CoinMarketCap takes a look at vote escrow, an innovative method to make the community governance and on-chain voting more secure and reliable among DAOs.
As decentralized platforms, many blockchains and blockchain-based applications need a way to decide how to develop and evolve. Since there is no centralized entity at the helm of this process, many platforms opt for decentralized governance — usually in the form of a decentralized autonomous organization (DAO).
Many blockchain projects feature community governance — allowing token holders to help shape how the platform operates and evolves through an on-chain voting process between governance token holders. These DAOs are essentially permissionless since anybody holding the token can participate in their governance.
Many of these platforms require users to lock their governance in an escrow contract to participate in voting — this process is known as vote escrow.
How Does it Work?
Vote escrow solutions range from incredibly simple to rather complex. Most fall into the simple side of the spectrum, making it easy for users to participate and get to grips with the process.
When users lock up their governance tokens, they receive a number of vote-escrowed tokens (veTokens) in return. These veTokens typically cannot be traded and are simply used to confer governance rights to their holders. Usually, a certain amount of time must elapse before users can participate in governance — ensuring they are more likely to act in the long-term interests of the platform.
During this time period, the tokens are "locked" in an escrow account and generally cannot be traded or used for any other purpose. Once the escrow period elapses, the tokens are released and can be used to cast a vote. The length of the escrow period can vary depending on the specific protocol and the nature of the decision being made.
Many platforms offer a veToken multiplier if users opt to lock their tokens for an extended period of time.
Though vote escrow solutions have exploded in popularity among DeFi platforms, a number of challenges have emerged which has limited their effectiveness. Chief among these is the risk of centralization — where a number of whales manage to secure major early positions in a token and gain control over its governance later.
Sybil attacks are another challenge since an attacker can sometimes create multiple fake identities or accounts to gain disproportionate voting power.
One poignant example of this is the recent Curve wars — where major DeFi protocols used various tactics (including bribes) to gain control over Curve’s governance.
Because of this, a growing number of platforms and protocols are refining the vote-escrow concept in an attempt to increase participation and align incentives among all stakeholders in the ecosystem.
What Are Vote Escrow Tokens?
Vote escrow tokens (veTokens) are one of the key innovations of the vote escrow governance format. When a token holder wants to vote on a proposal, they must first lock their vote escrow tokens in an escrow account for a certain period of time.
One example of a vote escrow token is veCRV. This token is used by the Curve DAO, a decentralized exchange protocol that is primarily used for stablecoin trading. With veCRV, users can lock their Curve DAO tokens (CRV) in an escrow account in order to earn voting rights. The longer the tokens are locked, the greater the voting power they confer.
By using veCRV, the Curve DAO helps to enforce long-term decision-making. Since the tokens are locked for a certain period of time, users are discouraged from voting purely for short-term gain.
Though veTokens are generally non-transferrable, some protocols allow users to use their tokens for various purposes — such as unlocking liquidity or accessing additional yields.
Today, many DAOs use vote escrow solutions to manage user participation and rewards.
What Is Ve(3,3)?
Arguably the most important innovation in the field, ve(3,3) is a new mechanism for vote escrow that was first proposed by renowned DeFi developer Andre Cronje in January 2022.
The system is designed to fairly distribute future emissions of a reward token among ecosystem participants, helping to maintain the long-term viability of the associated platform(s) and ensure stakeholders are rewarded for improving efficiency and acting in everyone’s best interests.
Ve(3,3) introduces three major changes over the simple vote-locking format, namely:
- Weekly emissions are adjusted based on the % of the token supply that is locked. As a higher % of the supply is locked, emissions are reduced.
- Ve(3,3) includes provisions to ensure ve token lockers do not get diluted by emissions — such any supply increase leads to an equal increase in their token holdings.
- Ve locks are NFTs. This means users can trade their locks on secondary markets and take out credit against their locks on open lending platforms. This helps to maximize capital efficiency.
This solution helps to keep emissions in line with interest by reducing inflation when the proportion of vote lockers is high. This is contrary to the way that many Proof-of-Stake (POS) blockchains operate — since they often increase yields as the fraction of the staked supply increases.
The ve(3,3) system was first implemented by Olympus DAO, but there are now at least a dozen other DeFi platforms using the ve(3,3) system for governance. Some notable examples include Solidly and its numerous forks.
Which Projects Currently Use Vote Escrow?
Today, the vast majority of platforms that support vote escrow-based governance are decentralized exchanges (DEXs).
As it stands, the best-known projects leveraging the vote escrow system include:
Curve
Curve is a stablecoin exchange protocol that helped to define the vote escrow governance format.
To participate in the governance of the Curve DAO, users need to lock their CRV tokens to obtain veCRV. This veCRV determines the user's voting power, with users with more veCRV having more voting power.
Depending on the unlock time selected, users can earn up to a 2.5x multiplier on the CRV rewards they receive for contributing liquidity to one or more of its liquidity pools.
Solidly
Solidly is a novel automated market maker that gained prominence in 2022, since it was among the first platforms to incorporate both Curve's vote escrow system and OlympusDAO's (3,3) tokenomics.
It also introduced the vote escrow NFT (veNFT) — allowing vote escrow positions to be traded on NFT marketplaces.
The platform is designed to maximize liquidity provision and reward long-term participants in the form of the SOLID token.
Solidly was deployed on the Fantom blockchain, but gave rise to a number of forks operating on other chains — including Sterling and Ramses on Arbitrum, and Equilibre on Kava.
Velodrome
Arguably the most prominent Solidly fork, Velodrome is a liquidity and trading marketplace deployed on Optimism.
The platform allows users to earn rewards for staking their assets in its liquidity pools. The platform features an innovative bribe system, which allows users to bribe voters (using VELO tokens) to maximize emissions to their pool of choice.
The platform is currently the largest DeFi platform on Optimism by TVL, with over $300 million worth of assets spread across its various liquidity pools
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