From governance to ES mining, a comprehensive explanation of the DeFi economic model

Table of contents

1. Incentive Compatibility in Token Economics

2. Different Economic Model Classifications, Objectives and Designs

3. Looking at the DeFi economic model from the incentive model

4. Voting escrow model

-Curve: the first ve model

• Different innovations for vetoken mechanism

• Velodrome: the most representative ve(3,3)

5. ES mining mode

• ES: Game with real income and encourage loyal users to participate

• Camelot: Introduce some ES mining incentives

• GMX: Encourage competition for real revenue distribution

6. See the core elements of DeFi economic model design from Value Flow

• Composition of Value Flow

-Tokenomics reshape Value Flow

• The key mechanism of DeFi Tokenomics: game and value redistribution

“ [Money] it drives the world, for better or worse. Economic incentives drives entire swathes of human populations to behave” — Chamath Palihapitiya

01. Incentive Compatibility in Token Economics

Decentralized P2P systems based on cryptography were not new in 2009 when Bitcoin came out.

You may have heard of the BitTorrent protocol, commonly known as BitTorrent, which is a P2P-based file sharing protocol, mainly used to distribute large amounts of data to users on the Internet. It utilizes some form of economic incentive, for example, “seeds” (users who upload complete files) get faster downloads, but this early decentralized system launched in 2001 still lacks a sound economic incentive design.

The lack of economic incentives stifled these early P2P systems, making it difficult for them to prosper over time.

When Satoshi Nakamoto created Bitcoin in 2009, he added economic incentives to the P2P system.

From DigiCash to Bit Gold, the Byzantine Generals Problem has not been fully resolved in multiple experiments to create decentralized digital cash systems. However, Satoshi Nakamoto implemented a Proof-of-Work consensus mechanism + economic incentives to solve this seemingly unsolvable problem, that is, how to reach consensus among nodes. Bitcoin not only provides a store of value for people who want to replace the existing financial system; it also provides a new, general-purpose design and development method using the combination of cryptocurrency and incentives, which eventually formed the current financial system. A strong and vibrant P2P payment network.

From Satoshi Nakamoto’s “Galileo Era”, encryption economics has evolved to Vitalik’s “Einstein Era”.

A more expressive scripting language brings the realization of complex transaction types, and brings about the birth of a more general decentralized computing platform. After Ethereum switched to Proof-of-Stake (PoS), token holding Participants will become validators of the network and earn more tokens this way. Controversy aside, this is indeed a “more inclusive method of token distribution” compared to Bitcoin’s current ASIC mining method.

“Designing a token economic model is actually designing an “incentive compatible” game mechanism.”

• Hank, BuilderDAO

Incentive compatibility (Incentive Compatibility) is an important concept in game theory, which was first proposed by economist Roger Myerson in his classic book “Basis of Game Theory: Incentives and Cooperation” (The Theory of Cooperative Games). Published in 1991, this book has become one of the important reference works in the field of game theory. In the book, Myerson elaborates on the concept of incentive compatibility and its importance in game theory.

Its academic definition can be understood as: a mechanism or rule design in which participants act according to their true interests and preferences, without resorting to fraudulent, cheating, or dishonest actions in pursuit of better outcomes. This kind of game structure can enable individuals to maximize their personal interests and at the same time maximize their collective benefits. For example, in Bitcoin design, when expected income > input cost, miners will continue to invest in computing power to maintain the network, and users can continue to conduct secure transactions on the Bitcoin ledger—this trust machine now stores more than 40 billion US dollars in value, and every day Processed transactions valued at over $600 million.

Putting it into Tokenomics, using Token incentives and rules to guide the behavior of multiple participants, achieve better incentive compatibility in the design, and expand the scale and upper limit of the decentralized structure or economic benefits that can be realized is an eternal proposition.

Tokenomics plays a decisive role in the success or failure of a cryptocurrency project. And how to design incentives to achieve incentive compatibility plays a decisive role in the success or failure of Tokenomics.

This is similar to monetary policy and fiscal policy for national governments.

When the protocol acts as a country, it needs to formulate monetary policies, such as the token issuance rate (inflation rate), and decide under what conditions new tokens will be minted. It requires fiscal policy to regulate taxation and government spending, often in the form of transaction fees and treasury funding.

