Directed by:Carolina Goldstein、Tiago Fernandes,Three Sigma
Compiled by: Frank, Foresight News
introduce
Tokens play an important role in DeFi systems, but there are some differences in achieving protocol goals, value capture mechanisms, and ecosystem integration. Tokens serve as multi-functional tools, including utility tokens for transactions and access, governance tokens for decision-making, or revenue-sharing tokens for community wealth distribution. These tokens operate in various environments within DeFi, from decentralized exchanges to lending platforms, and even the underlying infrastructure that drives the entire system.
In this article, we will take a deep dive into the relevant token mechanisms that drive DeFi, from liquidity mining, staking, voting custody to revenue sharing models, revealing how these mechanisms shape the current landscape of blockchain protocols and how they are adopted by different protocols.
这项研究包括以下协议的代币：1inch Network、Aave、Abracadabra、alchemx、Angle、Ankr、ApolloX、Astroport、Balancer、Beethoven X、Benqi、Burrow、Camelot、Chainlink、Cream Finance、Compound、Convex Finance、Curve Finance、DeFi Kingdoms、dForce、dYdX、Ellipsis Finance、Euler Finance、Frax Finance、Gains Network、GMX、Hashflow、Hegic、HMX、Hundred Finance、IPOR、Lido、Liquity、Lyra、MakerDAO、Mars Protocol、Moneta DAO (DeFi Franc)、MUX Protocol、Notional、Osmosis、Orca、PancakeSwap、Perpetual Protocol、Planet、Platypus Finance、Premia、Prisma Finance、QiDao (Mai Finance)、Reflexer、Ribbon Finance、Rocket Pool、Solidly Labs、SpookySwap、StakeDAO、StakeWise、Starlay Finance、SushiSwap、Synapse、Tarot、Tectonic、Thales、Thena、Uniswap、UwU Lend、Velodrome、XDeFi、Yearn Finance、Y2K Finance、Yeti Finance。
It’s worth noting that this is not an all-inclusive list of DeFi protocol tokens, but rather a representative selection, with a particular focus on those that introduce innovations or slight changes in token mechanics.
Research Framework
To explore the various roles that tokens play in DeFi, we will take a systematic approach.After examining more than 50 DeFi protocols, a general trend emerged that was clear: most protocols provide a way for users to earn rewards in their tokens.
These rewards can range from tangible benefits to more abstract forms of value, and may include discounts on protocol features, higher returns for liquidity providers, inflation incentives, a share of protocol revenue, or the ability to vote on key decisions. These rewards may also be distributed differently, with some tokens minted or transferred directly, while others may involve the destruction of existing tokens or the generation of yield assets.
The ways to earn these rewards also vary: users can earn rewards by simply holding tokens, soft-locking, locking, or staking/delegating tokens in the network.
These lock-up mechanisms can vary significantly across protocols. Therefore, we will focus on three core aspects to give you a comprehensive understanding of the current token economics landscape: reward access, value, and distribution. It is important to recognize that while these options provide avenues for rewarded participation, they should be tailored to the design and goals of individual protocols.
Rather than using each protocol’s unique terminology to describe the various token strategies and models, this article will use a standardized approach to ensure clarity and ease of comparison. In this article, the following terminology will be used:
Staking: refers to the staking of tokens within the network (for decentralization);
Locking: involves locking tokens for a fixed period and they cannot be withdrawn before the end of the lock-up period, otherwise they will be severely punished.
Soft Locking: Tokens are locked for an unknown period of time with the possibility of unlocking, sometimes with withdrawal fees or waiting periods, which is often referred to as “staking” in typical token economics discussions;
LP (soft) lock: represents the same concept, but specifically related to locking up LP tokens;
According to our framework, the protocols included in this paper are divided into the following categories:
Reward form
Get rewarded by holding
A handful of platforms, including Euler Finance, MakerDAO, and most recently, dYdX, have rewarded users for holding tokens.
dYdX is a well-known derivatives exchange in the DeFi field. By offering lower transaction fees to DYDX holders, it has become one of the mainstream choices for active traders.
However, starting from September 29, 2023, dYdX began to transition to a standard fee structure for all traders. Although DYDX is mainly used as a governance tool for the platform, it is worth mentioning that token holders could also stake tokens in the security module to enhance the security of the protocol. However, the corresponding fund ceased operations on November 28, 2022.
Euler Finance is a project operation in the DeFi lending track. By delegating the governance token EUL, holders will have the right to influence EUL liquidity incentives and the direction of platform development. However, users must stake their EUL to participate in the vote. If they just hold it, they will not actually receive any direct rewards.
