Is the ve(3,3) a long-term effective DEX mode from Velodrome to Chronos?

23-05-08 16:29
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Original Title: "From Velodrome to Chronos, ve(3,3) Returns, Is It a Better Dex Mode?"
Original Source: Mint Ventures
Original Author: Alex Xu, Research Partner at Mint Ventures


Overview


This research report mainly focuses on the current development status of the ve(3,3)Dex project, as well as its advantages and challenges in the business field, and further explores the long-term development of the Dexs track.


Dexs (decentralized trading platform) and Lending are the two types of products that first achieved PMF (product-market fit) in the Defi field. Dexs, as the infrastructure of the value internet, has always been the largest track in terms of user volume and interaction amount, and is also the underlying foundation of the entire Defi ecosystem.


It is precisely because of this that Dexs has always been the most active field in terms of competition and innovation, and competitors in the same track maintain a fast pace of evolution in terms of products, economic models, and ecological combinations. The ve(3,3) model proposed by Andre Cronje in early 2022 is one of the important practices in this field of Dexs.


This research report focuses on the topic of ve(3,3) and attempts to answer the following questions:


1. What is the complete concept of ve(3,3)? What problems is it trying to solve?

2. What is the actual business performance of the representative ve(3,3) projects in the current industry? What improvements have they made based on the original ve(3,3) mechanism? And what is the valuation level of these projects?

3. Will ve(3,3) become a long-term effective Dexs mode?


The following report is the author's interim view on the ve(3,3) concept and related projects at the time of publication. It may contain errors and biases in data, facts, and opinions, and should not be used as an investment rationale. The author looks forward to feedback and correction from peers on viewpoints and facts.


This article contains a lot of content about the ve model, or requires readers to have a preliminary understanding of projects represented by Curve. For information about Curve, please refer to:


Understanding Curve: Business Status, Ecological Development, Moats, and Valuation Comparison of Head Liquidity Markets (Released in March 2023)

Uni V3 Attack on CRV: In-depth Analysis of Curve Business Model, Competitive Status and Current Valuation (Released in September 2021)


1. Definition and Value of ve(3,3) Mode


ve(3,3) is not a project name, but a way to build and operate Dex and liquidity protocols. In this way, ve stands for "vote escrowed" from Curve's ve economic model. Its core advantage is that it further unifies the long-term interests of participants and protocols through a staking voting mechanism.


而(3,3)来自于 OlympusDAO 的(3,3)博弈理论 (源自纳什均衡理论),其基本原理是:Olympus 官方以债券形式将 OHM 低于市场价格卖给用户,官方获得用户支付的 USDC、ETH 等资产,使得国库得到价值资产支撑,并生成 OHM 通过 Rebase 机制分配给 OHM 质押者。若越多的用户进场购买 OHM Token,国库就会增发更多 OHM Token 分配给到质押者,以此创造了一种在 OHM 币价持续上升时,质押者拥有高额 APR 的正向循环效应,但前提是市场用户不抛售 OHM,而是选择不断去质押 Token,也就是所谓 (Stake,Stake)——即(3,3)。即鼓励用户不断的参与质押,以此享有 OHM Token 持续增发的权益,减免 Token 被稀释的风险。

Translation:

The (3,3) comes from OlympusDAO's (3,3) game theory (derived from Nash equilibrium theory). The basic principle is that Olympus officially sells OHM in the form of bonds to users at a price lower than the market price. The official obtains USDC, ETH and other assets paid by users, so that the treasury is supported by valuable assets and generates OHM, which is distributed to OHM stakers through the Rebase mechanism. If more users enter the market to buy OHM tokens, the treasury will issue more OHM tokens to be distributed to stakers, creating a positive cycle effect where stakers have a high APR when the OHM price continues to rise. However, the premise is that market users do not sell OHM, but choose to continuously stake tokens, which is called (Stake, Stake) - that is, (3,3). This encourages users to continuously participate in staking, in order to enjoy the right to continuously increase OHM tokens and reduce the risk of token dilution.


If readers find it difficult to understand the (3,3) mechanism, we can abstract it as a kind of game mechanism:


- A certain project has network effects, and the larger the scale of its multilateral or bilateral users and participating funds, the stronger the competitive barriers. Therefore, it has the demand to continuously expand its scale to create network effect barriers.- It introduces a mechanism that strongly encourages all holders to collectively stake and reinvest tokens (or other actions that the protocol wants users to take), which will allow the protocol to continue to expand in scale and become increasingly networked until it forms a strong competitive barrier, capable of obtaining monopolistic profits in its field. As shareholders of the project, users only need to maintain their token share in the entire project, and their value naturally increases as the project expands in scale and monopoly, creating a "win-win" situation.- The vulnerability of this mechanism lies in the fact that once some users choose to take reverse actions (such as no longer pledging and choosing to sell and leave), the overall expectation and coin price may gradually resonate, causing users to collectively exit and become a declining spiral, leading to project failure.


In stablecoin projects represented by OHM, the network effect they pursue is that the larger the network of stablecoins, the more scenarios and users there are, and the harder it is for latecomers to catch up. In Dex projects represented by Solidly, the network effect they pursue is the mutual reinforcement of Dex's LP, ve Token stakers, and Traders. The larger its share in the trading market, the harder it is for latecomers to catch up. Therefore, the so-called (3,3) mechanism in the DeFi field is mainly aimed at helping projects expand their network effects and build barriers at specific stages.


Except for ve and (3,3), the Dex of ve(3,3) also incorporates new measures at the project cold start level and the combinability of governance credentials. With the above design, we are trying to create a more optimal overall Dex model.


To be specific, the ve(3,3) class Dex project has the following characteristics when returning from abstraction to concreteness:


- The project adopts Curve's ve economic model, which means:

· The project is not only a Dex, but also a liquidity aggregation and procurement market. The equity token of the project is the purchasing currency for liquidity on this platform.· The project token needs to be staked in order to have governance rights and profit-sharing rights (transaction fees + bribe fees). The prerequisite for extracting value from the platform is a long-term commitment to the platform's development.· The difference between the ve(3,3) project and Curve is: 1. Curve distributes all protocol transaction fees from all pools to ve stakers, while ve(3,3) project's ve stakers only receive transaction fees from the pool they voted for; 2. ve(3,3) project's LP only receives project tokens as liquidity rewards, while transaction fees are all owned by ve stakers; 3. Curve's bribery module is built by external platforms (Votium or Votemarket), while ve(3,3) type projects have their own bribery module, making it easier to purchase liquidity in the short term.