This is complicated. Designing a model that reconciles humanity and economics is incredibly difficult, as humanity’s past millennia of economic experimentation and governance construction has demonstrated. There are mistakes, wars, and even regressions. Crypto, which is less than two decades old, also needs to create a better model in these trial-and-error iterations (such as the Terra event) to welcome a long-term successful and resilient ecosystem. And this is obviously a kind of thinking reset that the market needs more in the long encryption winter.

02. Different Economic Model Classifications, Objectives and Designs

When designing an economic model, we need to be clear about what the token is designed for. Public chains, DeFi (decentralized finance), GameFi (gamified finance) and NFT (non-homogeneous tokens) are different types of projects in the blockchain field, and they have some differences in designing economic models.

**The design of public chain tokens is more like macroeconomics, while others are closer to microeconomics; the former needs to focus on the overall dynamic balance of supply and demand within the entire system and between ecology, while the latter focuses on the supply and demand relationship between products and users/markets . **

Different types of projects have completely different design objectives and design core points of their economic models. in particular:

1. Public chain economic model: Different consensus mechanisms determine different economic models of the public chain. But the same thing is that the design goal of its economic model is to ensure the stability, security and sustainability of the public chain. Therefore, the core is to use tokens to motivate verifiers, attract enough nodes to participate and maintain the network. This usually involves the issuance of cryptocurrencies, incentive mechanisms, and node rewards and governance to maintain the continued stability of the economic system.
2. DeFi economic model: Tokenomics originated from the public chain, but has been developed and matured in DeFi projects, which will be analyzed later. The economic model of a DeFi project usually involves lending, liquidity provision, trading, and asset management. The design goal of the economic model is to encourage users to provide liquidity, participate in lending and trading activities, and provide participants with corresponding interest, rewards and benefits. In the DeFi economic model, the design of the incentive layer is the core, such as how to guide token holders to hold tokens instead of selling them, how to coordinate the distribution of interests between LP and governance token holders, etc.
3. GameFi economic model: GameFi is a concept that combines gaming and financial elements, aiming to provide gamers with financial rewards and economic incentives. The economic model of a GameFi project typically includes the issuance, trading, and distribution of revenue for in-game virtual assets. Compared with DeFi projects, GameFi’s model design is more complicated. Taking transaction pumping as the core of income determines how to increase users’ reinvestment needs and become the first point of economic model design, but it also naturally proposes a design for the playability of the game mechanism challenge. This makes most projects inevitably exhibit Ponzi structure and spiral effect.
4. NFT economic model: The economic model of NFT projects usually involves the issuance, transaction and rights of holders of NFT. The design goal of the economic model is to provide NFT holders with opportunities to create value, trade value and income, and encourage more creators and collectors to participate. This can be subdivided into NFT platform economic model and project economic model. The former focuses on royalties, while the latter focuses on how to solve economic scalability, such as increasing repeat sales revenue and fundraising in different fields (refer to Yuga Labs).

While these projects have their own unique economic model designs, they may also have overlapping and overlapping aspects. For example, DeFi projects can integrate NFT as collateral, and GameFi projects can use DeFi mechanisms for fund management. In the evolution of economic model design, whether it is in the business layer or the incentive layer, the development of DeFi projects is more abundant. At the same time, many models of DeFi are also widely used in projects such as Gamefi Socialfi, so the economic model design of DeFi is undoubtedly worthwhile. field of in-depth study.

03. Looking at the DeFi economic model from the perspective of the incentive model

If we divide it according to the business logic of different projects, we can roughly divide the DeFi economic model into three main categories: DEX, Lending, Derivatives. If we divide it according to the characteristics of the incentive layer of the economic model, we can divide it into four modes: Governance model, pledge/cash flow model, voting custody “including ve and ve(3,3) models”, es mining model.

Among them, the governance model and pledge/cash flow model are relatively simple, and the representative projects are Uniswap and SushiSwap respectively. A brief summary is as follows:

• Governance model: Tokens only have the governance function of the agreement; such as UNI, which represents the governance right of the agreement. Uniswap DAO is the decision-making body of Uniswap, where UNI holders initiate proposals and vote to determine decisions that affect the agreement. The main governance contents include managing the UNI community treasury, adjusting the handling fee rate, etc.
• Pledge/cash flow model: Tokens can bring continuous cash flow; for example, when Sushiswap was launched, it quickly attracted liquidity by allocating its token SUSHI to early LPs, completing the “vampire attack” on Uniswap. And in addition to transaction fees, SUSHI tokens also have the right to distribute 0.05% of protocol revenue.

