Introduction
veDAO launched with the purpose of giving ordinary people an opportunity to own and control a portion of Solidly.
In the course of this work, the veDAO team developed deep subject matter expertise on both Solidly and ve(3,3), learning what is and isn’t working for Solidly and its broader ecosystem — expertise that we’ll apply to evolve Solidly and bring its next-generation capabilities to Optimism.
In the coming weeks, we’ll be sharing a series of posts that explore how we’re thinking about how this new protocol will function and how veDAO / WeVE holders will benefit. We begin with today’s post, which presents our perspective on Solidly’s challenges and opportunities.
Solidly’s Design
Solidly brought together some of the most effective mechanisms designs in DeFi with the goal of creating a public good DEX for the Fantom ecosystem:
- A base-layer AMM targeted at ecosystem protocols, earning their buy-in by distributing initial ownership of the voting power as veNFTs
- Incentivizing trading fees rather than passive liquidity (a la Curve) by giving fees to the voters of a pool, thus directing liquidity to where it is most needed and creating a virtuous cycle for the ecosystem
- ve(3,3) mechanics that reward early lockers as well as collective locking (3,3)
Effective protocol design incorporates incentives for users and stakeholders to take actions correlated with the protocol’s success, such as providing liquidity and holding the protocol’s token. In a DEX, incentives must compensate liquidity providers to take on IL risk and opportunity cost of their capital. Solidly adapted this model to aim at a larger goal: to serve as a public good for its network by providing deep liquidity to swaps critical to ecosystem growth.
In the “ve” model, key parameters such as token distribution, locking mechanics and its emission schedule are set at the start so that incentives can sustain the project’s economic health. As an ecosystem protocol, Solidly had a vested interest in ensuring that incentivized pairs actually benefited the ecosystem and that incentives didn’t outright encourage rent-seeking behavior. For the protocol to run smoothly, key conditions had to be met (at least in the long-term) for a sustainable flywheel effect.
A Balanced Flywheel
Setting aside coding, UI/UX, and community issues, at its core, Solidly fell short on a key test. Players could purchase voting power to direct rewards to liquidity pools they had privileged access to. Boutique and singly-owned pairs allowed players unaligned to the overall goals of the protocol to accrue voting power and to maximize a very high percentage of total emissions, a seemingly profitable move but value dilutive for the ecosystem in the long run.
As we reflected, we’ve come to realize that a protocol needs to have the following incentives to serve as a base for proper behavior:
- From the voter’s perspective, (external) bribes and fees must be greater than the cost of accumulating voting power and the opportunity cost of capital. This wasn’t achieved in Solidly because all the airdrop recipients could amass a significant portion of voting power at effectively zero cost, and due to the way the ve(3,3) model works, they were able to maintain that high voting power — again, at effectively zero cost — even though another player might benefit more from this additional voting power.
- In the Curve ecosystem, bribers are usually protocols that need to incentivize liquidity for some reason, largely because they need to subsidize impermanent loss for LPs or because they need to subsidize liquidity for algostables. For them, the cost of a bribe should be both less than alternative methods for incentivizing liquidity(e.g., native token emissions), as well as the benefit of subsidizing impermanent loss (better price discovery). In Solidly, fees that normally would accrue to LPs instead accrue to voters for those pairs’ respective gauges, in a sense “bribing” them for their votes to direct emissions. In practice, these fees have little impact on the voting decisions, as emissions are much higher than fees.
- From the LPs perspective, potential reward emissions need to be greater than any impermanent loss risk. In Solidly’s case, this requirement was met, but almost too well. We’ll dive into that in the next point.
- At the protocol level, the marginal benefit of total emissions must be less than the marginal cost of purchasing additional voting power. This was not met because, as we saw in Solidly, a player purchase voting power with some amount of capital and generated more capital with the reward emissions they directed to an unproductive liquidity pool.
Problems → Solutions
We believe there are 5 key changes we can make to Solidly’s mechanisms that will make the costs of voting power greater than emissions rewards while still providing enough incentives to LPs to overcome IL risk at competitive rates while also fixing other underlying protocol issues: changing initial distribution, reducing emissions and rebases, controlled token listing, increasing non-emissions rewards for voters, and adding a human layer to support the protocol.
Problem 1: Emissions
Detail: A large majority of Solidly’s token supply was distributed in the first 8 weeks, with a significant portion going to airdrop recipients and early lockers in the form of rebases. This created a gold rush for these initial emissions, allocating a large share of the protocol’s control in a short period of time. Locked tokens greatly reduced future emissions, leaving limited incentives to sustain liquidity for long-term ecosystem development.
Desired Behaviors:
- Incentivize locking while supporting meaningful token velocity & liquidity.
- Give time for liquidity routing to build with healthy emissions (tail emissions > 4 years).
- Ensure the protocol is properly maintained and developed through core team incentives.
