In the previous article (Weekly Gauge #58) we have identified the personae and habits of the majority of players within the veDEX flywheel. In this week’s article, we'll see how Paladin will evolve in 2024 from its initial design as an incentive hub dedicated to protocol governors, to a more comprehensive role as a central node serving to optimally coordinate the dynamics of cash flows between liquidity seekers and suppliers.
Historical recap
Since it first launched in 2021, Paladin have deployed a number of decentralized applications on Ethereum mainnet, some of which later expanded to Layer 2s such as Arbitrum, Optimism, and Polygon. The first release and proof of concept was Paladin Lending, introducing governance markets for Uniswap, Compound and AAVE.
Although these contracts successfully handled a total value locked of up to $20 million, it turned out that the low recurrence of votes with financial implications likely to justify a party's investment in order to increase its voting power, together with the overwhelming dominance of these projects’ foundations in such votes, drastically limited the viability of the business model. Later on, the separation of political and economic votes introduced by Curve gauge-based governance would breathe new life into paladin lending's fundamentals.
Buoyed by this new lease of life in the decentralization of voting power, redistributing the direct economic influence of governance token holders on the distribution of liquidity mining rewards to the platform's liquidity providers, a whole new game theory took shape, enabling Paladin to improve its original system and give birth to Quest. Since then, it emerged as Paladin ecosystem flagship product, distributing nearly $7 million in incentives to over a thousand users in 2023.
In the continuity of Quest, Paladin released the Warlord protocol in March 2023, fulfilling a broader vision by becoming the first governance index that allows users to tap into vote incentives from both Convex and Aura ecosystems, reducing the risk and volatility of being exposed to only one vote market. Supported by the creation of Tholgar, a community led auto-compounder vault on top of the WAR index, the protocol attracted up to $700,000 of total value locked.
Warlord Total Value Located
Finally, Paladin’s historical and long lasting synergy with AAVE, which started with the release of its first vote lending market back in 2021, was reignited by the development of Dullahan a vault that produces passive income for stkAAVE owners and provides newly released stablecoin GHO borrowers with access to reduced interest rates. Dullahan is designed to support the growth and adoption of GHO, while simultaneously incentivizing stkAAVE participation.
Vectors of evolution
Market needs
In the metagovernance layers such as Convex and Aura, emissions are reaching a mature stage. Both platforms have secured the majority share in the governance layers of their respective veDEX, holding 49% of veCRV for Convex and 53% of veBAL for Aura. As the bribes market matures, there is observed stabilization in the APR for voters, settling at around 55% for vlAURA. This stability is a positive indicator.
However, it's worth noting a recent decline in the value of the Aura token. Despite this, the $/vote incentive has remained constant, leading to a mechanical increase in the APR for governance token holders. On the other hand, this also results in decreased efficiency for incentive creators.
Is it worrisome that there's a decline in efficiency for incentive creators? Indeed, it is a concern, but it can also be elucidated by various factors. Here are some explanations:
Some incentive creators are willing to overpay without second thoughts, leading to an imbalance between the various marketplaces' efficiency. (here highlighted by a negative 40% on Votium versus a positive 10% to 70% on Quest)
Certain incentive creators vote in their own pools, accepting a lower ROI to acquire assets from others.
Significant volatility can have a substantial impact on the pricing of the incentive.
These behaviors and personas have already been analyzed in the Weekly Gauge #42.
In recent months, notable players such as Bunni, Maverick, and solidly forks have joined the realm of incentive-driven DEXs.
Maverick's upcoming phase 3 emission system introduces a unique approach by linking rewards to external incentives and veMAV votes, ensuring fair distribution to LPs in Boosted Positions. Unlike other systems, Maverick prioritizes external incentives (in the form of MAV tokens) to avoid reward concentration. This provides projects with the opportunity to acquire MAV at a discount for incentives. Additionally, Maverick introduces a boost system based on the veMAV holdings of LPs.
https://medium.com/maverick-protocol/voting-escrow-as-oracle-499b86452ac9
Market Needs: Shaping Liquidity within the vote Marketplace
The overarching market need is the creation of a marketplace where liquidity can be directed or shaped based on the specific requirements of incentive creators. This involves developing protocols and mechanisms that allow for flexible and efficient allocation of liquidity resources.
Liquidity direction protocols such as Conic and Opal are instrumental in achieving this goal. These protocols enable the Paladin ecosystem to become a centralized hub for directing liquidity efficiently, offering incentive creators the ability to obtain the most cost-effective liquidity in the market.
The marketplace aggregates deep liquidity, creating a dynamic ecosystem where liquidity can be easily moved through simple incentives. Compensation for liquidity direction is facilitated through a layered approach, involving emissions from various sources: DEX (CRV, BAL), metagovernance (CVX, AURA), liquidity direction (CNC, GEM), and the incentive marketplace (PAL).
Domain of Expertise, plans for 2024
Incentive design & efficiency
In a continuous effort to improve the vote incentive creation process, with the goal of onboarding more and more projects into governance market, Quest v2 interface integrates an efficiency counter based on the vote incentive creator inputs, as well as automated recommendations for ranged and fixed $/vote in the corresponding input fields on the quest creation form, ensuring creators to maintain net positive efficiency between the value of native token spent and DEXs liquidity mining emissions captured.
Since the process remains quite generic at this point and that most creators are facing different tailored needs, Paladin is dedicating its workforce in 2024 to the development of an analytics/advisory tool on top of Quest guiding users toward a more sustainable and efficient use of the protocol.
Liquidity bootstrapping (warlord & dullahan expansion)
Since 2023 was synonymous with product launches, taking advantage of the bear market to build a solid infrastructure, 2024 and the good days ahead will be synonymous with expansion and the development of a well-established product market fit.
This will start with the creation of wETH zap for Warlord, enabling an exponential increase in the target user base of the first and only governance incentive index, while interest in voting markets is growing at an accelerating pace, supported by the restaking narrative and the deployment of veDEX to new networks.
At the same time, GHO's recent repeg thanks to well executed liquidity management and incentive strategies on the DEX Maverick, whose veMAV governance token should finally see the light of day early this year, will enable Dullahan to finally beat the wings, encouraging GHO loans by offering a particularly attractive discount as well as a compounding system boosting stkAAVE yields, and thus helping to secure the safety module of on-chain lending pioneer AAVE.
In conclusion, Paladin's evolution from a governance focus to a liquidity coordination hub showcases its adaptability to the ever evolving DeFi landscape. From the initial Paladin Lending design to the latest versions of Quest, Warlord, and Dullahan, the original metagovernance project has continuously addressed challenges and recognizes the need for a marketplace directing liquidity efficiently, exemplified by the integration of protocols like Conic and Opal.