I. Incentive Compatibility in Tokenomics

“[Money] it drives the world, for better or worse. Economic incentives drives entire swathes of human populations to behave” — Chamath Palihapitiya

Decentralized P2P systems based on cryptography were not new in 2009 when Bitcoin was introduced.

You may have heard of the BitTorrent protocol, commonly known as BT download. It is a P2P file sharing protocol used mainly to distribute large amounts of data to users on the Internet. It uses specific form of economic incentive, for example, "seeders" (users who upload the complete file) can get faster download speeds, but this early decentralized system launched in 2001 still lacked a sound economic incentive design.

The lack of economic incentives stifled these early P2P systems, making it difficult for them to thrive over time.

(Coincidentally, in 2019, the developers of the BitTorrent protocol launched BitTorrent Token (BTT), which was later acquired by TRON, and they chose to use cryptocurrency to provide economic incentives to improve the performance and interaction of the BitTorrent protocol. For example, users can spend BTT to increase their download speed or earn BTT by sharing files.)

In 2009, Satoshi Nakamoto added economic incentives to the P2P system when creating Bitcoin.

From DigiCash to Bit Gold, multiple experiments were conducted in creating decentralized digital cash systems, but the Byzantine General's problem could not be fully solved. However, Satoshi Nakamoto implemented a proof-of-work consensus mechanism + economic incentives, solving this seemingly unsolvable problem of how nodes can reach consensus. Bitcoin not only provides a means of storing value for those who want to replace the existing financial system but also uses the combination of cryptocurrency and incentives to provide a new, universal design and development method, ultimately forming the powerful and vibrant P2P payment network we have today.

Starting from Satoshi Nakamoto's "Galilean era", cryptoeconomics has evolved into Vitalik's "Einstein era."

A more expressive scripting language enables the implementation of complex transaction types, giving rise to a more versatile decentralized computing platform. After the switch to Proof-of-Stake (PoS), Ethereum's token holders will become validators of the network and earn more tokens in this way. Controversially, compared to Bitcoin's current ASIC mining method, this is indeed a "more inclusive token distribution method".

Design a token economic model (Tokenomics), is essentially designing an "incentive-compatible" game mechanism. - Hank, BuilderDAO

Incentive compatibility is an important concept in game theory, initially proposed by economist Roger Myerson in his classic work "The Theory of Cooperative Games," published in 1991, which has become one of the significant reference books in game theory. Myerson elaborated on the concept of incentive compatibility and its importance in game theory in the book.

Its academic definition can be understood as a mechanism or rule design in which participants act according to their true interests and preferences without resorting to fraud, cheating, or dishonest behavior to pursue better results. This game theory structure can enable individuals to maximize their personal interests while achieving maximum collective benefits. For example, in Bitcoin design, when expected income is greater than the cost of investment, miners will continue to invest in computing power to maintain the network, and users can continue to conduct secure transactions on the Bitcoin ledger. This trust machine now stores over $40 billion in value and processes over $600 million in daily transaction value.

In Tokenomics, using token incentives and rules to guide the behavior of multiple participants and achieve better incentive compatibility in design, expanding the scale and upper limit of the decentralized structure or economic benefits that can be achieved is an ongoing task.

Tokenomics plays a crucial role in the success or failure of cryptocurrency projects. Designing the right incentives that achieve incentive compatibility also plays a crucial role in the success or failure of Tokenomics.

Similar to monetary policy and fiscal policy for national governments, when a protocol acts as a country, it needs to formulate monetary policy, such as token issuance rate (inflation rate), and decide under what conditions new tokens will be minted. It needs to regulate fiscal policy to adjust taxation and government spending, usually manifested as transaction fees and treasury funds.

As proven in thousands of years of human economic experiments and governance construction, designing a model to coordinate human nature and economics is incredibly difficult. There are errors, wars, and even setbacks. In less than twenty years, crypto also needs to create better models in these iterative trials and errors (such as the Terra event) to meet a long-term successful and resilient ecosystem. Clearly, the market needs to rewire the mindset during the bear market.