Solution: Building on a more efficient initial distribution, Solidly 2.0 will decrease the initial emissions and spread them out over the long term. Initial voters will receive rebases, but at a lower rate. We believe that this dilution, albeit slow, ensures that existing players have incentives to lock, but also to continue investing in the protocol and its success.
Problem 2: Distribution
Detail: Solidly airdropped 100% of the total ownership of the protocol to the top TVL protocols on Fantom. In addition, these protocols received an ongoing rebase that increased their ownership over time. Votes were essentially free for these protocols, and, in the absence of significant fees or bribes to incentivize other behavior, many chose simply to consolidate future control over emissions without regard for broader strategic or functional considerations.
Desired Behaviors:
- Generate demand for voting power from protocols
- Guide protocols to bribe voters earlier on
- Enable token velocity and ability to accrue power
- Have protocols own less than 50% of voting power
- Voting power flows to those who can maximize its utility (i.e. incentivized liquidity and bribes)
- Attract sophisticated users in retail airdrop distribution
Solution: We are exploring a series of airdrops based on those (protocols and retail) most likely to contribute to Velodrome’s broader mission. We are assuming an around 50% lock rate of divested airdrop/rewards. The distributed initial control should represent less of the eventual voting power; this allows new players who see value in the ecosystem to catch up and be equal participants.
Problem 3: Whitelisting
Detail: On Solidly, Token whitelisting was exploited, allowing actors to game emissions by, for example, deploying trading pairs with tokens fully owned by the creator and directing emissions to these pools. Downvoting is ineffective, as foregone emissions render doing so expensive, and bad actors can change votes at the last minute.
Desired Behaviors:
- Ensure Solidly 2.0 token pairs are useful pairs that will attract high volume and provide value to the Optimism ecosystem
- Create a clear path for new protocols to create new pairs to support their launch
- Introduce reasonable filters for all protocols to launch new swap pairs
Solution:
- Launch with an initial list of tokens suggested by Optimism and early protocol partners
- Establish a reasonable approval process and whitelisting fee
- Emergency DAO powers to blacklist tokens (a la Curve)
Issue 4: Bribes and Incentives
Detail: One of Solidly’s innovations was to provide fees to voters rather than to LPs to incentivize proper voting behavior over emissions and to include native bribing mechanisms for pools. However, fees were set incredibly low at 0.01%, making it impossible near the launch and difficult long term for fees to overcome just voting for emissions. In addition, the bribing mechanism was completely broken allowing voters to stream bribes during the week and then change their vote at the last minute to a different pool.
Desired Behaviors:
- External bribes and fees provide enough value to overcome emissions rent seeking
- New protocols find it profitable to bribe for emissions while building a voting position for themselves
Solutions:
- Increase fees to .022% to better incentivize voters through fees for votes
- Ensure that once votes are registered, they cannot be changed
- Explore reorganizing bribes to manner similar to Votium; i.e., the voting epoch split into two phases, bribe accumulation then voting period, airdrop on epoch turn.
- Explore additional passive voting optimization features (a la Votium or Union)
Issue 5: Lack of Human Layer
Detail: As an immutable protocol without a dedicated team or DAO to support, Solidly was lacking in documentation, communication, support, and the ability to fix bugs after launch.
Desired Behaviors:
- Ability to govern key protocol parameters to drive optimal voting and emissions behavior
- Clear communication and documentation outlining protocol function and behavior
- An active and healthy community to support users and partners of the protocol
Solutions:
- Quantity and direction of fees possible to be updated by the DAO or team
- Emergency blacklist functionality to weed out rent-seeking pools
- Active, modded Discord community with support functions
- Dedicated 5% voting power directed to Protocol Token / ETH pair
Misc Issues
- Improve swapping UX to properly warn when routing through illiquid pools
- Fix the analytics page (at solidly.dev) to provide correct data
- Display APRs and bribes in ways that are intelligible to LPs and users
- Revamp design look and feel for a more fun experience
Review of Changes
All of these changes work in tandem to operate on the fundamental constraint of Solidly:
- External Rewards (Fees/Bribes) + Value of Emissions to Protocols > Cost of Purchasing Voting Power > Monetary Value of Emissions to Farmers
- Fairer initial airdrops ensure that owner protocols have an interest in the success of Velodrome and avoid an unproductive TVL race for a large portion of initial Solidly 2.0.
- Smoother emissions lower the week to week value of emissions/vote and prevent early lockers from owning too much of the protocol.
- Whitelisting changes increase the opportunity cost of creating pools only for the purpose of farming for emissions.
- Increased fees and bribes incentivize voting to the most useful pools.
- Limited governance allows for parameter adjustments over time.
- Active team involvement allows for ongoing communications and support
What’s next?
The veDAO Team is working closely with their Optimism partners to finalize the details of the new protocol and development is already underway. Next week, the team will share more details on the specific mechanics of Solidly 2.0 including emissions, distribution, and more.
In the mean time, we’d love your thoughts and feedback on this post and the direction we’re heading. Please join the conversation on Discord and catch us on Friday’s Twitter Spaces AMA.