They have their own advantages and imperfections. The governance function of UNI has been criticized for not being able to realize value, nor for giving back to LPs and users who took greater risks in the early stage; however, the large number of additional issuances of Sushi caused the currency price to fall, and part of the liquidity was moved back to Uniswap from Sushiswap by LPs.

In the early stages of the development of DeFi projects, these two are relatively common economic models. Later economic models iterated on this basis. Next, we combine Token Value Flow to focus on the analysis of voting custody and es mining mode.

This article mainly adopts the Value Flow method to study the project, aiming to abstract the value flow of the project, including starting from the real income of the agreement, drawing the redistribution path of income in the agreement, the link of incentives, and the flow of tokens. All of these constitute the core business model of the protocol, and are constantly adjusted and optimized through Value Flow. Although Value Flow does not include all Tokenomics, it is a product value flow based on Tokenomics design. On this basis, combined with factors such as the initial distribution and unlocking of tokens, the Tokenomics of the protocol can be fully presented. In this process, the supply and demand of tokens are adjusted, thus realizing value capture.

04. Voting Escrow

The background of the birth of vote escrow comes from the dilemma of early DeFi projects. The solution lies in how to motivate users to hold coins, how to coordinate the interests of multiple parties, and contribute to the long-term development of the protocol. After Curve first proposed the ve model, other subsequent protocols have made iterations and innovations in economic models based on Curve, mainly ve model and ve(3,3) model.

ve mode: The core mechanism of ve is that the user obtains veToken by locking the token. veToken is a non-transferable and non-circulating governance token. The longer the lock-up time is selected (usually with an upper limit on the lock-up time), the more veTokens can be obtained. According to their veToken weight, users can obtain a corresponding proportion of voting rights. Part of the voting rights is reflected in the ownership of the liquidity pool that can determine the rewards of additional tokens, which will have a substantial impact on the user’s personal benefits and enhance the user’s motivation to hold currency.

ve(3,3) mode: VE(3,3) model combines Curve’s ve model and OlympusDAO’s (3,3) game model. (3,3) refers to the game results of investors under different behavior choices. The simplest Olympus model includes 2 investors, who can choose three behaviors: pledge, bond, and sell. As can be seen from the table below, when both investors choose to pledge, the mutual benefit is the largest, reaching (3,3), which is intended to encourage cooperation and pledge.

Curve: the first ve model

In the value flow drawing of Curve in the figure below, we can see that CRV holders cannot share any relevant benefits of the agreement. Only when LPs lock the CRV in their hands to obtain veCRV can they capture the value of the agreement. This is reflected in: Transaction fees, market-making revenue acceleration, and the agreement’s governance voting rights.

• **Transaction fee: **After the user locks the CRV token pledge, he can get 0.04% of the transaction fee share of most of the transaction pools on the whole platform by virtue of the pledged veCRV amount. The share rate is 50% of the total transaction fee (in addition 50% to liquidity providers), and the share is distributed through 3CRV tokens.
• **Market-making income acceleration: **Curve liquidity providers can use the Boost function to increase the CRV reward income obtained by their own market-making after locking CRV, thereby increasing the overall APR of their own market-making. CRV is determined by the amount of funds in the pool and LP.
• **Governance voting rights of the protocol: **Curve’s governance also needs to be realized through veCRV. The scope of governance includes not only protocol parameter modification, but also Curve’s new liquidity pool voting, and CRV’s liquidity incentives in each transaction Weight distribution between pools and more.

In addition, holders of veCRV can also obtain airdrops of other Curve-supported and cooperative project tokens. For example, Curve-based liquidity and CRV pledge management platform Convex token CVX will airdrop 1% of the total amount to veCRV users.

It can be seen that CRV and veCRV have fully captured the value of the overall agreement. Not only can they obtain the agreement’s fee sharing and accelerate the market-making income, but also play a huge role in governance, which creates a huge demand for CRV and Stable buying.

