The design core of the Token economic model lies in reasonably balancing short-term supply-demand relationships and long-term ecosystem stability. An ideal model should encourage demand while reducing supply, thus achieving price stability and value growth.

Supply

  • Circulating supply:
    Refers to the number of Tokens available for trading in the market. The circulating supply directly affects market prices; the more supply, the lower the price.

  • Maximum supply:
    The maximum number of Tokens that can be generated by the protocol, which is the upper limit of Token scarcity.

  • Total supply:
    The total amount of Tokens issued, including those that are burned and locked. Although these Tokens are not in the circulating market, they still impact the design of the overall economic model.
    Market capitalization (price × circulating supply) is a more accurate measure of Token value rather than solely relying on Token price.

Distribution

Token distribution determines the health of the holding structure. The concentration of distribution affects the degree of decentralization and governance fairness.

  • Decentralized distribution: Increases decentralization, reducing the risk of control by a single large holder over the protocol.

  • Centralized distribution: May bring governance efficiency but can also weaken community trust.

Monetary policy

Monetary policy defines the issuance rhythm and economic model of the Token, mainly divided into inflation and deflation modes:

  • Inflation model:
    Token supply gradually increases, which may dilute the value of existing holders. Suitable for early ecosystem development, but may lead to price declines in the long run.

  • Deflation model:
    Token supply gradually decreases, increasing scarcity. For example, Ethereum introduces a burning mechanism through EIP-1559, reducing ETH supply in transactions, gradually tending towards deflation.

In addition, monetary policy is closely related to the protocol's consensus mechanism. For example:

  • POW model: High energy consumption but low inflation (like Bitcoin).

  • POS model: Reduces circulating supply through staking mechanisms, enhancing value capture capability.

Value Capture

Value capture measures how the protocol converts ecosystem growth into returns for Token holders.

  • Core issue: How does the protocol return value to Token holders through transaction fees, staking rewards, etc.?

  • Distribution mechanism: A balance needs to be found between incentivizing long-term supporters and short-term speculators.

Analysis of the VE model

What is the VE model?

The VE (Voter Escrowed) model, pioneered by Curve Finance, is an innovative economic model that achieves governance optimization through Token locking.

  • Holders lock Tokens (like CRV) to receive veTokens (like veCRV).

  • The longer the locking period, the higher the weight of the veToken received.

  • veToken holders enjoy governance rights and reward distribution rights, but cannot unlock early during the locking period.

Core characteristics of the VE model:

  1. Flexible locking period:
    Holders can freely choose the locking period (up to 4 years), the longer the locking period, the greater the governance weight.

  2. Linear decay mechanism:
    Over time, the weight of veToken gradually decreases, incentivizing holders to re-lock.

  3. Governance is tied to rewards:
    The weight of veToken directly affects governance voting rights and reward distribution, with long-term lockers enjoying higher returns.

Effects of the VE model

1. Solve the problem of 1 Token = 1 Vote

In traditional models, large whales can manipulate governance decisions through short-term large purchases of Tokens, even maliciously undermining competitor protocols.
In the VE model:

  • Voting weight is linked to the locking period, significantly reducing governance weight for short-term holders.

  • Votes from long-term lockers are more valuable, incentivizing protocol supporters to grow alongside the ecosystem.

2. Reduce selling pressure, optimize supply

The long-term locking of Tokens directly reduces the circulating supply, lowering market selling pressure.

  • Short-term effect: Reduced circulating supply, more stable prices.

  • Long-term effect: With increasing demand, prices rise organically.

3. Incentivizing long-term supporters

  • Hardcore supporters: Gain greater governance rights and passive income by choosing the longest locking period.

  • Short-term speculators: Lower yields and influence, gradually exiting the competition.

4. Impact on the four pillars

  • Supply: The VE model reduces circulating supply through locking mechanisms, optimizing price performance.

  • Distribution: Although weakly related to distribution, the distribution of long-term lockers is more concentrated among protocol supporters.

  • Monetary policy: The VE model embeds deflationary effects, reducing Token circulation and optimizing the economic model.

  • Value capture: veToken holders receive more rewards, binding their interests to the protocol in the long term.

Case study: CRV War

CRV (the governance Token of Curve Finance) is a successful example of the VE model.

  • Background: A large number of protocols and whales compete for veCRV to gain governance rights and reward distribution rights of Curve.

  • Results: Participants had to lock CRV for an extended period, driving price increases and ecosystem stability.

  • Insight: The VE model effectively balances governance fairness and long-term value capture.

Summary

The VE model demonstrates significant advantages in supply control, governance optimization, and value capture through locking mechanisms and weight design.
It provides an innovative path for Token economic models, incentivizing long-term supporters while reducing short-term speculative behavior, ultimately promoting the healthy development of the protocol ecosystem.