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Complete explanation of DeFi economic models: Four incentive models from the perspective of value flow.

23-07-12 14:36

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Source: DODO Research

I. Incentive Compatibility in Token Economics

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

You may have heard of the BitTorrent protocol, commonly known as BT downloading. This is a P2P-based file sharing protocol mainly used to distribute large amounts of data to users on the Internet. It utilizes some form of economic incentive, for example, "seeds" (users who upload complete files) can get faster download speeds, but this early decentralized system launched in 2001 still lacks a well-designed economic incentive mechanism.

Due to the lack of economic incentives, these early P2P systems were stifled and struggled to thrive over time.

Coincidentally, in 2019, the developer of the BitTorrent protocol launched BitTorrent Token (BTT), which was later acquired by TRON. 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, when Satoshi Nakamoto created Bitcoin, he added economic incentives to the P2P system.

From DigiCash to Bit Gold, there have been multiple experiments in creating decentralized digital cash systems, but the Byzantine Generals Problem has never been fully solved. However, Satoshi Nakamoto implemented a Proof-of-Work consensus mechanism and economic incentives to solve this seemingly unsolvable problem of how to achieve consensus among nodes. Bitcoin not only provides a means of storing value for those looking to replace existing financial systems, but also combines cryptocurrency with incentives to offer a new, universal design and development method, ultimately resulting in the powerful and dynamic P2P payment network we have today.

From Satoshi Nakamoto's "Galileo era," the field of cryptography has evolved into Vitalik's "Einstein era" of cryptoeconomics.

A more expressive scripting language brings about the implementation of complex transaction types, giving birth to a more universal decentralized computing platform. After switching 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".

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

Incentive Compatibility is an important concept in game theory, first proposed by economist Roger Myerson in his classic work "The Theory of Cooperative Games". The book was published in 1991 and has become one of the important reference books in the field of game theory. In the book, Myerson elaborates on the concept of incentive compatibility and its importance in game theory.

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 structure can enable individuals to maximize their personal interests while also achieving maximum collective benefits. For example, in the design of Bitcoin, when expected income > input cost, miners will continue to invest computing power to maintain the network, and users can also continue to conduct secure transactions on the Bitcoin ledger - this trust machine now stores more than $40 billion in value and processes transaction values of more than $600 million every day.

Placing it in Tokenomics, utilizing token incentives and rules, guides the behavior of multiple participants and achieves better incentive compatibility in design, expanding the scale and upper limit of decentralized structures or economic benefits that can be achieved. This is an eternal proposition.

Tokenomics plays a decisive role in the success or failure of cryptocurrency projects. And how to design incentives to achieve incentive compatibility also plays a decisive role in the success or failure of Tokenomics.

This is similar to monetary policy and fiscal policy for national governments.

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

This is complicated. As proven in the economic experiments and governance constructions of human beings over the past thousands of years, designing a model to coordinate human nature and economy is extremely difficult. There are errors, wars, and even setbacks. In less than twenty years, Crypto also needs to create better patterns in these iterative trials and errors (such as the Terra incident) to meet a long-term successful and resilient ecosystem. And this is obviously a kind of thinking reset that the market needs more in the long crypto winter.

II. Different Economic Model Classifications, Objectives, and Designs

When designing an economic model, we need to clarify the target of token design. Public chains, DeFi (decentralized finance), GameFi (gamified finance), and NFT (non-fungible tokens) are different categories of projects in the blockchain field, and they have some differences when designing economic models.

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

The design goals and core points of the economic model for different types of projects are completely different. Specifically:

1. Public Chain Economic Model: Different consensus mechanisms determine different economic models for public chains. However, the design goal of its economic model is to ensure the stability, security, and sustainability of the public chain. Therefore, the key is to use token incentives to validate, attract enough nodes to participate and maintain the network. This usually involves the issuance of cryptocurrencies, incentive mechanisms, and rewards and governance for nodes to maintain the continuous stability of the economic system.

2. DeFi Economic Model: Tokenomics originated from public chains, but has developed and matured in DeFi projects, which will be analyzed in detail later. The economic model of DeFi projects usually involves aspects such as lending, liquidity provision, trading, and asset management. The design goal of the economic model is to encourage users to provide liquidity, participate in lending and trading activities, and provide corresponding interest, rewards, and returns to participants. In the DeFi economic model, the design of incentive layer is the core, such as how to guide token holders to hold tokens instead of selling them, and how to coordinate the interests distribution between LP and governance token holders.