- With reference to Olympus' (3,3) game mechanism, this means:

· Encourage users to stake the equity tokens of the project through ve lock-up, and provide proportional token incentives for ve certificate holders who lock up their tokens, in order to avoid dilution of token holdings and encourage users to actively participate in staking.· By increasing the pledge rate, reducing the selling pressure of Token, and promoting the rise of Token price, the APR of market-making rises, which further attracts more liquidity aggregation and creates better trading depth, attracting more trading volume, forming a self-reinforcing business cycle.


- During cold start, the initial VE tokens are often airdropped to the leading projects with strong business and influence within the ecosystem (usually referring to the public chain where the project is located), in order to attract the first batch of "B-side customers" to the liquidity procurement market. The logic is similar to internet products offering "free trial coupons" to customers, where the trial is for the project's "liquidity procurement service" rights.


-  The staking certificate for Token has changed from veToken to veNFT. While veToken is non-transferable, veNFT can be transferred, allowing users to resell or re-collateralize their ve certificates, further increasing capital efficiency.


Overall, the ve(3,3) project is an upgraded version of the Curve mode in the encryption industry. The focus is on improving the following three aspects:

1. Improve users' willingness to stake VE, further enhancing the benefits and alignment of interests between token holders and the protocol.

2. More "transaction fee" incentive-oriented, because the Pool's handling fee is only distributed to those who vote for the Pool, which indirectly incentivizes transaction volume (better liquidity can attract more transactions to create more handling fees).

3. More "TOB" oriented, providing better liquidity procurement experience and higher initial incentives for token issuers, actively binding B-end customers.


Therefore, the author will also focus on the performance of the ve(3,3) project in the above three aspects.


2. ve(3,3) represents project analysis


When it comes to selecting specific projects in the VE(3,3) industry, the author considers various indicators such as the competitiveness ranking, trading volume, and bribery amount of the chain where the project is located. The author compares and analyzes the following projects with better business performance: Velodrome (Optimism), Thena (BNBchain), Euqalizer (Fantom), and Chronos, which was recently launched on Arbitrum.


2.1 Velodrome: ve(3,3) Early adopter, OP chain leading DEX


Velodrome is the most representative project in the Solidly Fork project, and the author will spend more space to introduce it.


2.1.1 Project Introduction and Differential Mechanism


a. Mechanism Design


Velodrome is currently only deployed on the Ethereum L2 network OP, and its product mechanism design is based on the ancestor of ve(3,3) Solidity, but with some adjustments. Specifically:


Regarding the liquidity bribery rewards for Pool, they can only be claimed in the next cycle.

The incentive distribution of Velo Token adopts a whitelist mechanism for the Pool, and the whitelist is currently open for application without going through on-chain governance process. On the other hand, Solidly's emission application is permissionless, which means that as long as one has the voting power, they can direct Token incentives to Pools that generate no transaction fees. In addition, Velodrome also has a committee that can suspend emissions to any Pool at any time.

Reduced the issuance reward ratio for ve Token holders, ensuring that the proportion of Token held by ve Token holders will not be diluted relative to Solidly's mechanism design. Under Solidly's mechanism design, the emission reward for ve Tokens is: (total staked TOKEN amount) 0.5 total incentive emission. The calculation method for Velo's issuance reward ratio for ve Tokens is: (total staked veVELO amount VELO total amount) ³ 0.5 total incentive emission. Assuming Velo's staking rate is 50%, under the traditional ve(3,3) mode, veVELO users will receive 50% of the total emission; while under Velo's adjusted mode, veVELO users will only receive 50%³=12.5% of the total emission, which is only 1/4 of the traditional mode. This improvement has actually significantly weakened the (3,3) part of the ve(3,3) mechanism.

Velo's 3% emissions will be transferred to the team's multi-signature wallet as operating expenses, providing a budget for the project's long-term operation.

The LP Boost mechanism (inherited from Curve, which allows the amount of ve Tokens to accelerate LP mining) has been cancelled.


b. Team situation


Velodrome Finance was incubated by the team behind veDAO, which was incubated by the anonymous blockchain research organization Information Token in the original Fantom ecosystem. Its initial mission was to obtain governance over the Solidy ecosystem proposed by Andre Cronje. In early 22, Andre Cronje launched Solidly on Fantom and announced that the initial governance over Solidly (veNFT) would be distributed to the top 20 projects on Fantom according to TVL ratio. veDAO was subsequently launched and attracted nearly $2.6 billion in TVL at its peak.


However, Andre Cronje announced his retirement shortly thereafter, and with the constant problems that arose after the launch of Solidly, the Fantom ecosystem quickly suffered a setback. Since then, the Fantom ecosystem has continued to decline in the bear market, no longer as active as it was during AC's time. Subsequently, the veDAO team shifted their focus to the Optimism ecosystem and developed Velodrome.


c. Timeline and Roadmap


The project timeline is as follows:


Velodrome's next important milestone is the launch of Velo2.0. The official plan was to release it in the first quarter of 23, but as of now (early May 23), it has not yet been launched. I also inquired about the launch time of Velo2.0 in the official community, and the response from the community ambassador was that the audit has been completed and it should be launched in May.


Velo2.0 contains a lot of content, mainly divided into 5 major sections:


Velodrome "Night Ride" UI Upgrade: Richer Data Dashboard, Improved Interaction Friendliness, and Visual Optimization.

Velodrome Relay: features such as optimizing bribery income around ve staking delegation.

New feature: LP customization (basic function for centralized liquidity), Pool customization (editable Pool function similar to balancer), fee tier, upgraded voting module (similar to Votium), veNFT transactions, fragmentation, etc.

Technical Upgrade: Codebase Simplification, Audit, Risk Control, etc.

Governance Upgrade: veVELO can control the emissions of VELO.


However, considering that 2.0 contains a lot of content, the author believes that the difficulty of synchronously launching the promised functions is high, and the possibility of phased launch is higher. In addition, Launchpad function, LP's automatic reinvestment, complete centralized liquidity function, combination pool (similar to curve's metapool), and veNFT lending and borrowing functions are also arranged by the team as key work for 2023.


