure that comes from high token emission rates. And that’s how a new design that quickly gained traction emerged, the model, whose goal was to achieve the perfect game theoretical equilibrium with respect to the incentive alignment of both long-term committed token holders and short-term speculators. This system consisted in giving different weights to different people in a Sybil-free environment. ve Looking at it from a DAO perspective, where everything is on-chain, it is easy to support the argument that there must be different reward weights assigned to each participant based on their incentives. For example, short-term traders should have less power to influence the protocol’s trajectory and skew it in their favor. For example, if you are a token holder with a long-term commitment to the protocol, you wouldn’t want things like flash loans manipulating gauges, draining community funds… The basis for understanding this mechanism design in a Sybil-free environment is that there is no credibility behind an Ethereum address. And even if there was, this credibility would be easily traded on a secondary market. Here is where the intervenes by vesting tokens in a 4-year decaying ratio to the people who want long-term success for the protocol. ve model If you lock up for the maximum amount of 4 years, then you get 1 for every CRV veCRV If you lock up for 1 year, you get 0.5 for every CRV veCRV Since decides what pools get whitelisted, what protocols can participate in the flywheel, and who gets CRV rewards… this created a whole ecosystem where bribes became the prevalent law. As a consequence, protocols saw an opportunity to create their own environment within the ecosystem. In doing so, they launched their own stablecoin and attempted to direct liquidity to their own pool in order to benefit from the pegging mechanism that the AMM provides. veCRV Curve Curve Over time, factories became a thing, which democratized access to the flywheel. However, that is not enough to attract enough liquidity. The reason why some pools earn a lot of incentives is because they have a lot of liquidity. In other words, if you are an LP to one of these pools you will get the CRV token, which you could then lock up for more , which boosts your rewards even more… and now you are a player in a meta-game which you thought would leave the most sophisticated game theorists in disbelief. Going back to the protocol, it is now willing to provide its own incentives on top of the CRV rewards in order to attract liquidity. The problem is that now the protocol needs to convince holders to vote for its pool. At the beginning, it was not an easy task. You had to find out who those whales were, how to talk to them…But all of a sudden bribes come into play and the Curve wars began, aka “I will give you a percentage of my native token supply so that you vote for my pool”. Curve Curve veCRV veCRV As you can see, a new meta game started. From the LPs point of view, if you are a LP and you don’t hold any veCRV, the protocol will act as if you had provided only 40% of your liquidity (you provide 100 units of liquidity and the protocol only takes 40 into account for its calculations). On the contrary, if you hold the maximum amount of veCRV, your contribution gets boosted by a 2.5x multiplier which turns those 40 units of liquidity into 100 units. There are more calculations involved, but this is the basic idea you need to understand. Essentially, if you want to maximize your CRV rewards, then you must optimize for the amount of , which means that you have to lock up your tokens for at most 4 years, and who knows what the price of CRV will be in 4 years. Did Curve even exist 4 years ago? This is a big sacrifice considering the huge opportunity cost of being invested in a protocol for such a long period of time. veCRV But that’s not the end of the Curve Wars, since entered the DeFi scene by building a governance layer on top of Curve and its design. This was the beginning of a new flywheel that allowed for 3 possible activities with different reward mechanisms respectively. Convex Finance ve Providing liquidity on the Curve and staking those LP tokens into . This lets a user earn boosted $CRV rewards without holding . Staking LP tokens: Convex veCRV Rewards for cvxCRV are similar to those of holding veCRV, except for the upside of holding a liquid token plus a 10% CRV distribution from protocol fees. Staking CRV in exchange for yield-bearing cvxCRV. for around 1% additional rewards Staking and locking CRV All these 3 action accrue value for CVX tokens while also increasing the voting power of over Curve. currently holds more than 50% of Convex Convex veCRV Because of this new unexpected dynamic introduced by , now made it possible for any individual to boost their position, since would lock up CRV in your behalf. On top of, also introduced off-chain voting for emissions. Now there are two options: vote with veCRV, or use CVX tokens. Convex Convex Convex Convex Remember how at the beginning we mentioned how beneficial Curve’s pegging mechanism was for protocols that issue their own stablecoin like MIM, FRAX…? Well, now this protocols have the alternative of using CVX, which has a lower locking period of 16 weeks. In part II, we will not cover , accumulating CVX…but rather a more game theoretical approach that will involve well known actors like Andre Cronje and Daniele Sesta. Part II will serve as an introduction to the model, which combines the ve model with the prisioner’s dilemma implemented by and its most famous fork . Votium Redacted Butterfly ve(3,3) Olympus Dao Wonderland Hope this piece was helpful to understand the origin of the Curve Wars. This series of articles aims to be a primer on the token design mechanism experiments that rode the entire impulse to the top of the 2021 bull market. If you would like to share feedback or disagree with some of the statements made in this article, do not hesitate to reach out on . If you enjoyed Part I, feel free to share and stay tuned for what’s coming next :) Twitter This story was first published here.
