Outlier Ventures: Discuss 5 improvement plans of VE Token model

Original author: Robert Mullins, Outlier Ventures

Original compilation: Peng SUN, Foresight News

In the article "the advantages and disadvantages of the ve token model and improvement ideas", we introduced the current status of the current voting custody token design. Covers the original goals and current flaws of the token design, including a meta-governance protocol that accumulates all underlying veTokens, taking rewards from veToken holders and greatly diluting the latter's positions.

This article introduces the The mechanism proposed by the original intention, thereby promoting governance and better decentralization.

The new generation voting escrow model ve_v2 aims to achieve this by utilizing some of the following mechanisms.

RageQuit:

ve_v2 token created by MolochDAO A core feature of the design is the RageQuit feature. RageQuit allows staking users to unstake early if they are dissatisfied or their long-term evaluation of the project changes, with some penalties of course. This feature allows the departure of disgruntled stakers who may undermine governance decisions or not contribute as much as they once did. RageQuit will also reduce the opportunity cost risk for those who may decide to commit to an extended lockup period at the outset, but know they will exit in the future.

Some thoughts about RageQuit features are:

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- The longer the user locks the position, the smaller the penalty of RageQuit. This is a punishment for those who want to leave early during the lockup period; it is not a punishment for those who stick to the agreement but may have other priorities now.

- When the user RageQuit, the deducted tokens will be distributed to the remaining lockers according to the "ve" ratio. This is to reward more loyal depositors with the tokens of those who leave early, reducing the dilution rate and rewarding their loyalty without incurring additional costs to the protocol.

Adding the RageQuit function to the "ve" design can solve some obvious problems in the current system Specifically:

- Lockers can leave the market if they wish, and eliminate less loyal members, thereby shaping a loyal community.

- Loyal stakers will be rewarded with tokens deducted from those RageQuit users, allowing those who are most loyal to have more governing power.

- The perceived opportunity cost risk is low for those looking to lock up for the long term. Because they know they can RageQuit early if they want to.

While implementing the RageQuit feature seems like a positive decision, there are some drawbacks:

- As prices fall, RageQuit appears to be an option for disgruntled lockers A more attractive option, which could add more selling pressure when the coin falls.

- The RageQuit mechanism still does not solve the problem of meta-governance protocols accumulating all voting power and placing it in the hands of those with a shorter lockup period.

- If RageQuit per cycle becomes commonplace and a small number of stakers get all deducted The life cycle can become very centralized.

Basic Protocol Liquidity Staking

In addition to implementing the RageQuit function, it should also be used for those who are not prepared for long-term locking, but want to Provides a liquid staking option for those who internally (in a reduced way) govern and earn rewards. The main advantage and business model of the meta-governance protocol is to provide a wrapped derivative for the "ve" token that provides liquidity collateral. By removing this functionality, the need to accumulate voting power and centralize governance power to a meta-governance protocol with a short lock-up period is eliminated.

The basic protocol can use two-level pledge for governance and rewards:

- Liquidity Staking: This option will reduce the holder's governance power and agreement rewards while providing them with a liquid position. The protocol can use the revenue generated to buy back tokens from the market and distribute them to stakers. Similar to the xSUSHI mechanism, these holders will still have governance rights over the protocol, But it has lower weight than locked position holders. By providing a liquidity option, stakers are less likely to deposit into the meta-governance protocol and result in a concentration of voting power.

- “ve”_v2 Token Design: The secondary token pledge will be a An extended locked-in token design for voting escrow, incorporating some of the proposals outlined in this section.

Some advantages of the base protocol liquidity staking are:

- Completely removes the main advantage of the meta-governance protocol, returning value to the protocol's governance token.

- Offers investors an option that does not appear to be as permanent as a multi-year lock-in.

- Eliminates the risks associated with maintaining a liquidity wrapper peg, as the asset can be redeemed directly from the protocol, including all accumulated award.

- To further decentralize the protocol and put more governance power in the hands of "ve" lockers, but it is also owned by short-term supporters More say.

- Allows any type of investor to receive a portion of the rewards generated by the protocol revenue, which in turn incentivizes usage of the product as more users benefit from its success.