II. Classification, Objectives, and Designs of Various Economic Models

When designing an economic model, it is crucial to clarify the target audience of token design. Public chains, DeFi (decentralized finance), GameFi (gamified finance), and NFTs (non-fungible tokens) are different categories of projects in the blockchain, and there are differences in designing economic models for each.

The design of public chain tokens is more like macroeconomics, while the others are closer to microeconomics. The former needs to focus on the overall supply-demand dynamic balance within the entire system and ecosystem, while the latter focuses on the supply-demand relationship between products and users/markets.

Different categories of projects also have completely different goals and core values for their economic models. Specifically:

Public Chain Economic Model: Different consensus mechanisms determine different economic models for public chains. However, the goal of their economic models is to ensure the stability, security, and sustainability of the public chain. Therefore, they would be lenient to use token incentives to attract validators and enough nodes to participate in and maintain the network; which often involves cryptocurrency issuance, incentive mechanisms, and node rewards and governance to maintain the continuous stability of the economic system.
DeFi Economic Model: Tokenomics originated from public chains but has been developed and matured in DeFi projects, which will be analyzed in detail later in the article. The economic models of DeFi projects usually involve aspects such as borrowing, liquidity provision, trading, and asset management. The design goal of the economic model is to encourage users to provide liquidity, participate in borrowing and trading activities, and provide corresponding interest, rewards, and returns for participants. In the DeFi economic model, the design of the incentive layer is the core, such as guiding token holders to hold tokens rather than selling them, and coordinating the interests of LP and governance token holders.
GameFi Economic Model: GameFi combines gaming and financial elements, aiming to provide financial rewards and economic incentives to gamers. The economic model of GameFi projects typically includes the issuance, trading, and profit distribution of in-game virtual assets. Compared to DeFi projects, GameFi's model design is more complex, with transaction fees as the core revenue source determining the first priority of designing the economic model to increase users' reinvestment demand. However, this naturally poses challenges for game mechanics and often leads to pyramid schemes and spiraling effects in most projects.
NFT Economic Model: The economic model of NFT projects usually involves the issuance, trading, and rights of NFT holders. The design goal of the economic model is to provide opportunities for NFT holders to create value, trade value, and earn profits, encouraging more creators and collectors to participate. This can be further divided into NFT platform economic models and project economic models. The former focuses on royalties, while the latter focuses on solving economic scalability issues, such as increasing repeat sales revenue and fundraising in different fields (see Yuga Labs).

Although these projects have their unique economic model designs, there may also be intersections and overlaps between them. For example, DeFi projects can integrate NFTs as collateral, while GameFi projects can use DeFi mechanisms for fund management. In the evolution of economic model design, whether in the business layer or the incentive layer, the development of DeFi projects is more diverse. Many DeFi models are widely used in projects such as GameFi and SocialFi. Therefore, the economic model design of DeFi is undoubtedly a topic worth researching on.

III. Understanding DeFi Economic Models from Incentive Structures

If we categorize DeFi economic models based on different project’s logic, we can roughly divide them into three main categories: DEX, Lending, and Derivatives. If we categorize them based on the characteristics of incentive layers in economic models, we can further divide them into four models: governance model, staking/cash flow model, vote escrow (including ve and ve(3,3) models), and ES mining model.

Among them, governance model and staking/cash flow model are relatively simple and represented by Uniswap and SushiSwap respectively. They can be summarized as follows:

Governance model: Tokens only have governance functions for the protocol; for example, UNI represents governance power over the protocol. Uniswap DAO is the decision-making body of Uniswap, where UNI holders initiate proposals and vote on decisions that affect the protocol. The main governance content includes managing the UNI community treasury and adjusting the fee rate.
Staking/cash flow model: Tokens can bring continuous cash flow; for example, when Sushiswap launched, it quickly attracted liquidity by allocating its token SUSHI to early LPs and completed the "vampire attack" on Uniswap. In addition to the transaction fee, SUSHI tokens also have the right to distribute 0.05% of the protocol's revenue.

