A closer look at the ve(3,3) tokenomics model in DeFi

What is the ve(3,3) Model?

Context and History

The ve(3,3) model is a tokenomics system introduced in January 2021 by Andre Cronje, one of the pioneers of decentralized finance (DeFi). It is based on a fusion between the Vote Escrow (ve) system popularized by Curve Finance and the (3,3) theory from OlympusDAO. This model was first implemented by Andre Cronje on the Solidly protocol, a decentralized exchange he developed on the Fantom blockchain.

Although Solidly quickly failed after its founder announced his departure from the cryptocurrency ecosystem in 2022, the ve(3,3) model has influenced many other DeFi protocols. Today, it has been implemented in various adaptations and continues to be adopted and improved by different projects.

Why was this tokenomics model once considered revolutionary? Which projects continue to adopt it? What are its advantages and limitations? In this analysis, we will explore in depth the fundamental principles of ve(3,3) and its impact on the DeFi ecosystem.

The Vote Escrow Model from Curve Finance

Before delving into the ve(3,3) model, it is important to establish the fundamentals and understand the workings of the two systems that inspired it, starting with the Vote Escrow model from Curve Finance.

One of Curve’s key features is the competitive environment that pushes participants to acquire as much voting power as possible. Indeed, this allows them to influence the direction of CRV emissions, particularly in determining which liquidity pool receives the largest share of tokens.

The final idea is that when CRV emissions are redirected toward a specific liquidity pool, liquidity providers (LPs) are rewarded with higher yields. This incentivizes LPs to flock to selected pools, further increasing liquidity.

The Vote Escrow system led to the creation of veCRV, a token received by users when they voluntarily lock their CRV for a set period. The longer the lock duration, the greater their voting rights and rewards. Once again, this system was specifically designed to encourage participants to commit for long periods.

This mechanism gave rise to the famous "Curve War," where numerous protocols built on Curve offered increasingly high yields to their users to acquire their veCRV, allowing them to vote for their own liquidity pool and receive a larger share of CRV emissions.

The (3,3) Model from Olympus DAO

Now, it is essential to examine the second system that inspired the ve(3,3) model, namely the staking (3,3) system of the Olympus DAO protocol. In 2021, Olympus DAO was one of the most popular protocols in DeFi, to the point where it spawned an innumerable number of forks known as "OHM forks."

The (3,3) model from Olympus DAO was based on game theory and aimed to provide a series of scenarios depending on users’ actions: bond, stake, and sell. Looking more closely:

• The best possible outcome for both the user and the protocol is if everyone stakes: (3,3).
• When one user stakes and another bonds, this is also extremely positive because, on one hand, the token (in this case, OHM) is removed from the market, and on the other, it provides liquidity: (3,1) or (1,3).
• When one user sells while another stakes or bonds, the result is negative: (1,-1) or (-1,1).
• Finally, logically, if all users sell, everyone experiences major losses: (-3,-3).

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Understanding the ve(3,3) Model

Now that we have established the fundamentals, let's return to the ve(3,3) model. It is based on three main pillars:

• Vote Escrowed Tokens (veTokens): A system that allows users to lock their tokens to gain governance rights and rewards.
• Economic incentives: A mechanism designed to reward those who commit long-term by distributing a share of the protocol’s fees.
• Controlled emissions: A dynamic adjustment of emissions to prevent excessive dilution and maintain a balance between incentives and inflation.

Vote-Escrowed Token (veTOKEN)

Vote-Escrowed Tokens (or veTokens) are the primary feature of the ve(3,3) system. The principle is that a user can lock tokens (which we will call $TOKEN) to receive $veTOKEN in return. The amount of $veTOKEN received is proportional to the lock duration. This system assigns more weight to users who commit long-term.

For example, the Aerodrome protocol, a DEX on the Base blockchain, also adopts a Vote-Escrowed model that favors longer lock durations. The multiplier used depends on time, with a maximum lock period of four years:

• Locking 100 AERO for 4 years = 100 veAERO
• Locking 100 AERO for 2 years = 50 veAERO
• Locking 100 AERO for 1 year = 25 veAERO
• Locking 100 AERO for 300 days = approximately 20.55 veAERO

Thus, the more veAERO a user holds, the greater their voting power, reinforcing long-term participation in the system. Of course, the concept of locking tokens alone is not enough to attract participants to governance.

Once tokens are locked as veTOKEN, it is impossible to unlock them before the lock period ends. However, some protocols like Shadow use a different model. SHADOW can be locked into xSHADOW, which can be converted back to SHADOW instantly, but the conversion does not happen at a 1:1 ratio.