3. GameFi Economic Model: GameFi is a concept that combines gaming and financial elements, aiming to provide financial rewards and economic incentives for gamers. The economic model of GameFi projects usually includes the issuance, trading, and distribution of in-game virtual assets. Compared to DeFi projects, the model design of GameFi is more complex, with transaction fees as the core income determining how to increase user demand for reinvestment becoming the first priority of economic model design. However, this natural design challenge also poses a challenge to the playability of the game mechanism. This inevitably leads to most projects exhibiting Pareto structures and spiral effects.

4. 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, and encourage 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 how to solve economic scalability, such as increasing repeat sales revenue and fundraising in different fields (see Yuga Labs for reference).

Although these projects have their own unique economic model designs, there may also be overlapping aspects. For example, NFTs can be integrated as collateral in DeFi projects, and DeFi mechanisms can be used for fund management in GameFi projects. In the evolution of economic model design, the development of DeFi projects is more diverse in both the business and incentive layers, and many of DeFi's models are widely used in projects such as Gamefi and Socialfi. Therefore, the economic model design of DeFi is undoubtedly an area worth studying in depth.

III. From Incentive Mechanisms to DeFi Economic Models

If we divide the DeFi economic model according to the business logic of different projects, we can roughly classify it into three main categories: DEX, Lending, and Derivatives. If we divide it according to the incentive layer characteristics of the economic model, we can further divide it into four modes: Governance mode, Staking/Cash Flow mode, Voting Custody (including ve and ve(3,3) modes), and ES Mining mode.

Among them, the governance model and the pledge/cash flow model are relatively simple, represented by Uniswap and SushiSwap respectively. In summary, they can be described as follows:

Governance Model: Tokens only have governance functions for the protocol; for example, UNI represents the governance rights of the protocol. Uniswap DAO is the decision-making body of Uniswap, where UNI holders initiate proposals and vote to decide on decisions that affect the protocol. The main governance content includes managing the UNI community treasury and adjusting the fee rate.

Pledge/Cash Flow Model: Tokens can bring continuous cash flow; for example, when Sushiswap was launched, it quickly attracted liquidity by allocating its token SUSHI to early LPs, completing a "vampire attack" on Uniswap. In addition to transaction fees, SUSHI tokens also have the right to distribute 0.05% of the protocol's revenue.

They each have their own advantages and imperfections. UNI's governance function has always been criticized for its inability to bring value realization and to reward early LPs and users who took on greater risks; while Sushi's large issuance has led to a decline in token price, and some liquidity has been migrated back to Uniswap by LPs from Sushiswap.

During the early development of DeFi projects, these two economic models were relatively common. Later economic models were iterated based on these. Next, we will focus on analyzing the voting custody and ES mining models in combination with Token Value Flow.

This article mainly uses the Value Flow method to study the project, aiming to abstract the value flow of the project, including starting from the real income of the protocol, drawing the redistribution path of income in the protocol, the incentive link, and the flow of tokens. All of these constitute the core business model of the protocol and are continuously adjusted and optimized through Value Flow. Although Value Flow does not include all Tokenomics, it is a product value flow designed based on Tokenomics. 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. Voting Delegation

The background of the birth of vote escrow in the encryption industry originated from the dilemma faced by early DeFi projects in terms of mining, withdrawal, and purchase. The solution lies in how to stimulate users' holding motivation and coordinate the interests of multiple parties to contribute to the long-term development of the protocol. Following Curve's initial proposal of the ve model, other protocols have made iterations and innovations to the economic model based on Curve, mainly still using the ve model and ve(3,3) model.

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 a maximum lock-up time), the more veToken can be obtained. Based on their veToken weight, users can obtain corresponding proportion of voting rights. The voting rights partly reflect the allocation of token rewards in the liquidity pool, which has a substantial impact on users' actual benefits and enhances their holding motivation.

ve(3,3) Mode: The VE(3,3) model combines Curve's ve model and OlympusDAO's (3,3) game model. (3,3) refers to the game results of investors under different behavioral choices. The simplest Olympus model includes two investors who can choose to stake, bond, or sell. From the table below, it can be seen that the maximum joint benefit is achieved when both investors choose to stake, reaching (3,3), which aims to encourage cooperation and staking.