Curve Value Flow Mapping: DODO Research

Due to the strong demand for the anchoring and liquidity of the assets issued by the stable asset operators, it is almost impossible to let their stable assets land on Curve to establish a liquidity pool, and obtain CRV’s liquidity mining incentives to maintain sufficient transaction depth. their inevitable choice. The competition revolves around the daily output of CRV used for liquidity mining incentives. Its distribution is determined by Curve’s DAO core module “Gauge Weight Voting”. Users can vote in “Gauge Weight Voting” through their own veCRV, which can determine the next week’s The distribution ratio of CRV in each liquidity pool, the higher the distribution ratio, the easier it is to attract sufficient liquidity.

In this involuntary war without gunpowder, the competition is for the “judgment right to list coins” and “the right to distribute liquidity incentives.” Of course, while obtaining project governance rights through CRV, these projects will also receive stable dividends from the Curve platform as a cash flow income. The game and involution of various projects on Curve have generated continuous demand for CRV, stabilized the price of CRV under a large number of additional issuances, and supported Curve’s market-making APY, attracting liquidity, and achieving a cycle. So the CRV war has spawned a complex bribery ecosystem based on veCRV. At present, as long as Curve still dominates the exchange field of stable assets, this war will not end.

Ecosystem source based on veCRV:

We briefly summarize the advantages and disadvantages of the veCRV mechanism at a glance:

advantage

• After the lock-up, the liquidity is reduced, which reduces the selling pressure and helps to stabilize the currency price (currently 45% of CRV has been voted and locked, and the average lock-up time is as long as 3.56 years.)
• Make the long-term interests of all parties relatively consistent (veCRV holders also enjoy the fee share, that is, the interests of the liquidity provider, transaction party, token holder, and agreement are coordinated together)
• Weighting of time and quantity, better governance possibility

shortcoming

• More than half of the governance rights on Curve are in the hands of Convex (53.65%), and the governance rights are quite concentrated
• The liquidity in Curve has not been fully utilized (boost mining rewards and governance voting rights obtained by locking CRV at an address are limited to this address and cannot be transferred; it has attracted a large number of liquidity through high subsidies, but these Liquidity has not exerted its high-speed liquidity function, so it cannot generate external income)
• The hard lock time is not friendly enough for investors, 4 years is too long for the crypto industry

Different innovations for vetoken mechanism

In the previous DODO Research article, we analyzed in detail the five innovations in the incentive design of the veToken model. Each protocol makes different adjustments in key aspects of the mechanism according to its own needs and priorities. Specifically divided into:

• Design veNFT to improve the liquidity of vetoken
• How to better distribute tokens to vetoken holders
• Incentivize the healthy development of liquidity pool trading volume
• Layer the income structure and give users the opportunity to choose

Take Balancers as an example. In March 2022, Balancer launched the V2 version, which modified the original economic model. Users can lock the 80/20 BAL/WETH pool’s BPT (the LP token of the Balancer fund pool) to obtain veBAL, thereby deeply binding Balancer V2’s governance rights and protocol dividend rights to veBAL.

Users must lock BAL and WETH tokens at a ratio of 80:20, instead of just locking BAL—locking LP tokens instead of a single token lock can increase market liquidity and reduce volatility. Compared with Curve’s veCRV, veBAL has a maximum lock-up period of 1 year and a minimum lock-up period of 1 week. This also greatly reduces the lock duration.

In terms of fee sharing, 50% of the agreement fee obtained by Balancer will be distributed to veBAL holders in the form of bbaUSD. The rest of Boost, Voting, and governance rights are not much different from Curve.

Balancer Value Flow Mapping: DODO Research

It is worth mentioning that, in response to the “waste of liquidity - unable to increase external income for the product” problem in the vetoken model, Balancer uses the Boosted Pool mechanism of the interest-generating transaction pool to increase LP income (the LP token issued by the LP pool is called bb-a -USD, which can be used as a matching asset to pair with various assets in the AMM pool, and the leverage of assets is realized by issuing LP tokens, thereby increasing LP income). Later, Core Pools were proposed (in order to improve the original Boosted Pools that can only benefit LPs). Officials bribed veBAL holders to vote for Core Pools through Bribes, which would shift a large amount of $BAL to Core Pools, increasing the income of external interest-earning assets. This makes the Balancer protocol itself change the revenue structure.

Velodrome: the most representative ve(3,3)

Before we talk about Velodrome, let’s make a simple definition of ve(3,3) again: Curve’s veCRV economic structure + Olympus’s (3,3) game theory.