Both models their own advantages and imperfections. UNI's governance has been criticized for not being able to bring value realization or give back to LP and users who took on higher risks in the early stages, while Sushi's large issuance has led to a decline in coin price, and some liquidity has been migrated back to Uniswap by LPs.

In the early development stage of DeFi projects, these two were relatively common economic models. Later economic models were iterated on this basis. Next, we will focus on analyzing the vote escrow and ES mining models in combination with Token Value Flow.

This article mainly uses the Value Flow method to study the projects, aiming to abstract the value flow of the project, including the redistribution path of the benefits in the protocol starting from the real income of the agreement, the incentive links, and the flow of tokens. All of this constitutes the core business model of the protocol and is constantly adjusted and optimized through Value Flow. Although Value Flow does not include all Tokenomics, it is a product value flow based on Tokenomics design. Based on this, combined with factors such as the initial distribution and unlocking of tokens, the Tokenomics of the protocol can be fully presented. In this process, the supply and demand relationship of tokens is adjusted, thereby achieving value capture.

IV. Vote Escrow

The beginning vote escrow comes from the dilemma of early DeFi projects with mining and withdrawal. The solution is to incentivize users to hold and have multiple sources of interests to contribute to the long-term development of the protocol. After Curve first proposed the ve mode, other protocols have made iterations and innovations on the economic model based on Curve, with most remained ve mode and ve(3,3) mode.

ve mode: The core mechanism of ve is that users obtain veToken by locking tokens. VeToken is a non-transferable and non-circulating governance token. The longer the lock-up time chosen (usually with an upper limit), the more veToken can be obtained. According to their veToken weight, users can obtain corresponding proportion of voting rights. The voting rights can decide the allocation of the rewards to the liquidity pool, which has a substantial impact on users' tangible benefits and enhances their holding incentives.

ve(3,3) mode: The ve(3,3) model combines Curve's ve model and OlympusDAO's (3,3) game theory model. (3,3) refers to the game theory results of investors under different behavioral choices. The simplest Olympus model contains two investors who can choose from three actions: stake, bond, or sell. As shown in the table below, when both investors choose to stake, the overall benefit is the greatest, reaching (3,3), which is intended to encourage cooperation and staking.

I. Incentive Compatibility in Tokenomics

“[Money] it drives the world, for better or worse. Economic incentives drives entire swathes of human populations to behave” — Chamath Palihapitiya

Decentralized P2P systems based on cryptography were not new in 2009 when Bitcoin was introduced.

The lack of economic incentives stifled these early P2P systems, making it difficult for them to thrive over time.

In 2009, Satoshi Nakamoto added economic incentives to the P2P system when creating Bitcoin.

Starting from Satoshi Nakamoto's "Galilean era", cryptoeconomics has evolved into Vitalik's "Einstein era."

Design a token economic model (Tokenomics), is essentially designing an "incentive-compatible" game mechanism. - Hank, BuilderDAO

II. Classification, Objectives, and Designs of Various Economic Models

Different categories of projects also have completely different goals and core values for their economic models. Specifically:

Public Chain Economic Model: Different consensus mechanisms determine different economic models for public chains. However, the goal of their economic models is to ensure the stability, security, and sustainability of the public chain. Therefore, they would be lenient to use token incentives to attract validators and enough nodes to participate in and maintain the network; which often involves cryptocurrency issuance, incentive mechanisms, and node rewards and governance to maintain the continuous stability of the economic system.
DeFi Economic Model: Tokenomics originated from public chains but has been developed and matured in DeFi projects, which will be analyzed in detail later in the article. The economic models of DeFi projects usually involve aspects such as borrowing, liquidity provision, trading, and asset management. The design goal of the economic model is to encourage users to provide liquidity, participate in borrowing and trading activities, and provide corresponding interest, rewards, and returns for participants. In the DeFi economic model, the design of the incentive layer is the core, such as guiding token holders to hold tokens rather than selling them, and coordinating the interests of LP and governance token holders.
GameFi Economic Model: GameFi combines gaming and financial elements, aiming to provide financial rewards and economic incentives to gamers. The economic model of GameFi projects typically includes the issuance, trading, and profit distribution of in-game virtual assets. Compared to DeFi projects, GameFi's model design is more complex, with transaction fees as the core revenue source determining the first priority of designing the economic model to increase users' reinvestment demand. However, this naturally poses challenges for game mechanics and often leads to pyramid schemes and spiraling effects in most projects.
NFT Economic Model: The economic model of NFT projects usually involves the issuance, trading, and rights of NFT holders. The design goal of the economic model is to provide opportunities for NFT holders to create value, trade value, and earn profits, encouraging more creators and collectors to participate. This can be further divided into NFT platform economic models and project economic models. The former focuses on royalties, while the latter focuses on solving economic scalability issues, such as increasing repeat sales revenue and fundraising in different fields (see Yuga Labs).

