What the heck is ve (3,3) and why did it cause Fantom to take off?

On New Year’s Day, Yearn Finance creator Andre Cronje teased a new experiment that would be built on the Fantom blockchain. Cronje’s tweet contained scant details about the new project but the teaser still triggered significant hype among Fantom proponents.

As days went by, more details emerged about the new project, which is called Solidly. The initial talk was that it would be a combination of elements from the decentralized stablecoin exchange Curve Finance and OlympusDAO. 

Then, plans for an airdrop distribution of Solidly’s token to the top 20 DeFi protocols on Fantom also led to considerable activity on the network. The hype pushed Fantom to temporarily become the third-largest DeFi ecosystem by total value locked (TVL), according to data from DeFiLlama at the time. It's now back to fifth place.

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The DeFi community has dubbed Solidly’s hybrid model “ve (3,3).” The “ve” portion stands for “vested escrow” — popular with protocols like Curve — while “(3,3)” refers to the OlympusDAO protocol.

In short, Solidly aims to reinvent the way that new DeFi projects attract liquidity and generate revenue from transaction fees. Now that it has gone live, it’s worth drilling down on the problem it is supposed to be solving — and how it is supposed to do that.

A tale of two mechanisms

The new project is a combination of Curve’s vested escrow “ve” and OlympusDAO’s “(3,3)” reward mechanism. To understand how they work together, let’s first examine each component separately.

First, what is vested escrow? Simply put, vested escrow rewards users who lock up their funds on DeFi protocols for a long time with voting rights.

Vested escrow systems let you choose to lock up your tokens for a long period of time — up to several years. In return, you’re given governance tokens that can be used for voting on important issues. 

Decentralized exchange Curve is the most well-known protocol that uses vested escrow, and this has encouraged its community to lock up their tokens for long periods of time, helping to reduce selling pressure and arguably boost its price.

Second, let’s examine OlympusDAO’s (3,3) concept.

In essence, OlympusDAO found a unique way to encourage people to lock up their tokens. Users can both stake and “bond” their tokens, where staking gives some rewards and bonding allows them to get even further tokens at a discount with a vesting period. The “(3,3)” notation refers to a combination of bonding and staking that is supposed to provide the optimum returns.

Technical details aside, though, both vested escrow and (3,3) are ways to encourage token holders to lock up their tokens for as long as possible — thus incentivizing the community to hold their tokens rather than sell them if they go up in value. Solidly brings the two features together in an attempt to multiply this effect.

Introducing Solidly

Solidly is a decentralized exchange, similar in concept to Uniswap or Curve but with a few differences.

DeFi projects, especially the ones with stablecoins, use Curve to enable trading of their tokens and accrue liquidity. To do this, a project will typically lock up its tokens into vested escrow. In return, it receives governance tokens that can be used to vote for things beneficial to its project — such as increasing liquidity to its main trading pair. 

These projects can also choose to buy voting rights from major holders of Curve governance tokens like Convex and Yearn to vote for more incentives for their pools, thereby attracting even more liquidity. 

Here's the problem, though: all the transaction fees generated by trading activity on a given project go to Curve’s liquidity providers, denying the project access to what could be an ample source of additional revenue. Solidly aims to fix this by returning the fees back to its users.

While the new protocol uses vested escrow as a sort of governance system, it makes sure to reward those who are participating in this governance. So those who are using vested escrow end up getting extra rewards. This is similar to how (3,3) incentivizes those participating in staking and bonding, rewarding those who are active on the network.

With this approach in mind, Solidly offers a native token, called SOLID, that can be locked up for a governance token. Users can lock their tokens to earn voting rights called veSOLID, similar to veCRV on Curve. The longer SOLID tokens are locked up, the more veSOLID tokens are earned. 

If a market maker provides liquidity they can earn up to 40% of the trading fees. But if they lock up their tokens in vested escrow, they can earn up to 100% of the fees.

According to a Medium article by Cronje, veSOLID holders can vote on which pools should be incentivized and they accumulate all protocol fees.

Apart from having veSOLID as voting rights, Solidly also includes a non-fungible token (NFT) component in which the locked tokens are tokenized as veNFTs. According to Cronje, this creates the possibility that voting rights could be traded on the secondary market — thus helping make the locked tokens more capital efficient.

Fighting for the airdrop

Cronje originally planned to airdrop tokens for the new project to the top 20 Fantom DeFi projects, as of January 23. This criterion was later expanded to accommodate the top 25 protocols.

Since the projects knew the snapshot was coming up, they sought to attract more liquidity by offering higher APYs for people staking tokens on their platforms. 

One new project called veDAO offered staking of its own native token with very high rewards. This proved to be successful as it attracted $3 billion in liquidity, pushing it up the rankings to temporarily become the second biggest project on Fantom. The fast emergence of these new entrants meant some established Fantom protocols were in danger of missing out.

In response, some Fantom protocols formed a coalition called 0xDAO and started offering even higher APYs.

As of the time of the snapshot, 0xDAO held the second-largest TVL in the Fantom DeFi space with veDAO in fifth place. To ensure that established lending protocols like Tarot and Hundred Finance were not excluded from the airdrop, Cronje’s team extended the cutoff to the top-25 Fantom DeFi projects by TVL.

The top 25 projects captured in the snapshot have received their airdropped tokens. They will decide what to do with their share of the locked tokens, whether to distribute among their users or keep it as part of their treasury. 

Solidly launched on the Fantom mainnet on February 10 and the first weekly emission is scheduled for tomorrow.