Weekly Gauge #22 : Gauges Economic Boundaries
Discussing Curve incentives scalability challenge
In the previous edition of the Weekly Gauge, we assessed the vulnerability of the vote escrow framework to governance attacks, which can be orchestrated by unique individuals or malicious coalitions. However, the setup and aftermath of such an event are very likely to differ depending on the scale and decentralization of the system.
In order to anticipate and somehow prevent this risk factor, it is necessary to understand the role and mechanisms of the gauge model, as well as the micro and macroeconomic boundaries between which it is possible for the system to grow and maneuver.
Sources: https://snapshot.org/#/ ; https://dao.curve.fi/gaugeweight ; https://dune.com/queries/1005904/1738644
The initial problem solved by the implementation of the gauge framework is the lack of alignment between users and token holders of the protocol. While most projects used to design their governance tokens following the TradFi standards, as a result, scoring very low participation rates, vote locking has propelled it to over 90% for emissions.
By giving token holders the opportunity to manage the inflation of their holdings according to their share size, it bootstrapped the protocol on three distinct KPIs :
Increase of the governance participation;
Incentivize users to become token holders;
Incentivize token holders coordination;
On top of that, thanks to the algorithmic distribution of incentives, it is made possible to anticipate and act according to your projection of the value of a protocol’s incentive, which is especially useful during uncertain times, similar to the current market conditions.
By design, the gauge framework is more oriented toward microeconomic efficiency for various reasons. In this field, economic efficiency, depending on the context, is usually attributed to the following two related concepts:
Allocative or Pareto efficiency: any changes made to assist one person would harm another, which represent the zero-sum game ongoing between gauges;
Productive efficiency: no additional votes can be obtained by a gauge without decreasing the votes of another gauge, and production must proceed at the lowest possible average cost, which highlights the importance of voting incentive pricing thus of delegation market making.
However, several observations tend to indicate that Curve’s health and performances often highlight and rely on a global situation of DeFi rather than something specific to Curve. This leads us to the question of the macroeconomic perspectives of the platform.
Because the $CRV emission declines overtime - although it is a fairly long 120 years period - there is another side to the coin which should eventually replace the users' liquidity mining revenues, the ecosystem fees.
Source : https://dune.com/queries/1219620/2088626
Note that admin fees are not represented in the chart above, but can still be referred to as part of users ' revenue. Nevertheless, we observe that the times when fees were closest to matching rewards occurred during black swan events.
Some may say coincidentally, while others believe in a well thought-out plan, the new Curve stablecoin lending design introduced as crvUSD will perform an algorithmic management of collateral values to assess the liquidation risk, as well as increasing the trading volume on the dapp.
This highlights the fact that, with its original design, Curve alone wasn’t able to scale and sustain the capital efficiency. This issue is being addressed by the development of an alternative way to capture $CRV’s value through liquid lockers such as Convex, or voting incentive marketplaces.
Paladin is a service provider which creates a link between micro and macroeconomic concerns, by offering a comprehensive suite of tools to enable each participant to extract an optimized value from all features of the DeFi stack.