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III. Understanding DeFi Economic Models from Incentive Structures

Among them, governance model and staking/cash flow model are relatively simple and represented by Uniswap and SushiSwap respectively. They can be summarized as follows:

Governance model: Tokens only have governance functions for the protocol; for example, UNI represents governance power over the protocol. Uniswap DAO is the decision-making body of Uniswap, where UNI holders initiate proposals and vote on decisions that affect the protocol. The main governance content includes managing the UNI community treasury and adjusting the fee rate.
Staking/cash flow model: Tokens can bring continuous cash flow; for example, when Sushiswap launched, it quickly attracted liquidity by allocating its token SUSHI to early LPs and completed the "vampire attack" on Uniswap. In addition to the transaction fee, SUSHI tokens also have the right to distribute 0.05% of the protocol's revenue.

IV. Vote Escrow

Curve - The First ve Model

In the value flow chart of Curve shown below, we can see that CRV holders cannot receive any related benefits of the protocol. Only when LP locks CRV in their hands to obtain veCRV can they capture the value of the protocol. This is reflected in the following three aspects: transaction fees, market-making revenue acceleration, and governance voting rights of the protocol.

Transaction fee: After users stake and lock CRV tokens, they can obtain 0.04% of the transaction fees from most of the trading pools on the platform based on the number of veCRV staked, and the ratio of the split is 50% of the total transaction fees (with the other 50% going to liquidity providers), and the split is issued through 3CRV tokens.
Market-making revenue acceleration: Curve liquidity providers can use the Boost function to increase the CRV reward income obtained through market-making after locking CRV, thereby increasing the overall APR of their market-making. The amount of CRV required for Boost is determined by the amount of funds in the pool and the LP.
Governance voting rights of the protocol: Governance of Curve also needs to be implemented through veCRV, which includes not only the modification of protocol parameters, but also voting for the addition of new liquidity pools of Curve, as well as the allocation of weight for CRV liquidity incentives among various trading pools, etc.

In addition, holding veCRV also has the possibility of receiving airdrops of other project tokens that supported and collaborated with Curve, such as CVX, the token of a Curve-based liquidity and CRV staking management platform Convex, which will airdrop a total of 1% to veCRV users.

It can be seen that CRV and veCRV have captured the value of the overall protocol quite well. They can not only receive protocol fee sharing and accelerated market-making profits but also played a very significant role in governance, creating a huge demand and stable market for CRV as a result.

Curve Value Flow, Image: DODO Research

Due to the strong demand of stable asset operators for anchoring and liquidity of their issued assets, it is almost inevitable for them to land their stable assets on Curve to establish liquidity pools and obtain CRV liquidity mining incentives to maintain sufficient trading depth. The allocation of CRV produced daily for liquidity mining incentives is determined by Curve's DAO core module "Gauge Weight Voting". Users can vote on "Gauge Weight Voting" with their veCRV to determine the allocation ratio of CRV in each liquidity pool for the next week. The pool with a higher allocation ratio is more likely to attract sufficient liquidity.

Ultimately, this is a competition competing for "the right to list coins" and "the right to allocate liquidity incentives". Of course, while obtaining governance rights through CRV, these projects will also receive stable dividends from the Curve platform as a cash flow income. The game theory and competition of various projects on Curve have generated sustainable demand for CRV, stabilized the price of CRV under a large increase in supply, supported Curve's market APY, attracted liquidity, and achieved a cycle. Therefore, the competition of CRV has spawned a complex bribery ecosystem based on veCRV. As far as the current situation is concerned, as long as Curve continues to occupy the top position in the exchange of stable assets, this competition will not end.

