veTOKENs: DeFi lore, innovation, & yield from voting
We're (mostly) losing money in LPs
Defi has a problem. It's core product; LPs (liquidity positions/liquidity providers), the thing that enables tokens to be traded, isn't profitable for most users.
Disproportionately this the case for non-professional users, who are the vast majority of users in defi, and who the sector needs in order to have any hope of surviving long term.
The problem is IL (impermanent loss). Which becomes permanent loss whenever your position in an LP is realised, whether that be by you withdrawing your capital or via an automated manager e.g., Kamino vaults https://app.kamino.finance/liquidity?filter=kmno&sort=tvl
The Kamino Foundation's blog provides a great explanation of this problem
The Good, the Bad, and the Ugly: Market Making with Kamino
And the Balancer Ballers medium blog also does a great job in explaining it
The Balancer Report: Impermanent Loss
Whilst the posted APRs (Annual Percentage Rate) or APYs (Annual Percentage Yield, the compounded yield rate) can be large, they don't take into account the position you personally entered or exited an LP (or in the case of automated vaults each rebalance).
Case in point, here's a look at a subset of my current positions on Kamino.
Good APYs, great APYs in many cases, but my current overall PnL (profit & loss) varies wildly. That's because of IL.
Now in the longer term I hope that these positions are profitable and I've taken them out with that in mind, however I also make sure to regularly review and rotate positions to lock in profits and stop losses where I think it's prudent to do so. So I'm still needing to take a trader's mindset when using these products.
I'm going to out on a limb here and say I think most defi users aren't willing or able to invest the amount of time required to keep on top of market data to manage LPs well in order to avoid significant losses. Even experienced operators struggle at times.
This article from DL News lays out the problem well: Opinion: Why DeFi liquidity providers don’t worry about impermanent loss
So what are we to do? Enter veTOKEN voting.
Time for a (defi) history lesson
Defi is young, but it's had a rich colourful history in the short time it's been around.
The DeFi Llama 2022 DeFi Year In Review offers one of the best overviews of defi history I've seen.
As soon as we had AMM (automated market maker) LPs we had the issue of IL.
Advances in the technology like CLMM (concentrated liquidity market maker) LPs made LPs more efficient but they've done little to address the core problem of IL.
This article from the Kamino Foundation blog is a great primer on this: How CLMMs Improve The DEX Landscape
veTOKEN
Into the defi landscape came the veTOKEN model. As popularised by Curve Finance it has led to a series of subsequent innovations.
The history here is important and for this I recommend these two articles:
- Field Guide to the Curve Wars: DeFi’s Fight for Liquidity
- Governor Note: The veBAL Wars: the Curve Wars pale in comparison to the Balancer community's fight with a 'whale' user named Humpy
Curve was the first to prove out the veTOKEN model at scale. But since Curve there have been innovations that have expanded and extended the model.
Solidity and the ve(3,3) model
Andre Crone is a pioneer in defi. In fact he might be the most important person in defi today. He came up with the ve(3,3) veTOKEN model, a model which was another evolution of the Curve Finance model.
The reasoning and design of this model is explained in his blogs posts from back at the time he launched the first project to use this model; Solidity, which looked to make the veCRV model more efficient
ve(3,3) Ouroboros: Part 1 - Fee Distribution
ve(3,3) Ouroboros: Part 2 - Fees explored
Solidity ultimately wasn't a success, and prior to it's launch Cronje himself took a much publicised sabbatical from the industry, the factors for which are well documented in this article from DeFi Llama: Andre Cronje: The rise and fall of a DeFi God
However Cronje would return later to resume his leadership role at the Fantom Foundation and spearhead the upcoming Sonic release for Fantom.
He's a very clever and very wise figure in defi and crypto today, and his recent interview with Lightspeed (Blockworks) is one of the most important podcast episodes you can listen to if you're at all interested in crypto at a technological and social level: Andre Cronje Unfiltered: The Founder of Yearn, Keeper Network and Fantom
Balancer's veBAL model
https://app.balancer.fi/#/ethereum/vebal
Balancer advanced the ve(3,3) model with their veBAL model https://docs.balancer.fi/concepts/governance/veBAL/
These two articles from the Balancer Medium blog explain the model in detail and are well worth the read
veBAL — How to Increase your Benefits
veBAL Pt.2 — Bribing and BIP19’s Free Bribes
Beethoven X's The Reliquary: An upgrade to veBAL
https://beets.fi/mabeets
Beethoven X is a friendly fork of Balancer and they took the veBAL model and have added an innovation called The Reliquary.
