The words “token” and “economics,” which describe the supply and demand aspects of a cryptocurrency project, are combined to form the term “tokenomics.” It considers a crypto token’s economics, including its issuance, properties, availability, demand, distribution and other features. Decentralized finance (DeFi) projects’ potential worth can be estimated using tokenomics. Tokenomics has a significant impact on the value of each cryptocurrency or non-fungible token (NFT) because the rules of demand and supply cannot be altered.
However, tokenomics can carry a number of flaws. Certain projects often allocate a significant amount of initial supply to insiders, which could be a pump and dump red flag. Additionally, there is no standard handbook outlining the ideal token split between the creators, shareholders, community, treasury, and protocol developers.
DeFi approaches lacking an initial token distribution strategy, such as Curve, MakerDAO, and Uniswap, lead to suboptimal token allocation because larger contributors may not necessarily receive the best allocation or vice versa. Vote-escrowed tokenomics, also known as veTokenomics, was first proposed by the Curve protocol to address these problems.
What is veTokenomics? How does veToken Model work?
Tokens must be locked for a predetermined amount of time under the veTokenomics guidelines, which promotes long-term engagement and reduces the market supply of the tokens. Users are given veTokens in exchange, which are non-transferable and cannot be sold. The need to lock one’s tokens for a set amount of time in order to participate in governance will result in upward price pressure as time passes. Some DeFi efforts already allow you to lock up your tokens so that you can share in the protocol’s earnings. Owners of these locked tokens can manage the emission flow under the veToken design, which increases the liquidity of any specific pool.
The term “emission” refers to the pace at which cryptocurrencies are generated and issued. The emission rate is influenced by the economic model of the cryptocurrency, particularly if it is inflationary or deflationary. Because whales are unable to disproportionately use their votes to manipulate token prices, there is a greater correlation between actual protocol success and the incentives generated by token holders.
The 4-year lockup period used by Curve, which is also the most common timeframe, is the basis for the veToken mechanism. The financial objectives and voting rights of the tokens are efficiently stratified through the freezing of positions. The native token owner enjoys tradability while veToken holders has the potential to generate secondary income in the form of fees, and is also given voting rights. The veToken’s characteristics include mainly two parts: it is not tradeable or transferable and there is no intrinsic economic worth. These two characteristics are the main reasons why the veToken is a reliable and trustworthy tool for Web3 society governance.
Future of the veTokenomics model
Although still in its infancy, veTokenomics can help fix some problems of the traditional tokenomics model. Future protocols may use veTokenomics more into their conceptual layout in addition to coming up with creative ways to construct unique economic systems that employ veTokens as a bridging base. The veToken’s utility makes it possible to align the interests of all parties, and it also provides incentives that are far more consistent with the traditional financial industry.
As was already mentioned, veToken supports long-term incentives alignment. Because tokens might be locked for a number of years, users are compelled to operate in the protocol’s best interest rather than their own. Thus, veTokenomics is also widely accepted as a reliable and secure tool to improve Web3’s transparency. As a trustworthy crypto exchange that prioritizes transparency, Phemex will experiment with a range of potential veToken-based approaches to the benefit of its users.