- While this choice brings some big advantages, it also has some disadvantages :

-  There is no guarantee that it will prevent the meta-governance protocol from locking the "ve" token forever , and distribute the boosted rewards to their token holders.

- It adds another token, the protocol has to incentivize liquidity if they want to allow transactions of this xToken.

- Creates a problem related to governance attacks, since liquid staking alternatives have some governance power (though less than locked tokens).

- Added complexity for new market participants as there are now two stages of staking.

Loyalty Reward

Loyalty boost rewards have been replaced by GMX and Platypus and other protocols are used to encourage user retention and take advantage of gaming Regardless of getting them to participate in the agreement, or they will lose the additional reward of loyalty.

While the two protocols use different variables, both have similar underlying principles. Once stakers participate in the network by staking their tokens, they are rewarded in the equivalent of staked tokens. This extra boost is earned while users maintain their stake or compound interest. This loyalty boost disappears if they unstake or start releasing their rewards.

Some advantages of using this mechanism are:

- Stakers feel obligated to continue staking or compound interest so as not to lose the opportunity to increase loyalty.

- In the case of short-term fluctuations or reduced protocol rewards, the opportunity cost of unwinding may be considered too high if stakers still believe in the protocol Long-term prospects, they will continue to stake.

The disadvantage of this mechanism is:

- Stakers with large loyalty boost rewards may be more inclined to use perpetual futures contracts (if available) to hedge their positions .

Loyalty rewards are a forward-looking measure compared to "ve" lockups , which suggests that past behavior can be a predictor of future behavior. While this is not a perfect assumption, we can say that the longer they are staked, the greater the opportunity cost of unstaking. As a result, there will be a greater incentive to keep staking and reap rewards from increased loyalty.

Reward Release

Another interesting model used by GMX is that the governance token rewards are based on esGMX. esGMX is an escrow token that acts exactly like a normal governance token, but it is non-transferable for a period of time. In the case of GMX, this release period is 1 year under certain conditions. If these conditions are not met, the release will cease.

For these esGMX tokens, stakers have two options:

-  Automatically compound interest on these tokens (and all other rewards, including loyalty boosts), and get rewarded, just Like they are normal GMX staking tokens.

- Release these tokens, during which time they will not receive any rewards. To release these tokens, they must stake the average amount of tokens used to earn esTokens.

This model brings several advantages:

- In theory, stakers are more likely to compound their rewards and continue to earn protocol rewards, while Instead of releasing these tokens, as these tokens do not earn rewards during the release period.

- In the specific case of GMX, to release esTokens, a user must stake the same amount of tokens as earning esTokens. This mechanism ensures that if stakers want to unstake and leave, they will take a long time (1 year in this case) to release all their rewards, resulting in liquidity (GLP) or stakers remaining in the system , or esTokens have not yet been released and are out of circulation supply.

- Reduces immediate selling pressure. When issued, these esTokens cannot be sold, although they can be released over time, during which time the protocol will hopefully be more resilient to selling pressure.

- Reward long-term stakers with more protocol rewards. This approach works especially well for protocols that generate revenue and want to distribute it to committed participants.

- When stakers decide to unstake and sell their tokens, it is only fair to them that their esTokens continue to earn protocol rewards , as they earn these rewards during their contribution to the protocol. This is also a connection between the protocol and stakers, making it more likely that stakers will re-stake in order to release those tokens or earn more.

- Although unlike the previously mentioned loyalty boost, esTokens are able to be sold on the market after the release time has passed. If not released, they remain with the staker who earned them for life and will continue to earn protocol rewards, unlike loyalty rewards which are lost when stakers unstake tokens from the protocol.

The disadvantage of this mode is:

- This model does not apply to all protocols, for example, Curve cannot have a successful metered voting mechanism and release mechanism.

- Protocol rewards are still accruing to those who have unstaked and left the protocol, with rewards being withdrawn from remaining participants.

Locked without dilution - ve(3,3)

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Andre Cronje saw the inadequacy of the standard "ve" token design and tried to pass his ve(3,3) tokens to improve it. However, poor execution of his implementation, combined with poor UI/UX, eventually led to the implosion of the Fantom DeFi ecosystem, resulting in a loss of nearly $7 billion in TVL.