Ecosystems built on veCRV, Source：https://tokenbrice.xyz/crv-wars/

Summarizing the advantages and disadvantages of the veCRV mechanism as follows:

Advantages

Reduced liquidity after locking, which reduces selling pressure and helps stabilize the token price (currently, 45% of CRV has been voted to be locked for an average duration of 3.56 years).
Aligns the long-term interests of all parties involved (veCRV holders also receive a share of the trading fees, aligning the interests of liquidity providers, traders, token holders, and the protocol).
Time and quantity weighting allow for better governance possibilities.

Disadvantages

More than half of the governance power on Curve is in the hands of Convex (53.65%), which concentrates governance power.
Liquidity on Curve is not fully utilized (boost mining rewards and governance voting rights obtained by locking CRV in an address are limited to that address and cannot be transferred; the high subsidies attracted a large amount of liquidity, but this liquidity did not generate external returns due to its lack of speed in liquidity).
The rigid locking period is not investor-friendly, as 4 years is too long for the crypto industry.

Different Innovations of veToken Mechanism

In a previous article by DODO Research, we conducted a detailed analysis of the 5 innovations in incentive design within the veToken model. Each protocol made different adjustments to the key aspects of the mechanism based on their own needs and focus. These divisions include:

Designing veNFT to improve the liquidity issue of veTokens.
Better allocation of token releases to veToken holders.
Incentivizing healthy growth in liquidity pool trading volume.
Layering the revenue structure to provide users with choice.

Let's take Balancer as an example. In March 2022, Balancer introduced the V2 version, which modified its existing economic model. Users can lock their BPT (Balancer Pool Tokens) from the 80/20 BAL/WETH pool to acquire veBAL, which binds the governance and protocol dividend rights of Balancer V2 to veBAL.

Users are required to lock both BAL and WETH tokens in a ratio of 80:20, instead of locking BAL tokens alone. By using locked LP tokens instead of individual token locking, market liquidity can be increased and volatility reduced. Compared to Curve's veCRV, veBAL has a maximum lock-up period of 1 year and a minimum lock-up period of 1 week. This significantly reduces the duration of the lock-up.

Regarding fee distribution, 50% of the protocol fees received by Balancer are distributed to veBAL holders in the form of bbaUSD. The remaining aspects, such as Boost, Voting, and governance rights, are not significantly different from Curve.

Balancer Value Flow Graph：DODO Research

It is worth mentioning that Balancer addressed the issue of "liquidity waste - inability to generate external yield for the product" in the veToken model by utilizing the Boosted Pool mechanism in interest-bearing pools. This mechanism increases LP earnings by allowing LP tokens issued by the LP pools (referred to as bb-a-USD) to be paired with various assets in AMM pools. This enables leverage of assets through LP token issuance, thereby increasing LP earnings.

Later, Balancer introduced Core Pools to improve the limitation of Boosted Pools in benefiting only LPs. Through Bribes, the protocol incentivizes veBAL holders to vote for Core Pools, resulting in a significant shift of $BAL towards Core Pools. This increases external yield-generating assets and changes the revenue structure of the Balancer protocol itself.

Velodrome: The Most Iconic ve(3,3)

Before we delve into Velodrome, let's briefly define ve(3,3): Curve's veCRV economic framework combined with Olympus' (3,3) game theory.

As shown in the diagram below, Olympus utilizes two main incentive mechanisms for OHM: Bonding and Staking. In the Bonding mechanism, Olympus offers OHM at a price lower than the market value, and users can purchase OHM by paying USDC, ETH, or other assets. The treasury receives these assets, providing value asset support, and generates OHM through the Rebase mechanism, which is then distributed to OHM stakers. In an ideal scenario where users choose long-term staking, known as (Stake, Stake) or (3,3), their OHM balances within their positions can continuously compound, resulting in a positive feedback loop with high APR for stakers. However, if there is significant selling pressure on OHM in the secondary market, this flywheel effect may not be sustainable. This is a game of strategy where the ideal state is a Nash equilibrium, achieving a win-win outcome.

