The beauty of crypto is that value can now be programmed. This idea of programmable value has also unlocked the idea of time-aligning incentives between a protocol and stakeholders via time-locked or vesting tokens. As a result, weâve seen many protocols begin to adopt different variations of this design with varying success.
Examples
Some well-known examples of vote-locked, staked, or vesting tokens include:
Curve (veCRV) and also the initial airdrop which was linearly vested over one year. CRV can be locked for up to 4 years and the longer your lock, the higher your veCRV balance. 50% of all trading fees on the Curve protocol go to veCRV holders.
Balancer (veBAL): veBAL is locked for a one-year period and linearly unlocks. 75% of all fees generated by the protocol are proportionally distributed to veBAL holders. Interestingly, veBAL is an LP token consisting of 80%/20% BAL/WETH.
Aave (stkAAVE): requires a 10-day cooldown period before one can withdraw AAVE from stkAAVE. stkAAVE receives inflation rewards of AAVE.
Redacted (rlBTRFLY): revenue-locked BTRFLY is a newly designed system from Redacted Cartel which allows BTRFLY holders to lock their tokens for 16 to 17 week epochs to earn revenue generated by the prortocolâs products and treasury. rlBTRFLY holders also earn inflationary rewards of BTRFLY.
CowSwap (vCOW): Although COW does not have a protocol revenue sharing agreement currently, vCOW was the token distributed for the initial airdrop which has a 4 year linear vesting period to be converted into COW.
âŚand many more
Pros
Reward recipients of liquidity mining incentives, grants, and other $HOP rewards with partially locked or vesting tokens which should prevent mercenary yield farmers from earning HOP just to sell the token. A locked token rewards long term support instead of short term speculation.
Create a time-aligned token variant to direct protocol revenues/transaction-fees if the DAO ever decides to turn on a âfee switchâ of any sort (this RFC is not for discussing a fee switch, only for a vesting/staked token equivalent of HOP).
Cons
Redirecting developer time to a non-core protocol function
Being locked into a token design that we may want to change in the future
Discuss
I believe that this is at least worth the discussion to gauge early opinions. Should Hop adopt a vote-locked, staked, or vesting token? If so, what design makes the most sense?
HOP currently suffers from limited liquidity. Itâs important to remember that staking or locking would at the margin remove liquidity from the market. That doesnât mean donât do it, but you may want to include that under Pros and Cons. Removal of liquidity can be either, but at the moment, thereâs not a large amount of HOP liquidity to begin with.
VE models, while pursued elsewhere (as well outlined in the Examples section), may not fit every protocol.
We have seen in the past new token models come and go and caution the haste adoption of this voting escrowed model. There is a chance a better model may be born soon.
As is, it places operational costs on the dev team and is new smart-contracts and complexity.
While this sometimes translates to more rewards (via Governance), added complexity and fragmented token holders may affect participation in the long-term.
Speculation isnât fun but it leads to better price discovery, volumes, and liquidity.
Vesting/locking would only be introduced for newly issued tokens, so at the margin it would not remove liquidity from the market. Instead, any new liquidity entering the market would happen at a more steady pace. Yes, staking could potentially remove liquidity from the market and so I think vesting tokens should be a higher priority than staking anyway for the liquidity mining rewards that are currently being discussed.
I think I generally agree with this in that itâs probably too early to adopt something and there likely isnât enough developer bandwidth anyway. In any case, I think this thread should stay open and continue to develop the conversation around vesting, staking, fee distribution, etc. as it inevitably ebbs and flows in interest.
@lito.coen mentioned in Discord to take a look at SNX and GMX vesting rewards contracts which could solve the issue of developer bandwidth and also deprioritizes staking in favor of a near-term vesting implementation. I think this could be the optimal route.
I share a similar sentiment with the comments above, and looking at some of these examples, âve model hasnât exactly proven itself to be a successful model so far.
It adds an extra layer of complexity when we arenât exactly sure if itâs helpful to the protocol. There is also a misalignment between âve token holders and the protocol.
Locked tokens donât necessarily help with price in any way, as those who want to sell are unlikely to lock their tokens, so I donât necessarily agree here.
Why is there a misalignment between ve token holders and the protocol? I would say the exact opposite is true.
The goal here isnât necessarily to have people stake/lock their tokens, but to reward liquidity mining with pre-locked tokens (e.g. SNX, AAVE). The goal also is not to support the price in any way. Itâs to time-align liquidity mining participants with the protocol. Attracting longer term oriented liquidity is significantly more valuable than attracting mercenary liquidity that will leave the protocol as soon as liquidity mining is sunsetting.
've token holders will boost pools that favor them â large ve holders can target emissions towards âtheirâ pools. That might not always necessarily favor the protocol and can cause inequality amongst emissions.
There are no âtheirâ pools here with permissioned bridges with a small/select group of assets. In any case, I donât think anyone would advocate for a system as complex as voting and boosting for this initial scoping out of a locked token system. That is certainly not needed for Hop.
