Misconceptions Around the Solidly Model
Dispelling the 6 common complaints about the best new DEX design
I have been unabashedly excited about the innovative DEX model based on Andre Cronje’s original Solidly. The ve(3,3) concept that combines Curve’s locking for fees with Convex’s bribes for votes, and helps drive liquidity to the DEX. I believe the ve(3,3) design provides the best available balance between participants. If you’d like a more comprehensive overview on Solidly, I wrote about it here:
Despite the increase in TVL, high APRs for yield farmers and investors, and many forks across EVM chains, people are overlooking these DEXs due to misconceptions floating around. In this article, I’ll address some of the common ones and try to provide some objective analysis.
1 - Token emissions are too high and unsustainable to maintain a healthy token price
Native token emissions are designed to be initially earned by yield farmers (rented liquidity), distribute the token aggressively, and asymptotically approach zero. Longer term, DEX fees will sustain liquidity provider revenues, but this requires LPs to lock native tokens in order to vote for their pools and earn fees.
Emissions are situationally a fair criticism as we all know how negative reflexivity punishes all tokens and yields during bear markets. We haven’t seen the behavior of a Solidly style DEX during a bull market, but these protocols should see exponential increases in trading fees, liquidity, and higher yields (everyone is happy). In addition the actual liquid emissions on an epochal basis is far lower than advertised in the docs and doom posts you read on Twitter because rebases and protocols like Liquid Driver consume and lock a sizable portion of emissions.
Liquid emissions will continue to fall each epoch, lock rates will increase so investors can capitalize on cash flows from fees and bribes, and over time liquid emissions will consistently be less than yields shared by ve-lockers.
Using Velodrome as an example, the lock rate is nearing 90%, which means the previous epoch had approximately $102,000 of liquid $VELO to sell from yield farmers (far less than the $761,000 advertised). $102k may be high in a very deep bear market where liquidity has been leaving DeFi, but it will be absorbed very quickly when things turn around.
2 - Locking tokens is a scam
Historically, lock tokens have been impossible to liquidate unless you sell your private keys. $veCRV set the standard early and people willingly (yours truly) locked their $CRV for 4 years in order to earn fees and vote on Curve gauges. There were definitely a lot of lucrative airdrops (e.g. Convex), but the $CRV token price volatility and new competitors have lead to a lot of regret about locking.
$ve-lock positions are NFTs so there are very flexible ways to liquidate (exit your position). It also provides ample opportunities for buyers to come in at discounted prices.
Use a NFT marketplace
Thena’s integration is unique and allows users to sell via Liquid Driver’s conversion process. Deposit your $veTHE and receive a liquid wrapper called $liveTHE which can be swapped for any token on Thena’s DEX. You must pay a fee to use this mechanism, but at least you’re not stuck in a locked position on chain forever.
OTC - many willing buyers will take $ve-tokens off your hands at a negotiated discount
I opined on other applications for veNFTs in this article:
3 - The ve-token yield is from token emissions
Yields come from three sources.
Rebases - 30% of all emissions go to $ve-token holders to prevent dilution from bribes and fees collected on the protocol. (Last epoch 28% of epochal yield). Not every Solidly DEX has rebases (e.g. Chronos, Ramses and Equalizer), and it is yet to be seen how this will play out over time.
Fees - $ve-token holders vote for specific pools, which entitles them to 100% of the fees generated from swaps.
Bribes - Partner protocols and the Solidly team can bribe voters to vote for their pools. Thena’s ALPHA perps will soon start to stream autobribes to the most productive (highest volume) pools.
The rebases are almost never sold because they are so illiquid, and simply accrue to the ve-token (the 3,3, component). Selling a rebase means you have to split off the portion from your $veTHE and sell that NFT at a discount. Rebases are designed to reward early lockers because they take the biggest risk on the protocol success. Rebases offset the high emissions and reduced token prices early on and also prevent dilution from new lockers. Anyone who claims $veTHE emissions are the majority of the yield are just making an excuse when the vast majority of yield comes from liquid, non-native tokens.
4 - The team will dump their tokens once they vest and this is a slow rug
The team has every intention of locking their liquid tokens for yield because they designed the system. The liquid tokens teams like Velodrome and Thena receive have a 1-year cliff, so they haven’t been able to sell any of their allocation yet, and I don’t expect they will. This surprises a lot of investors after the ICO bubble and DeFi dump. You can ‘trust me bro,’ or you can check the chain and see what recent behavior looks like. DeFi Wars has every team member’s team wallet.
You’ll find they are claiming bribes and fees just like other market participants, and compounding or buying back liquid tokens to increase their exposure to the protocol.
5 - Liquidity will leave for higher yield
Liquidity is not loyal in DeFi, let alone all of finance. We’ve seen billions in stablecoin liquidity depart blockchains for safer government treasuries amidst rising interest rates. I expect the winning Solidly designs will lead to sustainable liquidity that will increase over time, specifically because the appeal to long tail assets and team treasuries. These DEXes are becoming more capital efficient to partner protocols like with Gamma, Algebra, DeFi Edge, and Dyson who are all building managed concentrated liquidity for efficient swaps. Thena’s autobribes will start incentivizing the most productive pools (BNB/USDT, WETH/BNB, eg) and naturally pull liquidity in to maximize APRs.
Other reasons for liquidity staying on Solidly DEXs are:
Security - audited by industry leading firms, PeckShield, Spearbit and OpenZeppelin
Protocol owned liquidity - Many protocols have and are building up $ve-token positions to generate yield on their liquidity through fees. The higher their voting share, the higher their fee capture
6 - It’s a broken model
DeFi is less than 4 years old, and Solidly is less than 2 years old, but we are very conditioned to call things dead based on price chart. The dislocation between adoption and price is more obvious during pico bottom bull and bear markets. Unfortunately, Solidly launched just before Terra, 3AC, Alameda, and FTX blew up the markets last year. However, the teams building Solidly DEXes have been nonstop building, innovating, and bringing in new partners. Solidly has also been forked many times across EVM chains, displacing the popular Uniswap or Sushiswap forks.
In conclusion, I believe Solidly DEXes are positioned to be the best onchain bet over the next 2-3 years in terms of maximizing yield and leveraging the $veNFT as tools improve composability. The perfect storm between reduced emissions, increased liquidity, and higher token prices should match nicely with a more favorable macro environment. In the meantime, spend some time to fully understand the mechanics behind these DEX designs to prevent writing them off based on one sentence tweets or price charts.
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None of this is financial advice