They are one of my very favourite defi protocols and this is the best version of the veTOKEN model.
This article from the Beethoven X blog explains it in detail: BEETWARS 2.0 — May the force BEETS with you
FYI I'm currently rocking a Level 11 relic
Velodrome: Not throwing the baby out with the bathwater
https://velodrome.finance/
Velodrome saw what Solidity had attempted, and failed at doing, and went: "They were right in a lot of ways, but wrong in a few critical ones. Let's just fix those."
https://medium.com/@vedao.alt/on-solidly-60f6481b26fd
Thus we have the Velodrome version of the veTOKEN model
These articles from the Velodrome blogs on Medium explain their model well.
https://medium.com/@vedao.alt/on-velodrome-2e9d6f9b9056
https://medium.com/@VelodromeFi/velodrome-launch-part-1-25b38120224a
And now Velodrome has expanded to Base, via Aerodrome and even to multiple chains (somewhat confusingly) within Velodrome themselves Velodrome: Superchain
So... so buttons? What's this mean for a degen like me?
This all means you, the aspiring market making degen, have a way to access LP fees (yield) in a way that removes your exposure to IL. Though you'll be taking on other risks, which I'll detail further down.
Each of the protocols we've talked about have epochs were users who've locked the veTOKENS for these protocols get to vote on which LPs part of the protocol's fees will be directed to.
Market makers understandably want to see as much yield directed towards their LPs so protocols allow you to add incentives (or as they're called in defi: Bribes) to increase the returns for your votes.
Yearn Finance's blog does a great job explaining the model and it's benefits (as does the Cure Wars article at the start): Introducing Yearn’s new bribe platform for Curve gauge voting
Beethoven X uses Redacted Hidden Hand platform to manage bribes
Velodrome (and Aerodrome) manage them on their platforms
Each epoch (normally 1-2 weeks) veTOKEN holders get to vote and collect vote rewards.
This all sounds great! What's the catch?
There is no such thing as a free lunch, and veTOKENS are no exception.
You are protected from IL, but not all loss. Primarily your risk is the TOKEN part of the veTOKEN.
If we look at $BEETS, $AERO and $VELO they aren't probably enough by themselves to invest.
NOTE: maBEETS, the veTOKEN of Beethoven X is the LP token from the $FTM/$BEETS LP so you always hold a percentage of the base blockchain token in your voting position. 
Combined with this you'll have to commit to lock your tokens up for a period of time to achieve voting power.
On Velodrome and Aerodrome this is to a maximum of 4 years, and you cannot unlock before then.
On Beethoven X you can unlock at anytime but it takes a number of weeks for your locked position to achieve max voting power. 
https://docs.beets.fi/beets/mabeets
And on both Velodrome/Aerodrome and Beethoven X you can delegate your votes to a third party to manage the voting for you. 
NOTE: The Relay model of vote delegation on Velodrome and Aerodrome does come with an added bonus. Whilst the Relay itself will lock AERO/VELO for 4 years and max lock any subsequent AERO/VELO earned for 4 years as well, you can withdraw from the Relay any time after the first 7 days. The only penalty will be if the Relay hasn't compound the latest set of rewards you'll miss out on them (but the UI will warn you about this and suggest you wait till those are compounded before withdrawing).
veTOKENS as a learning experience
Personally I've made more money in crypto from other types of projects.
But I have enjoyed veTOKEN management the most out of all the defi I've done and I believe it has been the best risk adjusted returns I've achieved out of everything I've done in defi.
I've definitely learned more about defi and crypto through veTOKENs as they give you a reason to look at the market regularly and examine the tokens from the pools you're voting on. By seeing who is paying for liquidity can give you good indications of which protocols are performing better than others, and you'll often spot newer protocols earlier by seeing them heavily incentive pools to help increase their token/s liquidity.
I've also ended up regularly checking in with protocol Discords to follow bribe placements and token developments from the veTOKENs I have.
It is the most interesting time you can have in defi in my opinion and it definitely helped sustain my interest during the recent bear market.
Over to you
There's a number of veTOKEN models out there in the market today from complex to very simple.
Do you use any regularly?
Which ones and what attracts you to them?
Let me know in the comments.