Revenues and incentives for locking

To attract users and encourage them to lock their tokens, protocols often set up issues of their own tokens, which they distribute to veTOKEN holders. This is obviously reminiscent of the Curve War era, and is part of the ve(3,3) model. Here are the three main advantages offered by these protocols:

• An APY to incentivize blocking: Holders of veTokens receive issues of new tokens, similar to a staking mechanism.
• Revenue sharing (revshare): A portion of protocol fees is redistributed to veToken holders. For example, protocols such as Pendle and Aerodrome redistribute shares of fees to veTOKEN holders.

The ve(3,3) model's long-term token locking system is particularly reinforced by revshare. In Aerodrome's case, the more AEROs the user locks in over a longer period, the greater the amount of veAERO received, and therefore the greater the revshare.

• Yield boost (veBOOST): veTOKEN holders can boost returns on their positions in liquidity pools. For example, the Pendle and Spectra protocols enable veToken holders to increase their APYs.

To be more precise, in the case of Pendle, veTOKEN holders have the option of choosing specific strategies through which they will earn fees from these positions. During the restaking hype, some users maximized their gains by incentivizing liquid restaking protocol pools.

In Spectra's case, here's an example of a position that earns up to 39.41% APY thanks to veBOOST mechanisms.

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The Limitations of the ve(3,3) Model

High Inflation Risk

As seen earlier, the ve(3,3) model relies heavily on economic incentives to attract participants to lock their tokens for the long term. Whether through staking (base yield) or yield boosting (veBOOST), these mechanisms require token emissions to function.

One of the main issues with tokens using a ve(3,3) model is their potentially excessive inflation.

For example, the AERO token from the Aerodrome platform follows a three-phase inflation mechanism:

Phase 1: Take-off

• Duration: First 14 weeks (epochs).
• Emissions increase by 3% per week.
• Objective: Accelerate adoption and attract partners by making liquidity provider (LP) rewards highly attractive. This temporary hyperinflationary model favors early adoption.

Phase 2: Cruise

• Start: From week 14 (epoch 14).
• Emissions gradually decrease by 1% per epoch.
• Objective: Reduce inflation while maintaining maximum liquidity stability on the protocol.

Phase 3: Aero Fed

• Start: From epoch 67, when emissions drop below 9M AERO per epoch.
• veAERO holders take control of emissions. Each epoch, they vote between three options:
  1. Increase emissions by 0.01% of total supply (0.52% annualized).
  2. Decrease emissions by 0.01% of total supply (0.52% annualized).
  3. Maintain the current percentage of total supply.

In this way, when the protocol is stabilized and sufficiently anchored within the ecosystem, community governance takes over via the Aero Fed system. Holders of veAERO (blocked tokens) have the power to regulate the issuance of new tokens.

The aim is to ensure dynamic management adapted to market demand:

• If the liquidity provided by LPs is low, they can vote to increase issuance to attract more participants.
• If inflation is too high, they can reduce issuance to protect the value of the token.
• An equilibrium can be maintained if the situation is stable.

This mechanism ensures maximum adaptability and enables the players involved to steer the protocol's monetary policy.

Let's take the case of Pendle, where the situation is rather similar. Initially, the protocol had enormous inflation in order to attract Liquidity Providers (LPs), only to stabilize and reduce inflation so that the token's value remained undiluted.

Since September 2024, PENDLE's issuance has been set at 216,000 new tokens every week. This issuance is then reduced by 1.1% each week until April 2026, to reach around 2% stable inflation each year.

At first glance, it would be normal to think that this inflation is enormous. Nevertheless, here's an interesting calculation: the total number of PENDLE tokens projected in April 2026, with an initial weekly issue of 216,076 tokens reduced by 1.1% each week, would be around 265,901,491 tokens. This represents inflation of 4.46% over 19 months, equivalent to average inflation of 2.82% per year.

Tokens with ve(3,3) models are therefore subject to high inflation in their early stages, which can dilute their potential increase in value. Obviously, each protocol has its own inflation mechanism, and Pendle and Aerodrome are simply two examples that do not guarantee a truth applicable to other projects.

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A “Plutocratic” Governance Model

The ve(3,3) model gives governance power in proportion to the veTokens held by the user. This means that the wealthiest actors control key protocol decisions: a governance model known as plutocracy.

Plutocracy: A system where power is directly linked to wealth rather than contribution or actual skills.

Since governance is based on veTokens, those with the most locked tokens have disproportionate influence over decisions such as emissions control (and who benefits from them).

To counter this, governance weight diminishes over time, but this does not fundamentally change the structural imbalance.

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Conclusion

The ve(3,3) model has had a profound impact on DeFi, but its effectiveness varies depending on implementation. While it aligns user incentives and stabilizes token circulation through locking mechanisms, it also introduces inflation risks and governance centralization.

Some protocols have managed to optimize ve(3,3), while others, like Solidly, collapsed rapidly. This highlights the complexities and risks involved in applying the model.

Its continued evolution will determine whether ve(3,3) remains a sustainable economic model for DeFi in the long run.