As shown in the figure below, there are two main ways to motivate OHM in Olympus: one is the bond mechanism (Bonding), and the other is the pledge (Staking) mechanism. Olympus officially sells OHM to users below the market price in the form of bonds, and the official obtains USDC, ETH and other assets paid by users, so that the treasury is supported by value assets, and OHM is generated and distributed to OHM pledgers through the Rebase mechanism. Ideally, as long as users choose long-term pledges, which is the so-called (Stake, Stake)—that is, (3,3), the OHM balance in their positions can continue to grow with compound interest, and the pledgers have a positive circular effect of high APR . But this flywheel cannot be sustained if the OHM sell-off in the secondary market is severe. This is of course a game, and the ideal state is a Nash equilibrium to achieve a win-win situation.

Olympus Value Flow Mapping: DODO Research

At the beginning of 22, Andre Cronje launched Solidly in Fantom, the core of which is veNFT and voting right optimization. veSOLID positions are represented by veNFTs, which seem to liberate liquidity, even if users transfer NFTs, any NFT holder has voting rights to decide the distribution of rewards; veSOLID holders will receive a certain base proportional to weekly emissions, This allows them to maintain voting shares even without locking up new tokens; at the same time, stakers get 100% of transaction fees, but can only earn rewards from pools that have voted, avoiding voters on Curve Giving the pool is just for bribery.

After AC announced on Twitter that the distribution of Solidly token ROCK will be directly airdropped to the top 20 protocols with the largest locked positions on the Fantom protocol, it detonated the Vampire Attack between protocols on the Fantom chain, and 0xDAO and veDAO came into being , Start the TVL war. A few months later, the veDAO team hatched another project of ve(3,3), Velodrome.

So why does Velodrome Solidly become the standard fork template on layer2 such as Arbitrum or zkSync?

In the original design, Solidly had some key weaknesses, such as being highly inflationary and completely permissionless—allowing any pool to earn SOLID rewards, and a large number of air tokens emerged. Rebase or “anti-dilution” didn’t add any value to the overall system either.

***What changes has Velodrome made? ***

• The Pool for the incentive issuance of Velo tokens has adopted a whitelist mechanism. The whitelist is currently an open application system, and there is no governance process on the chain (avoiding voting to determine token incentives)
• Liquidity bribery rewards for Pool can only be claimed in the next cycle
• (veVELO.totalSupply ÷ VELO.totalsupply)³ × 0.5 × emissions—reduced the reward ratio for additional issuance of ve token holders. Under the adjusted mode of Velo, veVELO users will only receive 1/4 of the total emissions of the traditional mode quantity. This improvement has actually greatly weakened the (3,3) part of the ve(3,3) mechanism.
• Canceled the LP Boost mechanism
• 3% of Velo emissions will be used as operating expenses
• Extended exploration of veNFT mechanism: including veNFT can be traded even when staking/voting, veNFT can be divided, veNFT borrowing, etc.;
• More reasonable token distribution and issuance rhythm: Velodrome distributed 60% of the initial supply to the community on the first day of the project launch, bundled with the Optimism team to help the cold start, and airdropped several agreements with veVELO NFT, no Conditions attached, which greatly helped attract the initial vote and bribery campaign.

Velodrome Value Flow Mapping: DODO Research

Velo’s pledge rate has been on the rise since its launch, with a high lock-up rate of 70%-80% at the peak (the current pledge rate of Curve, which also uses the ve model, is 38.8%). The “Tour de OP” plan that started in November is coming to an end, the incentive of 4 million OP rewards has come to an end, and the incentive for locking positions will further decline, forming a potential selling pressure. But the current Velo pledge rate still maintains a good level (~70%). The upcoming V2 upgrade is also designed to encourage more holders to lock up their tokens, so it’s worth keeping an eye on.

Velo pledge rate curve, image source: Velo official DC, source: mint ventures

05.ES mining mode

ES: Gaming with real income and motivating loyal users to participate

The ES mining model is a fascinating and challenging new Tokenomics mechanism. Its core idea is to reduce the cost of protocol subsidies by unlocking the threshold, and to enhance its attractiveness and inclusiveness by motivating real users to participate.

In the ES mode, users can obtain ES Token rewards by staking or locking positions. Although this kind of reward makes the rate of return look higher, in fact, due to the existence of the unlocking threshold, users cannot immediately cash out these benefits, which makes the calculation of real benefits complicated and difficult to predict. This makes ES mode both challenging and attractive.