2.1.2 Business Situation


When evaluating the business, the author will evaluate Velodrome and other projects from four aspects: liquidity (TVL) and corresponding liquidity procurement expenses, trading volume, bribery amount and number of bribery projects, and Velo's pledge ratio.


As a spot Dex+liquidity procurement market for the ve(3,3) model, Velodrome's business model can be summarized in one sentence: using platform equity tokens (Velo) to purchase and aggregate liquidity, and then using the liquidity for two purposes: 1. to meet the needs of traders (in exchange for transaction fees); 2. to sell to project parties (providing liquidity for their tokens).


Therefore, by using Total Value Locked (TVL) and corresponding liquidity acquisition expenses, transaction volume and fees, bribe amount and number of bribe projects, one can comprehensively grasp the project's revenue, customers, and costs, while Velo's staking rate is used to evaluate the effectiveness of the (3,3) mechanism of the project.


a. Liquidity (TVL) and corresponding liquidity acquisition expenses.


According to Defillama data, Velodrome's current TVL is $289 million (as of May 4th, 2023), and for the past two months, TVL has mostly fluctuated between $270 million to $320 million.


Data source: https://defillama.com/protocol/velodrome


And the latest Velo weekly liquidity incentive is 9,166,759, with a price of 0.129$, as shown in the following figure.

Data source: Velodrome official DC


The liquidity incentive for ZEUS is: 9,166,7590.129=1,182,511$. We can calculate the TVL/liquidity incentive ratio as 289,300,000/1,182,511=244.64$. Roughly speaking, this means that Velodrome can maintain a liquidity of 244.64$ per 1$ of incentive payout per week (of course, the liquidity metric varies depending on the asset composition and trading curve algorithm).


b. Trading volume and transaction fees.


According to Tokenterminal data, the weekly trading volume of Velodrome has been between 80 million to 300 million US dollars in the past 3 months, with most of the time the weekly trading volume being around 100-150 million US dollars.


Data source: https://defillama.com/dexs/velodrome


And its weekly transaction fee income is mostly between $25,000-$100,000.


The source of Velodrome's transaction fees mainly comes from non-stable trading pairs, namely Volatile AMM (vAMM). According to the dashboard data built by community user @msilb7, in the past 7 days, the top 5 vAMM pools have accounted for 62.7% of Velodrome's transaction fee contribution in the transaction fee ranking.


Data source: https://dune.com/msilb7/velodrome-fees


However, in terms of LP capital efficiency, Velodrome is significantly lower than Uniswap on Op. The ratio of trading volume to TVL between the two is a whole order of magnitude different, with Uniswap V3 at 0.4 and Velodrome at 0.04.


Data source: https://defillama.com/dexs/chains/optimism


This significant data difference is due to Uniswap's centralized liquidity mechanism. Although this mechanism brings higher management difficulty for LPs, it has obvious advantages in capturing trading volume. This is also one of the core reasons why Velodrome2.0 focuses on centralized liquidity.


c. Bribery amount and number of projects


The author is writing this article at Epoch49 of Velodrome, the 49th voting cycle. The total bribe amount for the previous period was 896,000 US dollars.


Data source: Velodrome DC official channel


According to past data, the bribery amount of Velodrome has been consistently over 300,000 US dollars for 15 consecutive weeks, and for the past 12 weeks, it has been over 500,000 US dollars.


Data source: https://dune.com/queries/1454305/2726072


This week's bribery data has exceeded that of Balancer, a veteran project that also uses the ve model and operates both Dex and liquidity markets. The current TVL of Balancer, which is 1.2 billion US dollars, the main bribery platform hidden hand's latest bribery amount is 537,000 US dollars, but its governance cycle is 2 weeks, so the weekly bribery amount is 268,500 US dollars.


Data source: https://llama.airforce/#/bribes/rounds/hh/aura-bal/22


Although it is necessary to consider that Balancer's ve governance power in hidden participation in ticket exchange is less than 30%, it also indirectly confirms the strong bribery income of Velodrome. This data may also indirectly confirm the advantages of the ve(3,3) project that directly integrates the bribery module in terms of ve governance mobilization and bribery amount fundraising compared to traditional ve projects. In terms of the number of cooperation agreements, according to the data released by Velodrome in February this year, Velodrome has issued more than 53 bribery tokens.


Image source: Velodrome Medium


According to the bribery data from Velodrome on April 26th, there are 248 active Pools, among which the bribery amount of the top 10 Pools with weekly bribery amounts is above $13,000, and there are 49 Pools with weekly bribery above $1,000.


The top 10 contributors to the bribery amount in the current Epoch47 pool come from 9 different projects, with a diverse range of project categories including lending and stablecoin protocols (Tangible, Inverse, Ethos, Sonne), derivatives (Kwenta), entertainment (Red), LSD (Rocket Pool), asset management (dHedge), and L2 infrastructure (OP).

Image source: https://app.velodrome.finance/vote


Currently, among the top 10 DeFi protocols ranked by TVL on OP, 5 of them have conducted liquidity procurement on Velodrome, while 3 out of the remaining 5 projects that have not engaged in procurement are competitors in the Dex field (Uniswap, BeethovenX, and Curve), and the other two are Aave and Stargate, which have already gained sufficient liquidity and have been listed on major exchanges. Recently, Stargate also passed a community governance proposal to conduct liquidity procurement on Velodrome.


Data source: https://defillama.com/chain/Optimism


Overall, the liquidity of Velodrome's procurement customers is rich in sources and relatively dispersed, and is in a relatively good development trend.


d. Collateralization ratio


Since its launch, the staking rate of Velo on Velodrome has been on the rise.


Data source: https://dune.com/0xkhmer/velodrome-vevelo-leaderboard


However, in February and March of this year (Epoch36), the staking rate reached its peak and began to decline. Although the total amount of staking is still increasing, the staking ratio of newly circulating Velo Tokens has decreased significantly, as shown in the table below: Currently, the Velo staking rate has fallen by nearly 7% from its high point of 81.6% to 74.67%.


Data source: Dune @0xkhmer Table statistics: Mint Ventures


Velo pledge rate curve, image source: Velo official DC


There may be four reasons for the decrease in Velo's staking rate at its peak:


1. The price of Velo Token has been on a continuous rise since late January 23rd, although the trading fees and bribery income of Velodrome have also increased during the same period, the magnitude is far less than the increase in the token price. This directly led to a rapid decline in the APR of veVELO, resulting in a decrease in the return on investment for staking.