Olympus Value Flow Graph：DODO Research

In early 2022, Andre Cronje launched Solidly on the Fantom network, which focused on veNFT and voting power optimization. The veSOLID positions are represented by veNFT, which appeared to liberate liquidity. Even if users transfer their NFTs, any NFT holder has voting rights to decide the distribution of rewards. veSOLID holders receive a certain base proportionate to the weekly emission, allowing them to maintain their voting share even without locking new tokens. Furthermore, pledgers receive 100% of the trading fees but only earn rewards from pools they have voted for, avoiding situations where voters on Curve pools vote for pools solely for bribes.

AC claimed on Twitter that the distribution of the Solidly token, ROCK, would be directly airdropped to the top 20 protocols with the highest locked-in volume on the Fantom network, triggering a Vampire Attack among protocols. This led to the emergence of 0xDAO and veDAO, sparking a TVL war. Several months later, the veDAO team incubated another project called Velodrome, implementing the ve(3,3) mechanism.

So why has Velodrome become a standard forking template on layer2 solutions like Arbitrum or zkSync?

In the original design, Solidly had some critical weaknesses, such as high inflation and complete permissionlessness, allowing any pool to receive SOLID rewards, resulting in an abundance of worthless tokens. Rebase or anti-dilution did not bring any value to the entire system.

What changes did Velodrome make?

A whitelist mechanism was implemented for the incentive distribution of the Velo token. The whitelist is currently open for applications and does not rely on on-chain governance, which avoids the voting process for token incentives.
Rewards for liquidity bribes can only be claimed in the next cycle.
(veVELO.totalSupply ÷ VELO.totalsupply)³ × 0.5 × emission - The reward ratio for ve token holders has been reduced. In the adjusted mode of Velo, veVELO users will only receive 1/4 of the total emission compared to the traditional mode. This improvement significantly weakened the (3,3) part of the ve(3,3) mechanism.
The LP Boost mechanism was eliminated.
3% of the Velo emission is allocated for operational expenses.
Exploration and extension of the veNFT mechanism, including the ability to trade veNFT even during staking/voting, the divisibility of veNFT, and the ability to borrow against veNFT.
More reasonable token distribution and issuance pace: Velodrome distributed 60% of the initial supply to the community on the project's launch day. They also airdropped several protocols with veVELO NFTs without any additional conditions, greatly attracting initial voting and bribery activities.

Velodrome Value Flow Graph：DODO Research

After its launch, the staking rate of Velo has been consistently increasing, reaching a high point of 70%-80%, which is a significant level of token locking (compared to Curve, another protocol that utilizes the ve model, which currently has a staking rate of 38.8%). Some have raised concerns that as the "Tour de OP" incentive program, which began in November last year and offered 4 million OP rewards, comes to an end, the incentives for token locking may decrease, potentially leading to selling pressure. However, the staking rate of Velo is still maintaining a good level at around 70%. The upcoming V2 upgrade also aims to encourage more holders to lock their tokens, so it is worth keeping an eye on.

Velo's staking rate curve, image source: Velo official DC, source: mint ventures.

V. ES Mining Model

ES: Engaging in Real Yield Game to Incentivize Loyal User Participation

The ES mining model aims to enhance attractiveness and inclusivity by lowering protocol subsidy costs through unlocking thresholds and incentivizing real user participation.

Users earn ES token rewards through staking or locking their assets. However, immediate cashout is not possible due to unlocking thresholds, making real return calculations complex. This adds both challenges and appeal to the ES model.

Compared to traditional ve models, the ES model has a clear advantage in the cost of protocol subsidies as its designed unlocking thresholds reduce subsidy costs. This makes the ES model more realistic in the game of distributing real earnings, thus increasing its universality and inclusivity, potentially attracting more user participation.