Curve - the first ve model

In the value flow diagram of Curve shown below, we can see that CRV holders do not receive any related benefits of the protocol. Only when LPs lock their CRV to obtain veCRV can they capture the protocol value, which is reflected in transaction fees, market-making acceleration, and governance voting rights.

Transaction Fee: After locking the CRV token by staking veCRV, users can receive a 0.04% transaction fee share from most trading pools on the platform based on the amount of veCRV staked. The distribution ratio is 50% of the total transaction fee (the other 50% goes to liquidity providers), and the distribution is made through the 3CRV token.

Market-making profit acceleration: After locking CRV, Curve liquidity providers can use the Boost function to increase their CRV reward earnings from market-making, 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 LP.

Governance Voting Rights of Protocols: Curve's governance also needs to be implemented through veCRV, which includes not only modifying the parameters of the protocol, but also voting on the addition of new liquidity pools for Curve and the allocation of weight for CRV's liquidity incentives among various trading pools, etc.

In addition, holding veCRV can also potentially receive airdrops of other project tokens supported and cooperated by Curve, such as CVX, the token of the 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 capture the value of the overall protocol quite fully. They not only receive a share of the protocol's transaction fees and accelerated market-making profits, but also play a very important role in governance. This has created a huge demand and stable buying pressure for CRV.

Due to the strong demand from stable asset operators for anchoring and liquidity of their own 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. Around the competition for CRV produced daily for liquidity mining incentives, its distribution is determined by Curve's DAO core module "Gauge Weight Voting". Users can decide the allocation ratio of CRV in various liquidity pools for the next week by voting with their veCRV in "Gauge Weight Voting". The higher the allocation ratio of the pool, the easier it is to attract sufficient liquidity.

This non-smoke war is about the "judgment right of listing" and the "distribution right of liquidity incentives". Of course, while obtaining project governance rights through CRV, these projects will also receive stable dividends from the Curve platform as a cash flow income. The game and internal competition of various projects on Curve have generated continuous demand for CRV, stabilized the price of CRV under a large amount of issuance, supported the market-making APY of Curve, attracted liquidity, and achieved a cycle. Therefore, the war of CRV has spawned a complex bribery ecosystem based on veCRV. For now, as long as Curve still occupies the head of stable asset exchange, this war will not end.

We briefly summarize the clear advantages and disadvantages of the veCRV mechanism:

1. Advantages

After being locked, the liquidity decreases, reducing selling pressure and helping to stabilize the coin price (currently, 45% of CRV has been voted to be locked, with an average lock-up period of 3.56 years).

Ensure long-term interests of all parties are relatively coordinated and consistent (veCRV holders also enjoy fee sharing, i.e. the interests of liquidity providers, traders, token holders, and the protocol are coordinated together);

Time and quantity weighting for better governance potential.

2. Disadvantages

More than half of the governance power on Curve is in the hands of Convex (53.65%), indicating a significant concentration of governance power.

The liquidity in Curve has not been fully utilized (boost mining rewards and governance voting rights obtained by locking CRV at an address are limited to that address and cannot be transferred; the high subsidies have attracted a large amount of liquidity, but these liquidity have not played their role in high-speed liquidity and therefore cannot generate external returns).

Hard lock-up periods are not investor-friendly, and 4 years is too long for the crypto industry.

针对 vetoken 机制的不同创新
translates to

Different Innovations for the vetoken Mechanism
in English.

In a previous article by DODO Research, we analyzed in detail the 5 innovations in incentive design of the veToken model. Each protocol has made different adjustments to the key aspects of the mechanism according to its own needs and focus. The specific divisions are:

- Design veNFT to improve the liquidity issue of vetoken.

- How to better allocate token releases to vetoken holders.

- Encouraging the healthy development of liquidity pool trading volume.

Take Balancer as an example. In March 2022, Balancer launched its V2 version and modified the original economic model. Users can lock BPT (the LP token of Balancer's fund pool) of the 80/20 BAL/WETH pool to obtain veBAL, which deeply binds the governance and protocol dividend rights of Balancer V2 with veBAL.

Regarding the fee split, 50% of the protocol fees earned by Balancer will be distributed to veBAL holders in the form of bbaUSD. The remaining Boost, Voting, and governance rights are similar to Curve.