MakerDAO’s MKR token has a dual purpose. First, MKR holders can actively participate in governance decisions and vote on key parameters; second, MKR will serve as a protection measure for the protocol when the market fluctuates sharply and the value of the collateral is insufficient - in this case, new MKR tokens can be minted and exchanged for DAI.
Although MakerDAO lacks a clear revenue mechanism, MKR holders indirectly benefit from the excess DAI generated through stability fees, as this surplus DAI can be used to buy back and burn MRK tokens, thereby reducing supply.
With the recent launch of the Smart Burn Engine, MKR tokens will accumulate in the form of Uniswap V2 LP tokens instead of being repurchased and burned. Maker will periodically use the DAI in the Surplus Buffer to buy MKR tokens from the Uniswap V2 DAI/MKR liquidity pool, and the purchased MKR tokens will then be paired with additional DAI from the Surplus Buffer and provided to the same market. In return, Maker will receive LP tokens and increase MKR's on-chain liquidity over time.
Some other protocols also use buyback and burn mechanisms to indirectly reward users for holding tokens, but since most protocols combine this with other mechanisms, they will be mentioned in the later sections of this article.
Obtain network rewards through staking or delegation
Some protocol tokens are used for staking or delegation to achieve network decentralization and enhance the security of the ecosystem. Staking requires token holders to lock their assets as collateral and actively participate in network operations, verification, transaction validation, and maintaining blockchain integrity. This aligns the interests of token holders with network security and reliability and provides potential rewards as well as the risk of losing staked tokens in the event of malicious behavior.
Protocols that use this staking or delegation mechanism include Mars Protocol, Osmosis, 1inch Network, Ankr, Chainlink, and Rocket Pool.
Osmosis offers OSMO token holders a variety of staking options, including delegating to a validator to secure the network, where delegators are rewarded with transaction fees based on the amount of OSMO they stake, minus the commission of the chosen validator. Stakers (both validators and delegators) receive 25% of newly released OSMO tokens when they secure the network.
In addition, Osmosis also offers Superfluid staking, which enables users to stake tokens in the form of OSMO trading pairs to obtain returns for a fixed period (currently 14 days). These tokens continuously generate swap fees and liquidity mining incentives, while OSMO tokens can also receive staking rewards. In January this year, Osmosis introduced an automated internal liquidity arbitrage mechanism to accumulate returns, and the community is currently conducting governance discussions on the potential use of these funds, including the implementation of a destruction mechanism that could deflate OSMO.
Mars Protocol is also part of the Cosmos ecosystem and operates in a similar way, with token holders playing an important role in securing the Mars Hub network, managing outpost functionality, and setting risk parameters through staking or delegation.
The 1INCH token is the governance token and utility token of the 1inch network. Its main use is in Fusion mode. The parser stakes 1INCH and deposits it in the "feebank" contract to enable Swap transactions. Users who entrust 1INCH to support the Fusion mode will receive a portion of the generated income. Once staked, the token cannot be withdrawn before the end of the specified lock-up period, otherwise it will be punished (the default lock-up period is 2 years). In addition, 1INCH holders have voting rights in 1inch's DAO, enabling them to influence the direction of the platform.
Ankr's ANKR token has multiple functions, including playing the role of staking, governance, and payment in the ecosystem. ANKR staking is unique in that it can be delegated to full nodes, not just validating nodes, allowing the community to actively select reputable node providers. In return, stakers will share node rewards and some slashing risks. Currently, ANKR staking has expanded to more than 18 blockchains. ANKR tokens also support user participation in governance, including voting on network proposals. In addition, ANKR tokens can also be used for payments within the network.
Chainlink's native token LINK is the foundation of node operators, enabling individuals to stake LINK and become node operators. Users can also delegate LINK to other node operators, participate in network operations and share fee revenue. LINK tokens are used to make payments in Chainlink's decentralized oracle to support the operation of the network. In addition, LINK tokens are used to reward node operators who provide basic services, including data retrieval, format conversion, off-chain computing, and guaranteed uptime.
Rocket Pool is one of the main players in Liquid Staking Derivatives (LSD). Without the Ethereum PoS participation requirement of 32 ETH, Rocket Pool introduced the RPL token to provide insurance for the network's slashing risk and enhance security. "Minipools" only require 8 or 16 ETH as collateral, and the rest is 24 or 16 ETH borrowed from the staking pool. RPL acts as additional insurance as collateral to reduce slashing risks. RPL token holders also have governance rights. In addition, RPL tokens are also used to pay protocol fees, providing a comprehensive toolkit in the Rocket Pool ecosystem.