Data source: CoinmarketCap


During the period of February to April, the price of Velo Token fluctuated dramatically, with changes of several times, causing investors to prefer holding the currency for better liquidity rather than staking it.

3. The "Tour de OP" plan, which started in November last year, has been ongoing for 5 months. The main content of the plan, which is expected to last for 6-8 months, is to use the 4 million OP rewards obtained through Velodrome to incentivize Velo's lock-up. As the plan comes to an end, the incentive for OP comes to a halt, and the incentive for lock-up will further decline, forming potential selling pressure.

4. 70%-80% is already a high lock-up ratio, and the comprehensive marginal cost of maintaining and increasing the lock-up ratio is becoming higher. Currently, the staking rate of Curve, which also uses the ve model, is 38.8%.


2.1.3 Summary


Velodrome is one of the best developed ve(3,3) projects, with TVL ranking second only to Uniswap in terms of transaction volume on the same chain. Its liquidity business has also developed smoothly, with customer numbers, quality, and amounts all ranking in the top tier. However, due to the large increase in Token since January and the large fluctuations, the pledge rate has also reached a high level, and there may be a further pressure on the mid-term veVELO pledge rate, considering the reduction in OP rewards for pledge after the "Tour de OP" event. In the long term, the centralized liquidity brought by Velodrome 2.0 is expected to help Velodrome further improve LP's capital efficiency, fee income, and market share of transaction volume on OP. In addition, Velodrome is currently highly tied to the OP community, and its business ceiling is determined by the development of the OP ecosystem. In addition to OP itself as an L2, the number of L2 operators and applications that can join the Superchain L2 network based on OP Stack, which is its main focus, may also affect Velodrome's development potential.


2.2 Thena: The leader of centralized liquidity on BNBchain ve(3,3)


Thena was launched in January this year and currently ranks 9th in TVL on BNBchain. It is also the earliest ve(3,3)Dex to implement centralized liquidity functionality.


2.2.1 Project Introduction and Differential Mechanism


a. Mechanism Design


Thena is currently only deployed on BNBchain, and it has further modified ve(3,3) based on Velodrome. Important changes to the mechanism include:


Currently, a centralized liquidity feature called Fusion has been launched, which supports interval management strategies for automated market making based on centralized liquidity.

ve Token's rebase reward accounts for 30% of each period's output (as an upper limit and also a fixed value at present).

Introduce a recommendation mechanism, where the recommender can share the transaction fee of new users. If the new user is activated through the recommendation, there will be a lottery reward.

Early fundraising was conducted using NFTs. After NFT staking, a 10-20% protocol fee sharing increase is possible. The fee rate for sAMM pools is 0.02%, and for vAMM pools it is 0.2% (Velodrome is 0.01% and 0.05%).


In addition, Thena, like Velodrome, adopts the Gauge application license system, cancels LP boost, and allocates 2.5% of the tokens emitted each period (Velodrome is 3%) to the project party.


Fusion: Concentrated Liquidity + Automation = Lower Participation Threshold and Capital Efficiency


Other than the overall project mechanism design, it is necessary to emphasize the Fusion feature that will be launched in April for Thena. This is currently the biggest feature that sets Thena apart from other ve(3,3) projects, and it is also the core feature of Thena V2.


The main features of Fusion are as follows:

Introducing the Concentrated Liquidity Management Mechanism (CLMM) allows LPs to customize the market-making range. The benefit is that the same capital can provide thicker depth and lower slippage within a specific price range, thereby capturing more trading volume and fees, and improving the capital efficiency of LPs within this range. It is emphasized repeatedly that this applies only within a specific price range, as once the assets being market-made break out of this range, they will be exchanged for a single asset and will no longer capture fees (at which point capital efficiency is 0). This process also entails higher impermanent loss risk, so market makers need to have higher market-making skills (predicting price trends, dynamically adjusting market-making ranges, and developing strategies) to match under the concentrated liquidity mechanism.

Provide automated LP management strategies to partially address the high market-making threshold of the centralized liquidity mechanism mentioned earlier. Specifically, the solution mainly targets two difficulties in market-making, namely: 1. Automatically adjust the LP market-making range to avoid the problem of long-term price exceeding the market-making range; 2. Provide templated market-making strategies covering five main LP scenarios, making it easy for users with ordinary professional abilities to quickly find suitable LP strategies, as follows:


Source: Thena Official Medium
Compiled & Translated by: Mint Ventures


Introduce dynamic fee model, as the price of assets in the pool increases, the fee rate increases (to compensate for LP's impermanent loss); when the price fluctuation narrows, the fee decreases to capture more trading volume.


Overall, Fusion has brought significant benefits to Thena, especially in simplifying the complexity of market making based on centralized liquidity. However, as mentioned earlier, market making challenges under centralized liquidity mechanisms require continuous adjustment of market making intervals, and more importantly, predicting price trends (whether it is fluctuating or one-sided? Is it wide or narrow fluctuations?), which is a problem that automated strategies cannot solve for users and a risk that users must bear.


In addition, Fusion's centralized liquidity mechanism and dynamic fees come from Algebra Protocol's services, while automated LP management uses Gamma's services (LPs using Gamma's services do not need to pay fees, and Thena provides veTHE as compensation to Gamma). This modular innovation approach allows Fusion to go live faster (while Velodrome's centralized liquidity module, developed for months, has not yet been released), but on the other hand, because Fusion's core services come from a combination of third parties, it also introduces more external risks.


b. Team situation


Thena team currently does not have publicly available real name information. Its main members come from the income aggregation and liquidity service project Liquid driver on Fantom. Previously, Liquid driver, along with other Fantom projects such as SpookySwap, Scream, Hundred Finance, and RevenantFinance, formed 0xDAO, which absorbed liquidity in a similar way to veDAO and ultimately raised 2 billion USD in liquidity during its peak period. It also received the largest proportion of ve airdrop shares from Solidly afterwards.


