What is veTokenomics and how does it work?
All facets of a token's production and management, including its allocation to various stakeholders, supply, token burn schedules and distribution, are managed through tokenomics analysis. Tokenomics help to determine the potential value of decentralized finance (DeFi) projects. Since the law of supply and demand cannot be changed, tokenomics dramatically impacts the worth of each nonfungible token (NFT) or cryptocurrency.
Related: What is Tokenomics? A beginner’s guide on supply and demand of cryptocurrencies
However, there are various loopholes in the tokenomics design, such as a substantial initial supply allocation to insiders, which may be a pump and dump warning sign. Also, there is no manual on how founders, treasury, investors, community and protocol designers should split the tokens optimally.
As a result, DeFi protocols, such as Curve, MakerDAO and Uniswap, lack a carefully planned initial token distribution, which results in sub-optimal token distribution because higher contributors might not always get the best allocation or vice-versa. To solve these issues, the Curve protocol introduced vote-escrowed tokenomics or veTokenomics. In this article, you will learn the basic concept of veTokenomics; how veTokenomics works and its benefits, and drawbacks.
Under the veTokenomics concept, tokens must be frozen for a set period, which encourages long-term participation and lowers the tokens' market supply. In return, users receive veTokens that cannot be sold and are non-transferable. That said, to participate in the governance mechanism, one needs to lock their tokens over a fixed time period, which will cause an organic token price increase over time.
One can already lock up your tokens in some DeFi initiatives to
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