It is worth mentioning that, in response to the "liquidity waste - inability to increase external revenue for products" issue in the vetoken mode, Balancer uses the Boosted Pool mechanism of interest-bearing trading pools to increase LP revenue (LP tokens issued by LP pools are called bb-a-USD, which can be paired with various assets in AMM pools as paired assets, and asset leverage is achieved through the issuance of LP tokens, thereby increasing LP revenue). Later, Core Pools were proposed (to improve the fact that Boosted Pools could only benefit LPs), and the official bribery of veBAL holders to vote for Core Pools would cause a large amount of $BAL to shift to Core Pools, increasing external interest-bearing asset revenue and changing the revenue structure of the Balancer protocol itself.

Velodrome: The most representative ve(3,3)

Before we talk about Velodrome, let's define ve(3,3) again: Curve's veCRV economic structure + Olympus' (3,3) game theory.

As shown in the figure below, there are two main ways for OHM incentives in Olympus: one is the bonding mechanism, and the other is the staking mechanism. Olympus sells OHM below market price to users in the form of bonds, and obtains USDC, ETH and other assets paid by users, so that the treasury is supported by valuable assets, and OHM is generated and distributed to OHM stakers through the rebase mechanism. In an ideal state, as long as users choose long-term staking, that is, the so-called (Stake, Stake) - that is, (3,3), the OHM balance in their position can continue to compound, and stakers have a positive cycle effect of high APR. However, if there is severe selling pressure on OHM in the secondary market, this flywheel cannot continue. This is certainly a game, and the ideal state is Nash equilibrium, achieving a win-win situation.

At the beginning of 22, Andre Cronje launched Solidly on Fantom, with its core being veNFT and voting rights optimization. The veSOLID position is represented by veNFT, which seems to liberate liquidity, so that any holder of NFT has voting rights to decide the distribution of rewards even if the user transfers NFT; veSOLID holders will receive a certain base proportional to the weekly emission, which allows them to maintain voting shares even without locking new tokens; at the same time, stakers receive 100% transaction fees, but can only earn rewards from pools they have voted for, avoiding the situation where voters on the curve vote for pools just to get bribes.

AC claimed on Twitter that the distribution of Solidly token ROCK will be directly airdropped to the top 20 lock-up protocols on the Fantom protocol, triggering a Vampire Attack between protocols on the Fantom chain. As a result, 0xDAO and veDAO emerged, starting a TVL war. Several months later, the veDAO team incubated another project called Velodrome, which is ve(3,3).

In the initial design, Solidly had some critical weaknesses, such as high inflationary tendencies and complete permissionlessness - allowing any pool to receive SOLID rewards, resulting in a large number of worthless tokens. Rebase or anti-dilution has also not brought any value to the entire system.

What changes has Velodrome made?

- The Pool for incentivizing the Velo token has adopted a whitelist mechanism, and the whitelist is currently open for application, without going through on-chain governance process (to avoid voting on token incentives).

- Regarding liquidity bribery rewards for pools, they can only be claimed in the next cycle.

- *(veVELO.totalSupply VELO.totalsupply)³ 0.5 Emission - *reduces the issuance reward ratio for ve token holders. Under the adjusted mode of Velo, veVELO users will only receive 1/4 of the total emission in the traditional mode. This improvement has actually significantly weakened the (3,3) part of the ve(3,3) mechanism.

- Canceled the LP Boost mechanism;

- 3% of Velo's emissions will be used as operating expenses.

- Extension exploration of the veNFT mechanism: including the ability to trade veNFT even during staking/voting, the divisibility of veNFT, and the lending of veNFT.

- More reasonable token distribution and issuance pace: Velodrome distributed 60% of the initial supply to the community on the first day of the project launch, tied with the Optimism team to jointly promote cold start, and airdropped several protocols with veVELO NFT without any additional conditions, which greatly helped attract initial voting and bribery activities.

After the launch, Velo's pledge rate has been on the rise. The high lock-up rate of 70%-80% is quite high (Curve, which also uses the ve model, currently has a pledge rate of 38.8%). Many people questioned that with the end of the "Tour de OP" plan that began in November last year and the end of the 4 million OP reward incentive, the lock-up incentive will further decline, forming potential selling pressure. However, the current Velo pledge rate still maintains a good level (about 70%). The upcoming V2 upgrade is also aimed at encouraging more holders to lock up their tokens, which is worth keeping an eye on.

V. ES Mining Mode

ES: Playing a game of real profits, incentivizing loyal users to participate

ES mining mode is an engaging and challenging new Tokenomics mechanism. Its core concept is to lower the cost of protocol subsidies by unlocking thresholds, and to enhance its attractiveness and inclusiveness by incentivizing real user participation.