While poorly implemented, the idea is good, allowing users to lock in their ratio of supply for NFTs. For example, if you bought 1% of the token supply and locked it into a ve(3,3) position, you would get 1% released, making your token supply ratio always 1%.

It has also been suggested that if all SOLID in circulation were locked into veSOLID, then the protocol would be There will be no release. "If all participants lock their positions, the release will be reduced to 0. If only 50% of the participants lock their positions, there will be a 50% release. However, the lockers will increase the release proportionally." This is obviously impossible , because liquidity must be provided, but its purpose is to allow token holders to obtain the maximum benefit when locking, thereby avoiding release.

Cronje's vision certainly has some advantages:

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- Allows lockers to "lock" a percentage of their locked supply, resulting in no dilution.

-  Allows lockers to exit their positions by selling their veNFTs on secondary markets.

- Reduced variable emissions as more tokens are locked allow for initial bootstrapping followed by possible price appreciation in the long term.

However, as ve(3,3) shows, it also has some disadvantages:

- Extremely difficult to achieve.

- It does not address the problem of meta-governance protocols accumulating and locking all underlying protocol assets.

ve(3,3) is very complex in design and extremely difficult to implement, but this The idea is interesting and should be explored further. Combining non-fungible weights with protocol governance is a relatively unexplored area in DeFi that theoretically makes sense for long-term lockups.

Improving governance participation among "ve" stakers: a proposal

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One of the problems with current "ve" governance is that if participants have no economic vote for reviewers), they are less likely to participate in governance. This statement is true for veCRV holders. Of the 10,203 historical holders, only 1,875 or 18.37% (as of October 19, 2022) have committed to governance proposals vote. This lack of governance participation is not new, nor should it be surprising. However, for a token design aimed at attracting long-term thinkers with massive governance participation, these numbers do not reflect the original vision of the "ve" design.

Conditional proxy:

Similar to Optimism's governance structure after its recent airdrop , before claiming their OP airdrops, users need to choose a proxy to make governance decisions on their behalf. There is still an option to delegate to yourself, but the Optimism team knows that governance participation by token holders is often low; so they ask people to delegate to a designated person before requesting an airdrop allocation.

However, not every representative can make all decisions on all aspects of the agreement . It's also possible that if there's a big decision about product fundamentals, users might want to vote for themselves. Conditional agents will spend more time empowering the appropriate representatives for each vertical that users care about. In the long run, this may lead to better governance decisions.

A proxy governance structure like the one below allows experts in their respective fields to make decisions that suit them Decision:

If the decision involves privacy or censorship, delegate to person (x).

- Delegate to person (y) if the decision is related to a DAO partnership.

- If the decision is related to the economic structure of the protocol, delegate it to the users themselves.

A conditional delegation structure like this would allow token holders to stake their votes Authorities are assigned to who they consider to be experts in the field, thereby benefiting the overall governance of the protocol.

ve-model is still under development:

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The voting escrow model is certainly a step in the right direction, especially compared to previous purely liquid governance tokens. However, as market participants become wiser about the impact of token design and the risks of holding illiquid positions, no amount of passive protocol rewards can make up for a large plunge that is not sure of recovery. If some of the ve_v2 proposals above are implemented by a protocol that wants to incentivize long-term participants in its network, there will be (hopefully) healthier markets, better governance decisions, and greater decentralization. The protocol and community will be better developed.

Although the token design of each project is very specific, including who is the token holder , how revenues are generated, value streams and regulatory structures. At a minimum, RageQuit and a base level of liquidity staking options should be implemented to avoid the meta-governance protocol massively undermining the weight of "ve" long-term lockers. This will also ease the transfer of most of the incentive voting and revenue to meta-governance token holders. Additional options are beneficial on a case-by-case basis and add additional benefits to the protocol if appropriate to the design of the protocol.

The "ve" token model will be a persistent token design in the DeFi protocol, although Not in its current form. It may be different than outlined above, but it will focus on greater governance participation, decentralization and more value being captured and retained by the protocol. Rewarding loyal token holders for early participation in the protocol and its governance should be a top priority for the protocol. The aim should be to reduce dilution, reward as many of these players as possible, and provide them with an exit if they need it in the future.

But we must keep in mind that this is a new technology trying to implement complex monetary policy; It will become clearer with time, as we all like to say:

"We are still in the early days."

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