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Understanding the ve(3,3) Economic Model
Understanding ve(3,3) Dynamics
The ve(3,3) economic model addresses the challenges of incentivizing liquidity providers (LPs) and ensuring revenue accrual for decentralized exchange (DEX) governance token holders. Our innovative approach creates a self-sustaining flywheel that balances incentives and rewards, ultimately promoting long-term growth and stability.
Traditional DEXs, like Uniswap, face issues with revenue accrual for governance token holders and sufficient incentives for LPs.
Firstly, trade fees are often insufficient to attract LPs, leading to liquidity mining programs with native token emissions. However, these emissions can negatively impact token prices over time for projects looking to incentivize liquidity.
Secondly, the governance token holders have difficulty redirecting revenue away from LPs to the DEX because any revenue taken away will cause more LPs to leave, reducing their liquidity and therefor their overall trade volumes. This is an existential problem.
The ve(3,3) model solves these issues through a unique fee and incentive structure:
- 1.Directing all trade fees to veCHR voters
- 2.Incentivizing LPs with CHR emissions
- 3.Allowing protocols to bribe veCHR voters directly for a share of emissions to incentivize their tokens
- 4.Supporting CHR emissions through transaction revenue and utility
This structure ensures high utility and rewards for holding and locking the CHR token, which in turn helps maintain the required liquidity.
The ve(3,3) model harmonizes the incentives of all participants in the Chronos protocol. This includes
$veCHRvoters, liquidity providers, traders, and protocols.
- Liquidity Providers — incentivized to add liquidity to the pools with the highest
$CHRemissions. With the maturity-adjusted return model, LPs are also incentivized to commit their liquidity for a longer duration to receive maximal rewards. This aligns our TVL with the long term health and sustainability of the project.
$veCHRvoters — incentivized to vote to direct incentives to high-volume and most bribed pools because these pools generate the most fees
- Traders — benefit from low slippage and better rates thanks to the liquidity provided
- Protocols — benefit from a public liquidity layer and can easily bribe voters to attract more incentives - and therefore, more liquidity - to their pools
Projects seeking to incentivize liquidity for their tokens can bribe veCHR voters directly, receiving a portion of emissions. This approach provides a secondary income source for veCHR lockers and allows projects to source liquidity efficiently without relying on high native token emissions.
As the price of the CHR decreases, the APR for locked veCHR increases, making it more attractive to investors. This mechanism helps maintain demand and counteracts downward price spirals. Over time, an equilibrium is established where the yield of buying and locking CHR helps protect the price. This in turn, ensures LPs have a sustainable source of yield in the form of CHR emissions.
This system is elastic in that it can both ramp up and down to suit all liquidity and market conditions. In conditions with higher liquidity and trade volumes, the price of CHR will naturally increase to a level suitable to sustain liquidity (because of increased revenues through trade fees) and vice versa. This means the system harmonizes through natural market forces to benefit all participants.
In summary, the ve(3,3) economic model fosters a flywheel effect that balances incentives, rewards, and demand, providing a sustainable solution for DEXs, liquidity providers, and CHR token holders alike. By addressing the challenges of traditional DEXs, the ve(3,3) model creates a healthier, more efficient, and attractive ecosystem for all participants.