15h ago
Lockonomics, or: How I Learned to Stop Worrying and Love the Dromes
I got tired of explaining why @AerodromeFi @VelodromeFi were not ponzis but actually a brilliant superior model for accruing liquidity and rewarding long-term holders.
So I wrote an article (link below)
The full article:
1) Here's how a basic DEX like Uniswap works — LPs get fees + incentives provided out of protocol by projects. The project token serves no role besides governance (RIP $UNI holders).
2) On the other hand, here's how the dromes work. LPs get the project token, in a quantity that is determined by project token lockers. Lockers get fees + "bribes" (3rd party project incentives) for the pools they vote to allocate tokens to.
3) If project token emissions are exactly equal to fees + bribes, this model is equivalent to the basic model.
But lockers still make money!
4) That's because the token supply gets inflated, but only lockers get rewards. So as long as < 100% of the supply is locked, lockers are making money.
In the dromes model, there is an inherent speculation tax on short-term holders (who get inflated) in favour of lockers.
5) In practice, the dromes have about 50% of their supply locked long-term. This means that the net (post-inflation) yield is half of what you see on the frontend.
6) Remember, this assumes:
1. market cap is constant
2. emissions = revenue (fees + bribes)
Both can be false in practice.
7) First, the market cap is volatile, but hasn't been dropping in pace with inflation as a general trend. This makes total sense, because protocol revenue has been growing!
8) Second, the big kicker: emissions are higher than revenue. It's a ponzi!!!! 😡
No, it's not.
9) Why it's not a ponzi.
The protocol is balanced when emissions = revenue.
And the protocol can set the rate of emission (right now permissioned, will become permissionless later). So it can always be brought back to equilibrium.
10) Why emissions > revenue?
To grow the protocol!
Higher APY attracts LPs, higher liquidity attracts volume, hence more fees.
This also incentivizes projects to use dromes for liquidity, as 1$ spent in bribes causes > 1$ in rewards to LPs, attracting more liquidity.
11) First, note that in the last few epochs, emissions < revenue!
But emissions > revenue did work well, as Aerodrome has consistently grown in revenue and volume. Velodrome's metrics regressed a bit, but it outperformed on the Superchain ex-Base.
12) It's also notable that when emissions > revenue, lockers have been more than fully compensated for the emissions (i.e. the net APY post-dilution is positive).
13) Why lock?
Locking effectively takes tokens out of circulation long-term, reducing sell pressure. This allows upside if the token trades on flow, and prevents people from selling with the market without taking a haircut.
14) Note however that at > 30% net (post-dilution) yield *right now* on Aerodrome, locked tokens effectively have a P/E ratio of 3.33... (Apple: 38, Nvidia: 51)
It's basically the cheapest thing in DeFi, with the big caveat that you have to lock long-term.
15) So in summary:
- If emissions = revenue, the dromes work just like Uniswap.
- ... but lockers still make money on net because the non-lockers are being diluted with no compensation.
- Emission control can always bring the protocol back to emissions = revenue.
- It's rational to have emissions > revenue if this grows the protocol, ensuring higher levels of future fees.
- Locking long-term reduces sell pressure.
16) I think the dromes model — aka "ve(3,3)" or "MetaDEX" — is brilliant, and I think it could be applied to other revenue-generating projects.
I'm coining the term "lockonomics" for projects that follow this basic recipe:
- Distribute yield via project token emission.
- Distribute revenue to long-term project token lockers
- ... ensuring net yield to lockers via short-term holders dilution.
Letting lockers direct emissions is optional and doesn't work with every protocol, but is interesting because it can incentivize certain actors (e.g. projects with a token) to accumulate locked tokens.
17 / END) Read the whole article for a much deeper explanation, extra details, and fun anecdotes:
@BautiDeFi @AerodromeFi @VelodromeFi Also shout out to you for being one of the persons I talked to that caused me to write this post, and specifically our conversation caused me to pull the trigger! Appreciate the good open-minded debate!
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