The year 2021 was a stellar time for the largest cryptocurrency market, with flagship coins like Bitcoin and Ethereum (find out here quotations in real time) which reached new all-time highs. That said, the global cryptocurrency market cap has also continued to explode parabolically while most altcoin ecosystems have seen decent growth. However, the star performers of 2020, which were DeFi tokens, mostly underperformed the broader market.
Over the past two years, DeFi protocols have generated millions in revenue and have seen a skyrocketing increase in the use and adoption of their products. However, it's been a bumpy ride over the past year, as skepticism around the tokenomics of some protocols has increased. This has also given rise to better models such as the veToken model that could shape the future of DeFi token design.
Defects in Tokenomics
Many market pundits are of the opinion that early DeFi token design models were quite flawed and resulted in massive destruction of value at the expense of retail investors. While most protocols used the idea of worthless governance tokens to rise to prominence in 2020, the model had some problems. As per the model, token holders strictly have governance rights, but this was not true in all cases.
DeFi giants like Uniswap and Compound, for example, have used the aforementioned model to fuel their growth and it has also helped a huge increase in TVL for tokens. However, COMP and UNI are “worthless” governance tokens since there is no direct economic benefit, such as a right to cash flows, to have them.
While the model isn't considered ideal, it was needed to avoid regulatory scrutiny and allowed these protocols to tokenize faster.
VeToken Model vs DeFi Tradition
There are some important advantages of the veToken model, over traditional DeFi models:
- Encourage long-term decision-making by incentivizing it and ensuring a long-term commitment to the protocol.
- Offers greater alignment of incentives among protocol participants. The ve model has proven to be beneficial in that it can align incentives across a broad range of protocol participants and stakeholders.
- Finally, it improves the dynamics of supply and demand by helping the numbers rise.
Rise of the VeToken
Since the worthless governance model had diminishing returns, the ve-token model has emerged as a popular alternative among DAOs to the worthless governance token regime. It aimed to encourage long-term decision-making, aligning incentives among protocol stakeholders, and creating favorable supply and demand dynamics for price appreciation.
Notably, many argued that major DeFi 1.0 tokens that have the worthless governance token model did not perform well. Curve on the other hand at press time had a 9,75% DeFi dominance, as its TVL was $ 18,9 billion.
The veToken model or the vote-escrowed model pioneered Curve's CRV and aims to infuse value into worthless governance tokens. It also involves token holders taking the risk of blocking their tokens in exchange for specific rights, such as governance power, within a protocol. For now, many in the market are of the opinion that veTokens could shape the future of DeFi tokenomics.