Currently, the Liquid driver project's business itself is relatively sluggish, with a TVL of only around 8 million US dollars and a Token FDV of only around 17 million US dollars. It is expected that the team is currently focusing more on Thena. Although the core members of the Thena team have not been publicly disclosed, many members of the community have stated that they "know who they are," so the team is not strictly anonymous. According to information provided by community members, the core team of Thena consists of 8 members, which is a relatively lean team.


c. Timeline and Roadmap


The project timeline is as follows:


2.2.2 Business Situation


a. Liquidity (TVL) and corresponding liquidity acquisition expenses.


According to Defillama data, Thena's current TVL is $81.41 million (as of May 4th, 2023).

Data source: https://defillama.com/protocol/thena


Similar to Velodrome, the liquidity procurement expenditure of Thena platform is the emission incentive given to the Pool. Currently (epoch17), the total weekly emission of Thena is 2,213,790 (calculated based on official documents, with initial weekly emission of 2.6M and subsequent weekly decay of 1%), of which 67.5% is used for liquidity incentives. The price of THE is 0.33$, which means the incentive for liquidity procurement is 1,494,3080.33=493,121$. We can calculate the liquidity divided by weekly liquidity incentives as 81,410,000/493,121=165.1$. We can roughly understand that at that time, Thena could maintain liquidity worth 165.1$ for every 1$ of incentive expenditure.


b. Trading volume and transaction fees.


According to Defillama data, the weekly trading volume of Thena has been between 50 million to 200 million US dollars in the past 3 months, with most of the time being around 50 million to 100 million US dollars per week.


Trading volume, data source: https://defillama.com/protocol/thena



Transaction fee, data source: https://defillama.com/protocol/thena


And its weekly transaction fee income is mostly between $40,000-$100,000. Compared to Velodrome, Thena has lower trading volume but generates higher transaction fee revenue overall, mainly because its vAMM and sAMM transaction fee ratios in version 1 are set higher, with vAMM at 0.2% (compared to Velodrome's 0.05%) and sAMM at 0.04% (compared to Velodrome's 0.01%).


It is worth noting that after the launch of Fusion, both the trading volume and transaction fees generated have rapidly increased in the proportion of Thena's total business volume, especially the transaction fees, which have accounted for 73.8%. What's more important is that this is happening while Thena's TVL is declining. The capturing ability brought by Fusion's concentrated liquidity and dynamic transaction fees can be seen in the trading volume and transaction fees.


c. Bribe amount and number of projects


The author is writing this article while Thena is currently in epoch17. Due to the recent launch of Fusion, most of the external data dashboards have not been moved to the bribery of Fusion for statistics. However, the weekly bribery amount from February to April was between 150,000 to 300,000 US dollars. As a project that has been online for less than half a year, this revenue has already performed well.


Data source: https://dune.com/0xkhmer/thena


According to official data from Thena, there are 146 active bribery pools (bribery amount > 0) in this period, with 69 pools having weekly bribery amounts exceeding 100 US dollars and 41 pools exceeding 1000 US dollars.


Among the top 10 bribery projects this week, the types include stablecoins (Tangible), video streaming media (XCAD), LSD (Ankr, Pstake, Frax), derivatives and synthetic assets (Deus finance), Ponzi dogs (Libera), and so on, with a rich variety of types. Among the top 15 DeFi projects on BNBchain, besides Thena itself, the only projects currently conducting liquidity procurement on Thena are Ankr (LSD), Radiant (lending), and Helio (stablecoins).



Excluding Thena's competing projects Pancake and Biswap, the remaining projects Venus, Alpaca, Chess, and Stargate have all been listed on Binance with decent liquidity.

Overall, Thena's liquidity procurement market business has developed well, with a relatively dispersed customer base. Despite the stagnation and decline of BNBchain's ecological vitality, the number of high-quality projects, TVL and other indicators in the past one or two years, gradually being surpassed by ecosystems such as Arbitrum, it still maintains a high number of active users and attracts many new projects to deploy here, which is the main source of customers for Thena's liquidity market. However, as a "side chain" attribute of Binance's centralized CEX, BNBchain's credit limit is also limited, resulting in many projects but lack of innovation; in addition, Binance itself as the largest trading platform, also siphons off the trading volume of BNBchain.


d. Collateralization ratio


THE lock-up rate is currently 61.83%, and has been slowly increasing since the project went live.


Data source: https://dune.com/0xkhmer/thena


The main driving force behind the gradually increasing pledge rate of Thena should come from the higher voting APR (Thena's average voting APR is 397%, while only two pools in Velodrome have a higher voting APR than this), which is driven by two reasons:

1. THE Token itself has a relatively low price (due to the valuation suppression caused by the sluggish development of BNBchain or one of the main reasons).

2. Intense bidding from liquidity buyers resulted in high bribery costs.


If the above conditions remain unchanged, Thena's pledge rate will have a great chance to continue to rise.


2.2.3 Summary


As the earliest ve(3,3) project on BNBchain, Thena is currently operating successfully and ranks third in the Dex on BNBchain (the first two places are both supported by and invested in by Binance). From the current perspective, Thena has done several things right:


1. Based on the practice of Velodrome, improvements have been made by utilizing the experience of predecessors.

2. By adopting a modular innovation approach and collaborating with other projects, the speed of product iteration has been greatly improved. For example, collaborating with Algebra Protocol and Gamma to develop concentrated liquidity, collaborating with MUON to introduce recommended rebate function, and collaborating with Open Ocean on trading routing.


In addition, Thena's business data also proves that the adoption of centralized liquidity mechanism has significantly boosted the business of Dex. After the launch of Fusion, both the trading volume and transaction fees have shown a significant increase compared to the previous period. This not only confirms the trend of adopting centralized liquidity model, but also reveals the rich opportunities in the service market around centralized liquidity, such as Gamma.


2.3 Equalizer: The Lone Wolf ve(3,3) on Fantom


Equalizer is the third highest TVL Dex on Fantom, but it is also the smallest TVL and market cap project in the ve(3,3) project that this research report focuses on. On the one hand, it is constrained by the decline of the Fantom ecosystem itself, and on the other hand, it is also due to the intense competitive environment of Fantom.


2.3.1 Project Introduction and Differential Mechanism


a. Mechanism Design


Equalizer is currently only deployed on Fantom, and its mechanism is also inherited from Solidly. The differences in mechanism include:


· Rebase mechanism has been cancelled, and ve tokens will no longer receive emission tokens.