At itâs simplest level, this is about starting a locked/vesting token equivalent to reward liquidity mining in its early days. This is not about a fee switch (way too early for that, although itâs certainly a step toward that) and itâs not about boosting pools. Itâs simply about time-aligning liquidity miners with the protocol.
Though high level I agree with the concept of vesting or generally speaking creating some friction between reward and selling pressure, I fear locking rewards may translate in a premium that investors would require. Silly example with unreal numbers just to clarify the idea, folks may expect a 20% APR for staking without locking, or 35% with locking.
When staking itself is âveâ, there should also be a premium for it as users sacrifice being able to react to the market. This may be done in the form of having staking rewards allocated with different weights depending on the time to expire of the time lock.
Not necessarily if staking model entitles LP tokens, as done with BAL/ETH BPTs. Like if staking HOP meant staking the LP token of HOP and ETH. Not saying we should go this direction, just saying there are ways around hurting liquidity.
I created another similar thread but it is focused on fees.
I think the first step should be the fees for the service. What will hop charge for its services?
Who are the users paying for the service and how much they are willing to pay for whatever service we are providing. A comparison with similar protocols and their fees could help us.
After the fees are set I think the staking, vesting would be more plausible.
âIt is important to note that tokens offering revenue to share to their holders may cause them to appear more security-like. While many would use this point to argue against DeFi tokens offering a revenue share, it is also true that unless this change occurs, DeFi as a whole will continue to exist as a mass speculation market.â
As summarized in DeFi Manâs piece, there are two primary methods for issuing revenue to token holders today:
Buy back the native protocol token from the market and (1) distribute it among stakers, (2) burn it, or (3) keep it in the protocolâs treasury
Redistribute protocol revenue to token holders
âFee distribution to holders + low float = gud tokenomicsâ
There has been plenty of feedback for this proposal. @fourpoops do you think it makes sense to readjust your proposal based on the feedback and put it up for a snapshot vote or continue the discussion to get more clarity?
I saw this more as a pure ârequest for commentâ and discussion thread that should live on in order to organize all thoughts around this topic. I donât think thereâs anything to move forward here in terms of a snapshot vote, but I do think the discussion can continue. I believe eventually there will be a vote regarding this topic once consensus around an action can be reached.
hey @fourpoops, interesting ideas for sure. I think locking tokens at the margin makes sense when tokens are released to contributors and to the community for sure. Iâve helped a few DAOs do this actually for their core contributors using the Hedgey protocol for Contributor Rewards - which instead of delivering the tokens directly, it actually delivers locked tokens to each person. The cool part is those locked tokens are held inside an NFT, so each contributor gets a unique NFT with their locked tokens, that they can still participate in governance and voting with, but aligns longer term with the DAO as the tokens are locked (typically) for 12 months inside a fun NFT. Something Hop could look into for its core team token distributions and community related token distributions.
I would advocate for the approach where HOP adopts a ve-token model that uses an LP token as the base (i.e. a 80/20 HOP/WETH LP token from Balancer). This model provides governance rights while also ensuring some amount of liquidity.
Several pros of this approach:
Hop may incentive just once to get holders to lock their tokens which reduces selling pressure as well as providing liquidity for traders, as opposed to incentivizing locking and liquidity separately.
once you have a ve-token, you can introduce gauge emissions, where ve-token holders periodically vote on which pools to allocate token emissions. Pairing the gauge system with a Bribe marketplace means that ve-token holders get to realize the financial value of their voting power in the form of bribes from external parties (not just inflation). A successful example where bribing brings significant income to ve-token holders can be seen on this Llama Airforce
Several cons of this approach:
locking your tokens makes your position illiquid, and this could be on the order of days for short locks up to several years for long locks. Illiquid tokens usually attract someone to build a liquid wrapper around the ve-token, and extracts fees out from the platform, in exchange for making the positions more liquid.
Introducing a bribing marketplace does not guarantee benefits to ve-token holders. What needs to happen is for some entity to find value from increased liquidity in a Hop pool to incentivize it. As an example, it would not make sense for most retail users to bribe for emissions into a pool, because the emissions are distributed across all liquidity providers. However, it would make more sense for an L2âs team/foundation to bribe for emissions towards the pool associated with their L2, since that would encourage more liquidity providers which leads to lower fees for users to bridge to this L2 over other L2s
Side note, a weighted LP can minimize impermanent loss. As example, if we compare a 80/20 pool vs a 50/50 pool when one token appreciates 500% against the other token in the pool, the 80/20 pool has 7.38% IL whereas 50/50 pool has 13.40% IL
You may run other IL calculations of weighted pools using https://baller.netlify.app/
Overall, I believe it would make sense for HOP token to adopt a ve-token model given we identify entities who could commit to putting up bribes in exchange for directing where emissions go. And this model would not make sense if we cannot identify such entities.
Disclosure: I am a contributor to Redacted, which created the Hidden Hand bribing marketplace. I also provide liquidity to several Hop pools and hold HOP tokens.