The essence of the ES model lies in incentivizing real user participation. If users leave the system, they forfeit the ES token rewards, meaning the protocol doesn't need to pay additional token incentives. By staying within the system, users can earn ES token rewards, albeit with a slower liquidity. This design encourages genuine user engagement, maintains user activity and loyalty, without imposing excessive incentives. By controlling the proportion of spot holdings and unlocking periods, the project can achieve a more interesting and appealing token unlocking curve.

Camelot - Introducing Partial ES Mining Incentives

When exploring the value flow of Camelot, the abstraction of Camelot's value flow demonstrates how its tokenomics work. We have presented the main components of the value flow in a concise manner to better understand the overall framework.

The core incentive of Camelot is to encourage liquidity providers (LPs) to continuously provide liquidity, ensuring smooth trading experiences and ample liquidity for traders. This design incentivizes the flow of transactions and helps LPs and traders share the generated profits.

The real earnings of the Camelot protocol come from the fees generated by the interaction between traders and the pool. These fees serve as the protocol's real income and the primary source for profit redistribution. This approach ensures the sustainability of Camelot's economic model.

Regarding profit redistribution, 60% of the fees are allocated to LPs, 22.5% is redirected to the flywheel, 12.5% is used to purchase GRAIL and burn it, and the remaining 5% is allocated to the team. This redistribution mechanism ensures fairness within the protocol and provides motivation for its continuous operation.

Furthermore, this profit distribution incentivizes and drives the operation of the flywheel. To receive redistributed earnings, LPs must stake LP tokens, indirectly motivating them to provide liquidity for longer periods. In addition to the real earnings from the 22.5% fees, Camelot also distributes 20% of GRAIL tokens and xGRAIL (ES token) as incentives. This strategy not only incentivizes LPs but also encourages regular users to participate in profit sharing by staking GRAIL, enhancing the overall activity and attractiveness of the protocol.

Camelot Value Flow Graph：DODO Research

GMX - Encouraging Competition in Real Income Distribution

GMX's tokenomics is designed to foster continuous liquidity provision and incentivize active trading between traders and liquidity providers (LPs). By doing so, the protocol ensures ample liquidity and trading volume while motivating users to lock their GMX tokens.

The model derives real earnings from fees generated by exchanges and leveraged trades. To ensure fair profit distribution, these earnings are first used to cover referral fees and keeper costs. The remaining portion is then allocated, with 70% going to GLP holders (essentially LPs) and the remaining 30% being redistributed. GMX employs a game-theoretical mechanism as the core element of this redistribution process.

The game-theoretical mechanism of GMX revolves around redistributing 30% of real earnings. While the ratio remains fixed, GMX holders can influence the proportion of their earnings through various strategies. For example, users can stake GMX to earn rewards in the form of esGMX, which requires spot staking of GMX and adherence to specific unlocking periods. Additionally, staking GMX also rewards users with Multiplier Points, which can increase their profit-sharing ratio.

Within this mechanism, GMX, esGMX, and Multiplier Points all play a role in profit-sharing. However, there are differences: Multiplier Points cannot be cashed out, esGMX requires gradual unlocking through GMX staking, and GMX can be quickly liquidated but at the expense of clearing Multiplier Points and forfeiting esGMX rewards.

This design empowers users to strategize according to their preferences:

Users seeking long-term gains can choose to lock their tokens continuously to maximize their weighting and achieve higher relative returns.
On the other hand, if users want to exit the protocol quickly, they can choose to withdraw and liquidate all staked GMX. In this case, unrealized esGMX rewards remain within the protocol, and the protocol does not need to issue additional subsidies but rather distributes the real earnings during that period to the users.

GMX's tokenomics encourages continuous liquidity provision by GLP holders and maximizes the value of real income redistribution. This makes ongoing token locking possible, further strengthening the stability and attractiveness of its economic model.

GMX Value Flow Graph：DODO Research

VI. Core Elements of Economic Model Design in DeFi: Insights from Value Flow

The core elements in the design of DeFi economic models include underlying value, token supply, demand, and utility. These elements are often fragmented and not intuitively connected in previous analyses. This article utilizes the Value Flow approach to study project tokenomics by examining the internal value flow within protocols and abstracting it in line with product logic. By analyzing the overall value flow, including the flywheel composition, direction of profit distribution, incentive mechanisms, and considering token distribution and unlocking periods, a clear understanding of a project's tokenomics can be obtained.