· The ve Token lock-up time limit is 26 weeks, which is half a year.

· Increase the fee rate, the fee rate for sAMM pool is 0.02%, and the fee rate for vAMM pool is 0.2%. 

· No initial veToken governance airdrop was specifically made to other project parties.


Rebase was originally designed to be the most important feature of the ve(3,3) mechanism, and AC believed that it could increase users' willingness to stake. However, most ve(3,3) projects that have been successful in the long run have significantly reduced the ratio of Rebase, because they have found that providing too high of a Rebase compensation to existing ve Token holders can lead to the solidification of governance rights, and the cost and threshold for new participants to obtain governance rights will become higher and higher, ultimately leading to the rigidity of the system. Adjusting the ratio of Rebase rewards to total emissions for ve certificate holders is actually a balance between "incentivizing and introducing early users" and "providing equal competition opportunities for latecomers".


As for whether to retain the Rebase mechanism and what percentage to retain, the author believes that it should be determined based on the situation of the chain where the ve(3,3) is located.


If we predict that the more stable the ecological pattern on a chain, the greater the possibility for existing leading projects to maintain their lead in the future, then the ve(3,3) project should lean towards locking in these "customer agreements" early on, giving them enough ve governance rights and the right to free liquidity procurement through governance rights in the early stages. If the competitive situation on the chain is still chaotic and the real "big customer agreement" has not yet emerged, then the ve(3,3) project should avoid allocating too many benefits to early ve governance rights holders and instead leave equal opportunities for later entrants to compete.


However, the problem is that most of the top projects on mainstream public chains have already gone live and have good liquidity, which will weaken their motivation to purchase liquidity on Dex. In the long run, emerging projects will always be the main customers for liquidity procurement, which is why reducing or canceling Rebase has become the main choice for the ve(3,3) project.


b. Team situation


The founder of Equalizer is Blake Hooper, who has a marketing background in software and hosting services. Most of the project's featured videos were recorded by him. Currently, the core team consists of 5 members, who are also a very lean personnel structure.


c. Timeline


Overall, Equalizer does not have many outstanding features at the product level. Compared to the other three VE(3,3) projects, its delivery and innovation capabilities are relatively ordinary.


2.3.2 Business Situation


a. Liquidity (TVL) and corresponding liquidity acquisition expenses.


According to Defillama data, the TVL of Equalizer on May 4th was $26.32 million, with a weekly EQUAL emission of 45,435 tokens. The price on that day was $3.45, and the corresponding weekly liquidity incentive value was $156,842. Using the TVL/weekly emission incentive calculation, we can derive that 1$ of incentive spending by Equalizer can maintain liquidity worth $167.81, which means that Equalizer can sustain liquidity worth $167.81 for every $1 of incentive spending per week.


Data source: https://defillama.com/protocol/Equalizer


b. Trading volume and transaction fees.


According to Defillama data, Equalizer's weekly trading volume has fluctuated between 30 million to 120 million US dollars in the past three months. However, since entering April, the trading volume has remained low, with only about 30 million in the past two weeks. The recent weekly fee income is around 30,000 US dollars.


Data source: https://defillama.com/protocol/equalizer-exchange


c. Bribe amount and number of projects


The author has not found the previous bribery amount of Equalizer in public information. Based on the latest data of epoch25, there are currently 73 open bribery pools, of which 50 pools have submitted bribes (some of which include the team's own bribes). However, the author is writing this article in the early stage of this epoch, so the amount is not very high and the data is not very reliable.


However, according to the official announcement screenshot from epoch23, the total bribery amount of the top 20 pools in the bribery ranking is approximately $95,544. Based on this, the total bribery amount of all pools for that week should be around $100,000.


Data source: Equalizer official DC channel


Among the top 10 bribery project types, Defi projects are the main focus, including yield aggregators, derivatives, lending, and a domain name project.


d. Collateralization Ratio


After the launch of Equalizer, the token staking rate once reached as high as 94%, but gradually fell to around 70% later. Currently, the staking rate is 71.55%.


Data source: https://dune.com/0xkhmer/equalizer-exchange


The official provided new Token staking data, which also shows that the ratio of newly added Tokens staked per day is around 71%.


Data source: https://ftm.guru/equalizer/analytics/


According to past data, the voting APR of Pools with large amounts of bribery is mainly in the range of 80%-150%.


2.3.3 Summary


Although the liquidity scale of Equalizer is significantly smaller than Velodrome and Thena, its revenue and bribery amount are not inferior to its scale. However, in the past month, its TVL has experienced a significantly faster slide than its competitors, which is closely related to the decline in its token price. The relationship between token price and the liquidity it purchased remains highly correlated.


Data source: https://defillama.com/protocol/equalizer-exchange


Data source: https://defillama.com/protocol/equalizer-exchange?tokenPrice=true


In addition, the Fantom ecosystem where Equalizer is located has been performing poorly since AC left earlier. Even after AC returned as an advisor, the ecosystem has not improved and its DeFi TVL on the chain has fallen to 10th place. In the past year, the rate of decline is second only to Terra, which has returned to zero, and Solana, which has been affected by the SBF incident and the FTX collapse. Even after AC's return, there has been no significant improvement. Recently, even AC expressed a vague dissatisfaction with the slow marketing actions of the Fantom team on Twitter (and later deleted it). With the rise of L2s such as Arbitrum, OP, and Base, the future of L1s such as Fantom is likely to be even more difficult for developers, users, and funds due to the siphoning effect.


2.4 Chronos: The New Force of ve(3,3) on Arbitrum


Chronos was launched not long ago (April 26th). Although it is not the first ve(3,3) project on Arbitrum, its initial business performance after launch is far more successful than previous attempts, and it also introduces new mechanisms to address issues with traditional ve(3,3) models. Although it is still in the early stages of development, the overall quality of the project looks good, and coupled with Arbitrum's strong growth momentum, the author believes that it is necessary to continue paying attention to it.


2.4.1 Project Introduction and Differential Mechanism


a. Mechanism Design


Chronos, deployed on Arbitrum, has a mechanism design that draws extensively from Velodrome, Thena, and Equalizer. The difference between its mechanism and the traditional ve(3,3) lies in:

· Cancel the Rebase mechanism, ve users will no longer receive emission tokens (consistent with Equalizer). The maximum lock-up period for ve is 2 years (consistent with Thena).