Under the ES mode, users can obtain rewards of ES Token through pledging or locking. Although this type of reward appears to increase the yield rate, in reality, due to the existence of unlocking thresholds, users are unable to immediately cash in on these profits, making the calculation of actual profits complex and difficult to predict. This not only increases the challenge of the ES mode, but also enhances its attractiveness.

Compared to the traditional VE model, the ES model has a significant advantage in the cost of protocol subsidies because its designed unlocking threshold reduces the subsidy cost. This makes the ES model more realistic in the game of distributing real profits, and therefore more universal and inclusive, which may attract more users to participate.

The essence of the ES mode is that it can motivate real users to participate. If users leave the system, they will give up the reward of ES Token, which means that the protocol does not need to pay extra token incentives. As long as users stay within this system, they can receive rewards of ES Token, although this part of the reward cannot be quickly cashed out. This design encourages the participation of real users, maintains user activity and loyalty, and does not impose excessive incentives on users. By controlling the ratio of spot positions pledged or locked and the unlocking period, the project itself can achieve a more interesting and attractive token unlocking curve.

Camelot - Introduction of Partial ES Mining Incentives

The core incentive goal of Camelot is to encourage liquidity providers (LPs) to continuously provide liquidity, ensuring that traders can enjoy a smooth trading experience and sufficient liquidity. This design ensures the smoothness of transactions through incentive mechanisms and helps LPs and traders share the generated profits.

The real revenue of the Camelot protocol comes from the transaction fees generated by the interaction between traders and pools. This is the true income of the protocol and the main source for revenue redistribution. In this way, Camelot ensures the sustainability of its economic model.

As for the redistribution of profits, 60% of the transaction fees will be allocated to LP, 22.5% will be redistributed to the flywheel, 12.5% will be used to purchase GRAIL and be destroyed, and the remaining 5% will be allocated to the team. This redistribution mechanism ensures the fairness of the protocol and provides motivation for its continued operation.

In addition, this type of profit distribution also encourages and drives the operation of the flywheel. In order to obtain redistributed profits, LP must pledge LP tokens, which indirectly incentivizes them to provide liquidity for a longer period of time. In addition to the actual profit of 22.5% transaction fee, Camelot also distributes 20% of GRAIL tokens and xGRAIL (ES token) as incentives. This strategy not only incentivizes LP, but also encourages ordinary users to participate in profit distribution by pledging GRAIL, enhancing the overall activity and attractiveness of the protocol.

GMX - Encouraging the pursuit of real profit distribution

GMX's tokenomics is a highly engaging and interactive design that aims to achieve a sustainable supply of liquidity and encourage continuous trading between traders and liquidity providers (LPs). The core goal of this design is to ensure the liquidity and trading volume of the protocol, while incentivizing continuous lock-up of GMX tokens.

The real source of revenue for this model comes from the fees generated by traders' exchanges and leveraged trading, which is the main source of income for the protocol. To ensure fair revenue distribution, income is first used to deduct referral fees and keeper fees. The remaining portion, 70%, is distributed to GLP holders (actually LP), and the remaining 30% is redistributed. GMX uses a game mechanism to distribute this portion of revenue, which is the core mechanism of this model.

The core game mechanism of GMX is designed to redistribute 30% of the real profits. This ratio is fixed, but GMX holders can influence the proportion of profits they can receive through different strategies. For example, users can earn rewards in esGMX by pledging GMX, and unlocking esGMX requires GMX spot pledge and a certain unlocking period. In addition, pledging GMX will also earn Multiplier Points, although this part of the reward cannot be directly cashed out, it can increase the user's profit sharing ratio.

In this game mechanism, GMX, esGMX, and Multiplier Point all have weight in profit sharing. The only difference is that Multiplier Point cannot be cashed out; esGMX requires GMX's pledge to be gradually unlocked; and GMX can be quickly cashed out, but it will clear Multiplier Point and give up esGMX rewards.

This design allows users to develop strategies based on their own needs. For example, for users who pursue long-term returns, they can choose to continue locking to obtain the maximum weight and higher relative returns. If users want to withdraw from the protocol quickly, they can choose to extract and cash out all pledged GMX, and the unrealized esGMX rewards will remain in the protocol. The protocol does not need to actually issue subsidies, but instead distributes the real income during this period to users.

