Many projects in DeFi issue governance tokens which allow their users to participate in the governance process. Governance tokens can also function as a way to distribute the platform’s earnings, accruing value over time based on underlying revenues.
These tokens are generally earned as rewards for users who interact with the protocol, for example, by providing liquidity, staking assets, etc. However, many users are more concerned with jumping from project to project while chasing the most lucrative opportunities, and are not committed to the longer term future of any particular protocol.
These yield farmers often immediately sell the tokens that they earn on the open market, putting downward pressure on the project’s token’s price.
To combat this, Curve Finance designed a new, more complex tokenomic model which requires users to lock up their CRV tokens for set time periods in order to gain the full benefits of participating in governance.
Curve gives users the option to lock their CRV for (vote-escrowed) veCRV, with longer locking periods yielding more veCRV. This has the immediate effect of taking large amounts of the CRV supply off the market, which is beneficial to the token price, as well as forging a long-term link to the protocol and an interest in its overall wellbeing.
The veCRV received for locking CRV is non-transferable, and its amount gradually decays until the locking period expires and the user can reclaim their original CRV. However, owning veCRV comes with a range of benefits to the user.
- earning a portion of the entire protocol’s trading fees (50% of fees goes to veCRV holders)
- boosting the rates of any CRV rewards earned for providing liquidity (up to 2.5x)
- voting on DAO proposals
- voting on the distribution of CRV rewards (‘gauge weights’)
Curve is the largest protocol in DeFi in terms of TVL (Total Value Locked), making this last point valuable not only to users, but also to other projects. Gaining influence over where the emission of rewards is concentrated helps projects in attracting more liquidity to certain (i.e. their own) pools.
Individual users, however, may have problems maximising their yield using only their own resources and veCRV. By pooling funds, many users together are able to concentrate boosts and increase yields whilst simultaneously splitting costs (gas fees) related to compounding. A formalised structure for this process of optimisation is known as a yield aggregator.
Yield aggregators, such as StakeDAO or Convex, have built models around the accumulation of CRV. By accumulating and locking CRV, as well as incentivising users to stake their Curve LP tokens, the protocol is able to capture extra value from Curve. They can then pass this on in the form of high APYs without the need for users to lock tokens for extended time periods.
Given the value of the influence that veCRV provides, a system of on-chain bribes and token delegation have developed where projects pay users, or each other, for their veCRV voting power. This battle for the accumulation of veCRV, and ultimately influence, over the most important protocol in DeFi is known as the Curve Wars.
The battle to gain influence over Curve’s token emissions also presents a problem in that decision-making power becomes centralised around those with the most veCRV. Despite this, the concept of a ‘vote-escrowed Token’ is a powerful tool and many projects have adopted, or are planning to incorporate the model soon.