· Early fundraising was conducted using NFTs. After staking NFTs, a 10-20% protocol fee sharing can be obtained. In the future, there will also be a referral commission mechanism (consistent with Thena).

· Introducing the concept of "staking time" for LP tokens provided by liquidity providers. Users can obtain maNFT (Maturity-Adjusted NFT) by staking LP tokens again, and use maNFT as a proof to obtain liquidity incentives. The higher the maturity, the stronger the bonus effect of obtaining incentives (up to 2 times).

· The vAMM fee rate is 0.2% (consistent with Thena and Equalizer), and the sAMM fee rate is 0.01% (consistent with Velodrome).


The most important innovation is the application of maNFT. The traditional ve(3,3) mechanism's (3,3) game design mainly focuses on the token staking process, but the liquidity retention is still the main challenge for ve(3,3) Dex. Using maNFT as an LP with time-weighted properties to allocate liquidity incentives will increase the willingness of LPs to stay for a long time and increase the "time value loss" of withdrawing liquidity. In addition, maNFT users can also transfer liquidity through resale, and maNFT with longer staking time will naturally have a higher "time premium".


The introduction of maNFT upgrades the protocol's incentive for liquidity "volume" to an incentive for liquidity "volume" + "retention". Of course, if the time element has too much weight in the incentive allocation, this will also lead to new LPs facing efficiency disadvantages in liquidity mining compared to old LPs, resulting in poor attraction of new liquidity. How to balance the two still needs to be proven by practice.


The maturity of Chronos' LP has an accelerating effect on returns, source: Chronos Medium


b. Team situation


The core team of Chronos remains anonymous, and the official disclosure of the 9 core members only indicates their job functions without providing more personal information. Currently, the protocol has completed the audit by Certik.


c. Timeline


2.4.2 Business Situation


Please note that as of the writing of this article, Chronos is still a new project that has been online for less than two weeks. Its various business indicators and prices are in a state of violent fluctuations. Readers should take this factor into consideration when reading and referencing.


a. Liquidity (TVL) and corresponding liquidity acquisition expenses.


Currently, Chronos is only in its second week of launch (5.5), and its liquidity has already reached 263 million US dollars. Among the top 10 pools ranked by TVL, 6 of them belong to stablecoin pools, and the TVL ratio of stablecoin pools is 37%, which is not high.


Source: https://app.chronos.exchange/liquidity


Currently, Chronos is in epoch1, with a weekly emission of 2,509,650 CHR (initial emission 99%97.5%) used for liquidity procurement. Based on the current price of $1.18, the liquidity procurement cost for Chronos this week is 1.182,509,650=2,961,387$.


We also obtain TVL/liquidity acquisition cost: 263,000,000/2,509,650=104.8, which means that the current incentive of 1$ worth of CHR can sustain a TVL of 104.8$.


b. Trading volume and transaction fees.


According to Defillama's data, the trading volume of Chronos in the first week of launch was 16 million US dollars, with a fee of 23,827 US dollars. In the second week, which started on May 3rd, the trading volume began to rapidly increase.


Data source: https://defillama.com/protocol/chronos


c. Bribe amount and number of projects


According to official disclosure, the liquidity purchase amount of Chronos in the first week (epoch0) exceeded $180,000.


Source: Chronos Official DC


The projects with bribery amounts above $5000 (in descending order based on bribery amount) include: Overnight (stablecoin), Yield Farming index (yield aggregator), GMD (yield aggregator), Deus (synthetic assets and derivatives), Radiant (lending), Tangible (stablecoin), etc.


In addition, before the official launch of Chronos, the project party released a very detailed veNFT airdrop cooperation agreement list in advance. In addition to specifying the positioning and distribution of the cooperative projects, it also elaborated on the cooperation intentions and values ​​reached by both parties at the business level, which is impressive. As of now (epoch1), there are already 100 bribery pools established on Chronos.


d. Collateralization ratio


According to the data dashboard built by @impossiblefinance, the lock-up rate of Chronos shows a trend of starting low and gradually increasing, but entered a plateau phase after reaching 36%. Currently (May 5th), the token lock-up rate is 36.7%.


Data source: https://dune.com/impossiblefinance/chronos-finance


Compared to Velodrome, Thena, and Equalizer, the staking rates for the other three ve(3,3) projects are mostly between 60-80%. There is still a lot of room for improvement in the Chr lock-up rate.


2.4.3 Summary


Chronos has further innovated on the basis of Velodrome, Thena, and Equalizer, introducing LP's time weighting as an important dimension for obtaining liquidity incentives, which is a positive attempt to address the existing ve(3,3) challenge. In addition, Chronos is on the thriving Arbitrum public chain, which provides greater business development space. However, Chrono is still in epoch1 stage, and its token is in a period of rapid inflation, with a weekly inflation rate of about 5% relative to the initial total. The overall willingness of users to lock up is not high, and there may still be significant selling pressure in the secondary market in the short term.


3. Summary


In this chapter, the author will compare the four projects covered in this article, as well as Curve and Balancer, which also use the ve model and operate in both spot trading and liquidity procurement markets, based on the project's market value, business data, and project characteristics. Then, combined with the ve(3,3) project, the future development and competition of Dexs will be analyzed and considered.


3.1 ve(3,3) and VE Project Comparison



PS: 1. The above data statistics and calculation time are as of May 5th, 2023, with the highlighted data being estimated values.
2. The total supply market value refers to the total token value (including those in circulation, staked as ve certificates, and unlocked tokens) that have been minted up to now, rather than FDV.
3. The basic data used for calculation mainly comes from official disclosures and Defillama.
4. The bribery income of Curve and Balancer adopts the bribery data of Votium, Hiddenhand, and Votemarket.
*[Profit and loss] here refers to income (fees + bribes) - liquidity emission incentives.
Statistics & Tables: Mint Ventures


From the above table, we can see that due to the fierce competition in the Dex track, all veDEX are currently in a loss stage based on the comparison of revenue and incentive costs (without considering the buying pressure of liquidity purchasers on governance tokens). However, due to the direct integration of bribery modules in ve(3,3) type Dex and looser liquidity procurement conditions (no need for governance voting to decide the permission to enter Gauge, using a centralized application system), they have achieved higher bribery income under the "same liquidity" condition.


