ve(3,3) Ouroboros: Part 2 - Fees explored
Part 1 explored the design of optimizing the protocol’s primary goal, however your protocol accrues fees, that’s what you want to incentivize, this can be achieved via ve(3,3) Ouroboros for any protocol by simply aligning fee claim with emission.
If the protocol is a lender, and fees are generated by users borrowing, they will vote emissions on assets with the highest borrow rates, which will incentivize more borrowing due to increased incentives, which earns more fees, thus Ouroboros.
If the protocol is an AMM, and fees are generated by trading, they will vote emissions on pools with the highest trade volume, this will incentivize more liquidity for that pool, which improves trade quotes, which increases trade volume, and thus earns more fees.
The design itself can be deployed on any protocol to align emission with incentives.
In part 2, we want to explore the fees themselves, how they are paid out, how this can be used by other protocols, and how to set them up to best maximize the (3,3) spirit.
Fee assets; Token vs Stable
Fees are often use for “buyback” models, while this seems positive for the protocol, this means the fees themselves are correlated to the protocols token price, this volatility is a blessing if prices go up, but a curse when prices go down.
The veCRV model popularized paying out fees in stable coins, this in itself, changes how participants think about fees. This changes the thinking of owning CRV from a denominated value (such as USD) to instead as a percentage of fee ownership. If CRV prices go down, you can purchase a cheaper claim on a greater percentage of stable fees.
So step 1, is to provide fees in an asset not correlated to the primary system asset. This means that by owning a % of supply, you are taking a bet on future fee growth of the protocol.
Fee assets; (3,3) ethos
The spirit of (3,3) for us, is simply “how can we work together”. One of my biggest regrets with yearn’s original design was that it sells the incentive tokens for the primary asset of the vault, at scale, we have seen how this parasitic nature can lead to depreciation of the underlying assets, in fact, killing its own source of income, instead I’ve always preferred mutualistic vaults, or (3,3) vaults. One where the underlying asset isn’t sold, but simply passed on to the user.
With that in mind ve(3,3) does not distribute fees in the native token (buyback), or as a stable (sell pressure), but instead as the asset in which the fee was accrued, and these are simply passed on. We believe this to be in the spirit of (3,3) and hope to see more adoption of the distribution mechanism in the future.
Fee claim / Third party project incentives
Often when building new systems, you need to interact with another system, be this Sushiswap, Curve, Aave, or anything else. Let’s say you launch a new stable coin, and you incentivize liquidity for your coin + MIM in Curve, your protocol is paying for liquidity, however, your protocol doesn’t earn fees, Curve earns fees. Having additional fee sources can be a huge boon for early projects, it can help pay for audits, expand the team, or be distributed to token holders, as such the ve(3,3) fee claim system was designed with this in mind.
Whomever owns the LP token, earns the fees, so as a new project, you can launch incentives on stable-mim, and simply have your LPs stake with your own pool, this means you earn 100% of the fees.
By splitting out fees from the LP position, and allowing other projects to have a claim on these fees, it allows the base protocol to facilitate additional fee streams for new & existing projects, without any complex deposit/withdraw fee claim mechanism. Fee separation and streaming is natively supported by the protocol.
Why incentivize liquidity and earn 0 fees, when you can earn all the fees.
We hope this lets new projects bootstrap easier, and allows existing projects additional incentives to migrate their liquidity.