Compared with the traditional ve model, the ES model has obvious advantages in terms of the cost of the agreement subsidy, because the unlocking threshold of its design reduces the subsidy cost. This makes the ES model closer to reality in the game of distributing real benefits, so it is more universal and inclusive, and may attract more users to participate.

The essence of the ES model is that it motivates real user participation. If users leave the system, they will give up ES Token rewards, which means that the protocol does not need to pay additional token incentives. As long as users stay in this system, they can get ES Token rewards, although this part of the rewards cannot be realized quickly. This design motivates the participation of real users, keeps users active and loyal, and does not impose excessive incentives on users. By controlling the spot ratio and unlocking cycle of staking or locking, the project itself can achieve a more interesting and attractive token unlocking curve.

• Camelot: Introduce some ES mining incentives

When discussing Camelot’s value flow method, the abstract value flow of Camelot clearly shows how Camelot’s tokenomics works. Here, we do not elaborate on each link, but abstractly show the main value flow parts in order to better understand its overall framework.

The core incentive goal of Camelot is to encourage liquidity providers (LP) to continue to provide liquidity to ensure that traders can enjoy a smooth trading experience and sufficient liquidity. This design ensures the smoothness of transactions with an incentive mechanism and helps LPs and traders share the generated benefits.

The real income of the Camelot protocol comes from the transaction fees generated by the interaction between traders and pools. This is the real income of the protocol, and it is also the main source for the protocol to redistribute revenue. In this way, Camelot ensures the sustainability of its economic model.

As for the redistribution of revenue, 60% of the transaction fee will be distributed to LPs, 22.5% will be redistributed to flywheels, 12.5% will be used to purchase and burn GRAIL, and the remaining 5% will be distributed to the team. This redistribution mechanism ensures the fairness of the protocol and also provides motivation for continuous operation.

In addition, this distribution of benefits encourages and drives the flywheel. In order to obtain redistributed income, LPs must pledge LP tokens, which indirectly motivates them to provide liquidity for a longer period of time. In addition to the real income of 22.5% handling fee, Camelot also allocated 20% of GRAIL token and xGRAIL (ES token) as incentives. This strategy not only motivates LPs, but also encourages ordinary users to participate in the distribution of income by staking GRAIL, which enhances the activity and attractiveness of the entire protocol.

Camelot Value Flow Mapping: DODO Research

• GMX: Encourage competition for real revenue distribution

GMX’s token economics model (tokenomics) is a highly interesting and interactive design. Its core goal is to achieve continuous supply of liquidity and encourage traders to continue trading with liquidity providers (LP). This design aims to ensure the liquidity and trading volume of the protocol, while incentivizing the continuous locking of GMX.

The real income of this model comes from the fees incurred by traders for exchange and leveraged transactions, which is the main source of income for the protocol. In order to ensure a fair revenue distribution, the income is first used to deduct referral fees and keeper fees. The remaining 70% will be allocated to GLP holders (actually LP), and the remaining 30% will be redistributed. GMX distributes this part of the income through the game mechanism, which is also the core mechanism of the model.

The core game mechanism of GMX is designed to redistribute 30% of the real income. This ratio is fixed, but GMX holders can use different strategies to influence the ratio of income they can share. For example, users can obtain esGMX rewards by staking GMX, and the unlocking of esGMX requires GMX spot staking and a certain unlocking cycle. In addition, staking GMX will also get Multiplier Points. Although this part of the reward cannot be directly realized, it can increase the user’s profit sharing ratio.

In this game mechanism, GMX, esGMX and Multiplier Point all play a weight role in profit sharing. The only difference is that Multiplier Points cannot be cashed out; esGMX needs to be unlocked gradually by staking GMX; while GMX can be cashed out quickly, but Multiplier Points will be emptied and esGMX rewards will be forfeited.

This design enables users to develop strategies according to their needs. For example, for users who are pursuing long-term returns, they can choose to continue to lock in order to obtain the greatest weight and obtain higher relative returns. And if users want to withdraw from the agreement quickly, they can choose to withdraw and realize all the pledged GMX. At this time, the unrealized esGMX rewards will remain in the agreement. The agreement does not need to actually issue subsidies, but the real during this period. Proceeds are distributed to users.

GMX’s token economic model encourages GLP holders to continue to provide liquidity in this way, and fully utilizes the value of real income redistribution. This makes the continuous lock-up of GMX possible, further strengthening the stability and attractiveness of its economic model.

