Vote-escrowed tokens, or “vetokens” have been one of the hottest trends in DeFi this year.
Vetokens rectify some of the weaknesses of traditional governance tokens by locking up tokens for longer periods of time in return for additional governing power and other benefits.
ICON’s DeFi platforms have embraced this trend, too.
In this post, we’ll explain what vetokens are and how they work, and look at two of ICON’s leading examples: OMM’s bOMM and Balanced’s upcoming bBALN.
Vetokens: giving value to the “valueless”
Prior to this year, most DeFi platforms adopted the so-called “valueless governance token” model.
Why “valueless,” you ask? Because valueless governance tokens give holders governance rights… and nothing else. Or as Ben Giove put it at Bankless:
“With this model, token holders are solely entitled to governance rights. While this may have been a way to avert regulatory scrutiny, and governance is certainly an incredibly valuable right, this meant that holders have no claim on cash flows, and the token provides no utility or perks to any stakeholders within the protocol; meaning that aside from speculation, there is no underlying demand for the token.”
Add inflating supply to this lack of underlying demand, and the result isn’t hard to predict: a governance token that gradually falls in value.
Observers point to this structural weakness to explain the relative underperformance of DeFi tokens last year, even though DeFi platforms themselves saw massive increases in adoption and generated millions of dollars in revenue.
Enter the vetoken.
Pioneered by Ethereum DEX platform Curve Finance, vetokens bring value to DeFi governance tokens by providing holders with increased voting rights, boosted yields and other benefits in return for locking up their tokens for a specific period of time.
This model offers a number of advantages over the traditional DeFi token model, namely:
- Encourages long-term decision making: By locking up tokens for longer periods of time — sometimes up to four years — the vetoken model forces holders to commit for the long haul… and vote accordingly.
- Aligns incentives among stakeholders: Locking up tokens helps align the incentives of stakeholders such as liquidity providers and token holders, encouraging everybody to play nice for the long-term health of the platform.
- Better supply and demand structure: Locking up tokens removes them from the market, reducing supply, while adding value to DeFi governance tokens increases demand.
bOMM: Boosted OMM
ICON money market Omm became the first ICON platform to adopt the vetoken model when it launched its “boosted OMM” token, or bOMM, in July.
bOMM is a non-transferable token that boosts your OMM rewards for using the Omm protocol and gives you voting power.
To review, users earn OMM — Omm’s governance token — by 1) lending or borrowing on the Omm money market, 2) supplying OMM on ICON’s DEX platform Balanced or 3) locking their OMM.
Prior to the launch of bOMM, investment size was the sole determinant of earning potential and governing power.
Or as OMM itself put it, “Those with the most, benefitted the most.”
With bOMM, however, the platform now rewards people based not on how many tokens they hold, but how long they plan to hold them.
To acquire bOMM, users must lock up their OMM for at least a week, or up to four years. The longer you lock up your OMM, the more bOMM you’ll hold — lock up your OMM for the full four years, and you’ll receive one bOMM for every OMM.
Note, however, that your bOMM decays linearly to zero over the course of the lockup. So if you’ve locked up 1 OMM for four years, your corresponding bOMM will decrease to 0.5 bOMM after two years.
Depending on how much bOMM you hold relative to everyone else, you can receive up to 2.5x the OMM for each market and liquidity pool you participate in.
From the Omm docs:
“For each market and liquidity pool:
- If no one has bOMM, everyone gets a 1x boost
- If everyone except you holds enough bOMM for a 2.5x multiplier, your boost is diluted to 0.4x
- If you set a 2.5x multiplier and no one else does, you get a 2.5x boost
- If everyone sets a 2.5x multiplier, everyone gets 1x boost”
If you participate in a market or liquidity pool without bOMM, you’ll earn diluted OMM rewards, and you won’t be able to take part in governance.
bBALN: Boosted BALN
Balanced, ICON’s decentralized exchange, will also be implementing its own vetoken: boosted BALN, or bBALN.
bBALN works very similarly to bOMM. In return for locking up your BALN — Balanced’s governance token — you can earn boosted rewards for participating in the platform.
From the Balanced proposal discussion:
“bBALN acts as a booster to your existing rewards from other activities on Balanced, up to a certain point. For example, if you are an LP in the sICX / bnUSD pool, the more bBALN you have, the more rewards you will earn from participating in this pool.”
Depending on how much bBALN you have, you can boost your rewards up to 2.5x.
To earn bBALN, you’ll need to lock up your BALN. How much bBALN you earn depends on how long you lock up your BALN. If you lock ’em up for the four-year max, you’ll get 1 bBALN for every 1 BALN. Lock them up for just the one week minimum, and you’ll get just 0.0048 bBALN per 1 BALN staked.
The bBALN deployment is currently in development. According to Balanced’s latest roadmap update, Balanced planned to “shift gears to the Boosted BALN upgrade” this month, including planning the deployment process, testing and taking care of any outstanding implementation work.