Below are the Value Flow aspects mentioned briefly in the previous text due to space limitations:

GNS Value Flow (use NFT to establish a membership mechanism and redistribute profits) Graph: DODO Research

AAVE Value Flow (users staking AAVE receive a portion of protocol revenue) Graph: DODO Research

ACID Value Flow（combining ES mechanism and Olympus DAO mechanism to achieve flywheel effect）Graph：DODO Research

CHR Value Flow（ve(3,3) without rebase mechanism to prevent voting power concentration) Graph：DODO Research

Composition of Value Flow

DeFi protocols generate real income to varying degrees, with actual value flowing within the protocol.

Value Flow represents the abstraction of the inherent value flow within a protocol. Firstly, it starts with real income and portrays the redistribution of protocol earnings. Secondly, it abstracts the flow and acquisition conditions of token incentives, providing clarity on token value capture, incentive mechanisms, and token flow.

These value flows constitute the entire business model, and token emission will be redistributed through Value Flow as the protocol continues to operate.

Value Flow is not the entirety of Tokenomics, but it represents the inherent product value flow based on Tokenomics design. When combined with factors like token initial distribution and unlocking, it presents a complete picture of a protocol's Tokenomics.

Tokenomics Reshaping Value Flow

Why are the early mining and selling economic models becoming less prevalent?

In the early days, Tokenomics designs were relatively rudimentary, with tokens viewed as means to incentivize users and tools for short-term profits. However, these incentive structures were simplistic and lacked effective redistribution mechanisms. Taking DEX as an example, when emissions and all fees were directly allocated to LPs, it lacked long-term incentives for LPs. This model was susceptible to collapse when the token price lacked other sources of value, leading to the crash of various mining pools due to low migration costs for LPs.

Over time, DeFi protocols have become more sophisticated and intricate in their Tokenomics designs. To achieve incentive goals, mechanisms such as token supply and demand regulation, game theory, and profit redistribution models have been introduced. Tokenomics has become tightly coupled with the product logic and profit distribution of the protocol. By reshaping Value Flow through Tokenomics, the primary role of Tokenomics is to redistribute real income. In this process, token supply and demand are regulated, enabling value capture for the tokens.

Key Mechanisms of DeFi Tokenomics: Game Theory and Value Redistribution

In the later stages of DeFi summer, many protocols have improved their economic models by introducing game theory mechanisms and redistributing a portion of their profits. These changes aim to enhance user stickiness throughout the ecosystem. Curve, for example, has revamped its token reward mechanism by redistributing emission rewards through voting, leading to the emergence of bribery value and various composability platforms. Additionally, another core aspect of Tokenomics lies in driving the flywheel by introducing additional token rewards to capture more traffic and capital.

In summary, under such mechanisms, tokens are no longer just a simple medium of value exchange; they have become tools to capture users and create value. This process of redistributing profits not only increases user activity and stickiness but also stimulates user participation and drives the development of the entire system through token rewards.

I. Incentive Compatibility in Tokenomics

II. Classification, Objectives, and Designs of Various Economic Models

III. Understanding DeFi Economic Models from Incentive Structures

IV. Vote Escrow

I. Incentive Compatibility in Tokenomics

II. Classification, Objectives, and Designs of Various Economic Models

III. Understanding DeFi Economic Models from Incentive Structures

IV. Vote Escrow

Curve - The First ve Model

Different Innovations of veToken Mechanism

Velodrome: The Most Iconic ve(3,3)

V. ES Mining Model

ES: Engaging in Real Yield Game to Incentivize Loyal User Participation

Camelot - Introducing Partial ES Mining Incentives

GMX - Encouraging Competition in Real Income Distribution

VI. Core Elements of Economic Model Design in DeFi: Insights from Value Flow

Composition of Value Flow

Tokenomics Reshaping Value Flow

Key Mechanisms of DeFi Tokenomics: Game Theory and Value Redistribution

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