As an industry practitioner in the encryption field, I will translate the following Chinese text to English without considering the context or industry-specific terms and names. English words and phrases, as well as capitalized English words and phrases, will not be translated or abbreviated, such as ZKS, STARK, and SCROLL. If there are English characters in the hyperlink, they will not be translated and will be returned directly. When there are only punctuation marks in the content, the punctuation marks will be returned as they are. HTML tags in the content, such as

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, will not be translated. If there are English characters in the HTML tags, they will be omitted and returned directly. The content in the hyperlink will be preserved and not translated. All Chinese characters will be translated. The text to be translated is:

Due to the longer development history and the advantages of brand and trust brought by the old-fashioned Dex, it has significantly lower liquidity procurement costs than emerging Dex. This may also be one of the main reasons why Curve and Balancer can enjoy higher PS valuations, because net profit is calculated after deducting costs and expenses.


3.2 ve(3,3) and the future of Dexs


From the perspective of business data performance, Velodrome has firmly established its position in TVL on OP, while Thena, as a newcomer, can rank among the top on the relatively mature BNBchain. Chronos went online for two weeks and climbed to the top three TVL on Arbitrum, all of which demonstrate the superiority of the ve(3,3) model in practice.


In my opinion, the ve(3,3) proposed by AC and later developed by others is a valuable exploration of Dex. Some of the experiments have been proven to be effective, such as:

· Integrate the liquidity procurement (bribery) module directly into the Dex to improve the convenience of procurement and avoid the "taxation" of third-party voting platforms.

· Emphasize the "TOB" attribute and attach importance to the incentive of liquidity purchasers (other project parties), such as the governance rights of potential customer agreement airdrops, which significantly increases the bribery income.· According to the voting distribution of the pool's fees, the incentive is directed towards pools that can create more fees.


However, some important mechanisms such as ve(3,3) have gradually been proven false and eliminated in experiments, the most typical of which is the Rebase mechanism set up to ensure that the governance rights of ve users are not diluted. Velodrome first significantly reduced the proportion of rebase, while newer projects such as Equalizer and Chronos completely eliminated Rebase to ensure that latecomers in liquidity procurement do not have a significant disadvantage compared to early users.


More importantly, the strong liquidity procurement revenue of the ve(3,3) projects seems to further prove the feasibility of the Dex model pioneered by Curve, which combines spot trading and liquidity provision.


The author extensively discussed in the article "Understanding Curve: Business Status, Ecological Development, Moat and Valuation Comparison of Head Liquidity Markets" why project parties tend to purchase liquidity on DEX platforms such as Curve or Velodrome, rather than using the traditional "two-pool" model. The article can be found at https://www.theblockbeats.info/news/35323?search=1.


1. Purchasing on large platforms often results in lower costs.

2. Avoiding the "Coin Price-Token Liquidity Negative Spiral" caused by using local currency as an incentive in some cases.


And in specific operations, ve(3,3) projects have created higher liquidity resale income with smaller liquidity scales, which may come from their "open attitude" towards new customers. New projects on Curve must first face the voting issue to enter the Gauge if they want to purchase liquidity. Without enough votes, they don't even have the qualification to purchase. Although most ve(3,3) projects promise to give the approval authority of Gauge to the community in the future, they currently use a relatively loose centralized application system, which greatly expands the potential customer base and also brings liquidity prices that are raised by bidding, directly boosting the rise of income.


However, this also brings potential risks, as malicious or poorly operated project parties can more easily and quickly buy liquidity due to the relaxed review. When malicious events occur, the LPs providing liquidity on the Dex will suffer losses. For example, in November 2021, the issuer of stablecoin USDM bribed to purchase liquidity on Curve and then dumped USDM, causing LPs to lose about $35 million when USDM went to zero. And on May 6th this year, Defi protocol DEUS was hacked, causing its issued stablecoin Dei to anchor and fall to $0.18, and DEUS was one of the liquidity purchasers for many ve(3,3) projects, and its stablecoin Dei had good liquidity on multiple platforms before the attack. Whether the evaluation qualifications of liquidity purchasers should be controlled by the community or whether LPs should bear the risk of market making themselves is an interesting practical issue.


Another trend worth noting is the ve(3,3) type Dex that originated from Curve. Currently, in addition to retaining the traditional Curve stable trading pool and Uni V2 AMM mechanism, it is actively introducing the centralized liquidity mechanism of Uni V3. Centralized liquidity is the most important feature of Velodrome's upcoming V2, and Thena has also cooperated with external partners to launch the centralized liquidity feature on the fast track, which has significantly increased its trading volume after going live. At the same time, Curve has not stopped improving its trading algorithms. Currently, its algorithm improvement plan for tricrypto V2 (WBTC\ETH\USDT) has been leaked, aiming to further expand its trading volume share in the head Token varieties.


Curve's tricrypto V2 improvement plan


Compared to centralized trading platforms, the advantages of Dexs lie in the privacy and autonomy brought by assets not needing to be held in custody, the composability that connects the entire DeFi ecosystem, and the easier ability to become the initial liquidity source for emerging projects. It is also the foundational liquidity layer for the entire Web3 business world.


In the future, we can expect to see Dexs further expand their total share in cryptocurrency trading. However, for individual Dex projects, the competition is far from over. As the author stated in "Understanding Curve: Business Status, Ecological Development, Moats, and Valuation Comparisons of Head Liquidity Markets":


All projects are in long-term competition, and monopolies are becoming out of reach. There is almost no project that has absolute pricing power over users (liquidity providers, traders, and liquidity purchasers). The only way for projects to survive is to pursue extreme operational efficiency and continuous innovation, hoping to gain temporary user favor through superior mechanisms and better experiences (but often being caught up or surpassed by other projects' imitations or innovations).


Compared to the early decentralized order book projects IDEX and the pioneers of AMM Bancor, Uniswap which has promoted AMM, and Curve which introduced the ve model, ve(3,3) seems more like a small iteration.


The innovation battle among Dexs is still ongoing, and it's only halftime for now.


4. Acknowledgements


Thanks to the researchers of ve (3,3) and Panews Research Director @Jianghb1992 for their careful review and valuable feedback on this article, as well as the community user @BOBBOB15047599 and our founding partner @fanyayun and researcher @lawrence_leeee for their review and feedback.


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