The token economy model of GMX encourages GLP holders to continue providing liquidity in this way, and fully utilizes the value of real income redistribution. This makes it possible for GMX to continue locking positions, further strengthening the stability and attractiveness of its economic model.

VI. From Value Flow to Core Elements of DeFi Economic Model Design

In the design of DeFi economic models, the core elements include basic value, token supply, demand, and utility. These constituent elements are relatively discrete, and some previous analyses cannot be combined in a straightforward manner. The Value Flow method used in this article abstracts the value flow within the protocol by studying the project's Tokenomics mechanism and combining it with product logic. The overall analysis of the project's value flow, including the composition of the flywheel, the direction of revenue distribution, and the incentive links, is then combined with the token's chip distribution and unlocking period, which can provide a clear understanding of a project's Tokenomics.

Here is the Value Flow that was briefly mentioned in the previous section due to space limitations:

GNS Value Flow (realizing membership mechanism through NFT and redistributing profits) Graph: DODO Research

AAVE Value Flow (the portion of protocol revenue earned by users who stake AAVE) Graph: DODO Research

ACID Value Flow (combining the ES mechanism and Olympus DAO mechanism to achieve a flywheel) Diagram: DODO Research

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

Value Flow Composition

DeFi protocols all generate real returns to a greater or lesser extent, with real money flowing within the protocols and value being created as a result.

Value Flow is the flow of value within the abstract protocol itself. Firstly, starting from the actual revenue, the distribution of the protocol's actual revenue is characterized. Secondly, the flow and acquisition conditions of token incentives are abstracted, so that the value capture of tokens, incentive links, and token flow can be clearly seen. These value flows constitute the entire business model, and the release of tokens will be redistributed through Value Flow during the continuous operation of the protocol.

Taking Chronos as an example, when abstracting its Value Flow, we need to first abstract the key stakeholders, such as Trader, LP, and veCHR holder. These key stakeholders are participants in the redistribution and nodes in the flow of value, with value flowing between them and profit redistribution occurring according to the mechanism design.

The key to abstracting Value Flow is to abstract the flow and mechanism of profit distribution, without requiring specificity at each step, but rather consolidating various small flow branches and abstracting and integrating them as necessary to form a cohesive flow. Using this diagram as an example, the real source of revenue is the transaction fees generated by the Trader, 90% of which are allocated to veCHR holders and redistributed through the ve mechanism to incentivize the native token. After abstracting Value Flow, we can clearly see how value flows within the protocol and how profit distribution evolves over time.

Value Flow is not all of Tokenomics, but it is the product value flow itself based on Tokenomics design. If combined with the initial distribution and unlocking of Tokens, it presents a complete Tokenomics of a protocol.

Tokenomics Reshapes Value Flow

Why are early mining and selling economic models becoming less visible?

In the early days, the design of Tokenomics was relatively rough, and tokens were seen as a means of incentivizing users and a tool for short-term profits. However, this incentive method is simple and direct, lacking an effective redistribution mechanism. Taking DEX as an example, when emissions and all transaction fees are directly distributed to LP, there is a lack of long-term incentives for LP. This model is prone to collapse when the coin price has no other source of value, as the migration cost for LP is too low, resulting in a series of collapsed mining pools.

With the passage of time, the design of DeFi protocols in Tokenomics has become increasingly sophisticated and complex. In order to achieve incentive goals and regulate token supply and demand, various game mechanisms and models for redistributing profits have been introduced. Tokenomics is closely coupled with the product logic and profit distribution of the protocol itself. Reshaping the Value Flow through Tokenomics has become the main function of Tokenomics, which involves redistributing real profits. In this process, token supply and demand can be regulated, and tokens can capture value.

DeFi Tokenomics Key Mechanisms: Game Theory and Value Redistribution

In the later stage of DeFi summer, many protocols actually improved their economic models by introducing game mechanisms to reallocate some profits, thereby increasing user stickiness throughout the chain. Curve has reallocated the token reward mechanism by voting to redistribute emission rewards, even leading to the value of bribery and various combination platforms. In addition, another core of Tokenomics mechanism is to push the entire flywheel by introducing additional token rewards, capturing more traffic and funds.

Overall, under this mechanism, tokens are no longer just a simple medium of value exchange, but also a tool for capturing users and creating value. This process of redistributing profits can not only increase user activity and stickiness, but also stimulate user participation and promote the development of the entire system through token rewards.