Get rewards by locking
In the current landscape of DeFi, token locking is the core mechanism for obtaining protocol rewards, including revenue sharing, increasing annualized interest rates, and inflation emissions. There are two main forms of locking:
Single-sided locking: users lock native protocol tokens;
LP locking: Users provide liquidity, usually consisting of protocol tokens and network native tokens, and then lock LP tokens;
The key to this mechanism is choosing the lock time interval during which the user will be bound until it expires. Some platforms offer extended time options for higher rewards, while others allow early unlocking at a high reward cost. Therefore, it is a strategic decision that balances risk and reward.
However, longer lock-up periods yield more rewards, such as enhanced voting rights and an increased share of protocol revenue, which is related to commitment and risk reduction factors: longer lock-up periods demonstrate confidence in the protocol, and the protocol rewards them with larger rewards.
A widely used token lock method is the Vote Escrow model, pioneered by Curve Finance, where when users lock their governance tokens, they receive veTokens, which grant voting rights but are generally untradeable. While vote escrow solutions have become increasingly popular among DeFi platforms, a number of issues have emerged that limit their effectiveness, including the risk of centralization, where a small number of large holders gain control of governance, as seen in Curve Wars.
As a result, more and more platforms and protocols are improving the concept of voting escrow to increase participation and align incentives across the ecosystem. While veTokens are generally non-transferable, some protocols allow tokens to be used for purposes such as unlocking liquidity or earning additional yield, and many DAOs now employ voting escrow solutions to manage user participation and rewards.
In Curve DAO, users lock their CRV tokens to gain voting rights, and the longer the lockup period, the greater the voting power. veCRV is non-transferable and can only be acquired by locking CRV, with a maximum lockup period of four years. Initially, one four-year locked CRV is equal to one veCRV. As the remaining unlock time decreases, the veCRV balance decreases linearly.
As mentioned earlier, this model has led to conflicts over voting rights, especially in terms of liquidity, with Convex leading the conflict. To vote on Convex proposals, users must lock up CVX tokens for at least 16 weeks, and these tokens will be inaccessible until then.
Ellipsis Finance, a Curve fork on BNB Chain, also follows this model. EPX holders can lock their EPX for 1 to 52 weeks, and the longer the lock-up period, the more vlEPX they receive.
Hundred Finance, now out of operations due to a protocol hack, employed a similar voting escrow model to Curve, where locking up 1 HND for 4 years would yield approximately 1 mveHND, and that balance would decrease over time.
Perpetual Protocol, a perpetual contract trading platform, also adopts this model, where users can increase their governance voting rights by up to 4 times by locking PERP into vePERP.
Many DeFi protocols have embraced derivatives of voting escrow mechanisms to incentivize user participation. Among them, Burrow adopted a similar model to Curve's ve-token, providing BRRR holders with the opportunity to participate in the BRRR lock-up program. Starlay Finance on Polkadot and Cream Finance on multiple chains introduced similar concepts, with token holders locking LAY and CREAM to obtain veLAY and iceCREAM tokens respectively. Frax Finance also uses this model, with veFXS tokens granting governance voting rights.
Similarly, QiDao and Angle have also implemented token locks to gain governance influence. In the options space, Premia and Ribbon Finance offer vxPREMIA and veRBN tokens respectively, and StakeDAO, Yearn Finance, MUX Protocol, ApolloX, PancakeSwap, Planet, SushiSwap, Prisma Finance, and DeFi Kingdoms have also integrated variations of voting escrow mechanisms.
These protocols differ in how rewards are distributed and the benefits they provide to users, which we will explore further in this article. In addition, Solidly Labs, Velodrome, and Thena are notable decentralized exchanges that have evolved from Curve’s voting escrow mechanism and incorporated unique adjustments into their incentive structure through the ve(3,3) mechanism.
Balancer introduces an interesting change to the Curve model, which is that instead of directly locking the protocol's liquidity mining reward tokens, users lock LP tokens. Therefore, users do not need to lock BAL, but must lock the liquidity token BPT used to add to the BAL/WETH 80/20 pool to obtain veBAL.
Alchemix also uses a variation of the LP lock-in type in the voting custody model - users mint veALCX by staking 80% ALCX/20% ETH Balancer liquidity pool tokens.
The Y2K token is a utility token in the Y2K Finance ecosystem. After being locked into vlY2K, it can provide various benefits. It is worth noting that vlY2K is expressed in the form of locked Y2K/wETH 80/20 BPT.
Finally, UwU Lend launched a new lending network built on its own UWU token - by combining UWU with ETH and providing liquidity on SushiSwap, customers can earn UWU-ETH LP tokens that can be locked in the DApp for 8 weeks.