GMX Value Flow Mapping: DODO Research

06. See the core elements of DeFi economic model design from Value Flow

In the design of the DeFi economic model, the core elements include basic value, token supply, demand and utility. These constituent elements are relatively discrete and cannot be combined intuitively in some previous analyses. The Value Flow method used in this article is to abstract the internal value flow of the protocol by studying the Tokenomics mechanism of the project, and combine the product logic to analyze the value flow of the project as a whole, including the composition of the flywheel, the flow of income distribution, and the link of incentives, combined with tokens. Chip distribution and unlocking cycle, etc., can intuitively understand the Tokenomics of a project.

The following is the Value Flow that was not expanded in detail due to space limitations:

GNS Value Flow (realize membership mechanism through NFT to redistribute income) drawing: DODO Research

AAVE Value Flow (Users pledge AAVE to share part of the protocol revenue) Drawing: DODO Research

ACID Value Flow (combining es mechanism and Olympus DAO mechanism to realize flywheel) drawing: DODO Research

CHR Value Flow (ve(3,3) without rebase mechanism, preventing the concentration of voting rights) drawing: DODO Research

Composition of Value Flow

DeFi protocols all generate more or less real income, real money flows in the protocol, and value is generated accordingly.

Value Flow is the value flow in the abstract protocol itself. First, start from the real income, and describe the real income redistribution of the agreement; second, abstract the flow direction and acquisition conditions of token incentives, so as to clearly see the value capture of tokens, the link of incentives and the flow of tokens. The flow of these values constitutes the entire business model, and the release of tokens will be redistributed through Value Flow during the continuous operation of the protocol.

Taking Chronos as an example, when abstracting its Value Flow, we need to abstract key stakeholders first, such as Trader, LP, and veCHR holders. The key stakeholders are the participants of the redistribution and the node of the value flow. The value flows between these parties and the benefits are redistributed according to the mechanism design.

The key to abstracting Value Flow is to abstract the flow direction and mechanism of income distribution. Here, it is not required to be specific to each link, but to combine various small flow branches and abstract integration when necessary to form an overall flow. Taking this picture as an example, the real source of income is the handling fee generated by Trader transactions. 90% of this part is allocated to the holders of veCHR, which is redistributed through the ve mechanism, so as to realize the incentive for native tokens. After Value Flow is abstracted, we can clearly see how value flows within the protocol, and how the benefits are distributed over time.

Value Flow is not the whole of Tokenomics, but it is based on the product value flow itself under the design of Tokenomics. If the initial allocation and unlocking of Token are added, the Tokenomics of a protocol is fully presented.

Tokenomics Reshape Value Flow

Why is the early digging and selling economic model less and less visible?

In the early days, the design of Tokenomics was relatively rough. Tokens were regarded as a means of motivating users and a tool for short-term profit. However, this incentive method is simple and direct, and lacks an effective redistribution mechanism. Taking DEX as an example, when the emission and all handling fees are directly allocated to LP, there is no long-term incentive for LP. This model is easy to collapse when the currency price has no other source of value, because the migration cost of LP is too low, so A collapsed mining pool was produced.

With the passage of time, the design of DeFi protocols on Tokenomics has become more and more refined and complex. In order to achieve incentive goals and regulate token supply and demand, various game mechanisms and revenue redistribution models have been introduced. Tokenomics is tightly coupled with the product logic and revenue distribution of the protocol itself. Reshaping the Value Flow through Tokenomics, and redistribution of real income has become the main role of Tokenomics. In this process, the supply and demand of tokens can be regulated, and tokens can realize value capture.

The key mechanism of DeFi Tokenomics: game and value redistribution

In the late stage of DeFi summer, many protocols have actually improved their economic models. The essence is to redistribute a certain part of profits by introducing a game mechanism, thereby making users on the entire chain more sticky. Curve redistributes the mechanism of token rewards, redistributes emission rewards through voting, and even derives the value of bribery and various combined platforms. In addition, another core of the Tokenomics mechanism is to promote the rotation of the entire flywheel and capture more traffic and funds by introducing additional token rewards.

**To sum up, under such a mechanism, tokens are no longer just a simple value exchange medium, but also become a tool to capture users and create value. This process of redistributing profits can not only increase user activity and stickiness, but also stimulate user participation and promote the development of the entire system through token rewards. **

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