In token lockups, a key feature is the promise of higher rewards, such as voting rights, as the tokens are locked for longer periods of time. This encourages longer lockup commitments and greater influence over protocol decisions. What sets protocols apart is the maximum lockup period, which can range from a few months to four years. Governance veTokens also differ; some use a linear decay model that gradually reduces voting rights, as seen in Curve, Perpetual Protocol, Cream, Angle, Frax, and others. In contrast, some protocols maintain governance influence even after the lockup period ends, such as Premia.
Various protocols, including SushiSwap, Premia, Ribbon, Yearn, ApolloX, DeFi Kingdoms, and Prisma, allow early unlocking of their tokens but take punitive measures, such as retaining a portion of earned rewards or introducing high fines.
In summary, token staking provides users with greater governance capabilities and other benefits, a topic we will explore further in this article.
Earn rewards through soft lock
Soft locks, often referred to as staking, introduce a slightly different way of locking tokens. Unlike traditional token locks, users do not have to follow a fixed lock-up period and can unlock at any time. Nevertheless, to incentivize users to lock longer, protocols often employ strategies such as voting escrow, where rewards increase with the lock-up period and allow immediate exit.
Some protocols have waiting periods during the unlocking process, or implement vesting schedules to discourage frequent lock-unlock cycles. In some cases, unlocking fees are introduced to encourage stable and active user participation while providing flexibility.
Benqi Finance, a lending and liquid staking protocol on Avalanche, follows a voting escrow approach, distributing QI rewards through liquidity mining, which can then be staked as veQI. When staking QI, veQI balances grow linearly over time, up to 100x the staked QI. When unstaking, all accumulated veQI is lost. Yeti Finance, an overcollateralized stablecoin protocol, uses a similar system.
Beethoven X is the first official fork of Balancer V2 built on Fantom and is now available on Optimism. It follows the same principle of accumulating veTokens, but the difference is that it requires locking BEETS/FTM 80/20 BPTs.
The three most popular derivatives exchanges, GMX, HMX, and Gains Network, offer large rewards to token stakers as an incentive to stake tokens, but have not introduced veToken’s token economics model.
Other protocols such as Astroport, Abracadabra, Tarot, and SpookySwap allow users to stake tokens in exchange for yield tokens, which capture value over time and can be used to redeem staked tokens plus any accumulated rewards.
Camelot tried a different approach, with xGRAIL being a non-transferable escrow governance token that can be acquired by directly soft-locking GRAIL, but can only be redeemed for GRAIL after a vesting period.
Additionally, protocols such as Liquity, Thales, XDeFi, IPOR, and Moneta DAO all use unilateral soft locks as a way to obtain protocol rewards.
Like Beethoven X, other protocols also adopt LP soft locks. Interestingly, many protocols use LP staking mechanisms to incentivize liquidity as insurance to protect the protocol from bankruptcy. Aave and Lyra are two protocols that support LP staking and unilateral staking to incentivize liquidity into their security modules to prevent funding shortages. Users can deposit AAVE/ETH and WETH/LYRA LP tokens respectively in exchange for protocol rewards for the insurance pool. These tokenized positions can be redeemed at any time, but there is a waiting period. On Notional, users soft lock NOTE/WETH Balancer LP tokens to receive sNOTE tokens. NOTE token holders can initiate an on-chain vote to withdraw 50% of the assets stored in the sNOTE pool in the event of insufficient collateral for system capital replenishment.
Likewise, users on the Reflexer protocol are responsible for keeping the protocol well-capitalized by soft-locking FLX/ETH LP tokens on Uniswap v2.
Hegic uses a Stake&Cover model, where staked HEGIC tokens are used to cover the net losses of options/strategies sold by the protocol and earn net profits from all expired options/strategies. It is also like Aave and Lyra, where staking is not only used to share rewards, but also to provide protection. Hegic Stake&Cover (S&C) pool participants will receive 100% of the net premium income earned (or accrued losses), which is distributed proportionally to all stakers, and users can make withdrawal requests at any time and receive funds at the end of each 30-day Epoch.
Finally, a few protocols allow the user to choose between soft and hard locking.
dForce has launched a hybrid model with both soft and hard locks, where locking into veDF can earn more rewards than soft locking into sDF.
On Avalanche's cross-stablecoin exchange Platypus Finance, users can obtain vePTP by staking PTP or locking PTP. For every 1 PTP staked, users can obtain 0.014 vePTP per hour (linear accumulation). The maximum amount of vePTP a staker can obtain is 180 times the amount of staked PTP, which takes about 18 months. And through locking, the total amount of vePTP is determined from the beginning.
Tectonic allows TONIC tokens to be soft-locked into xTONIC, and the Tectonic protocol has a 10-day waiting period for withdrawals. It is similar to Tarot, but Tectonic allows users to maximize their rewards by locking their xTONIC tokens.
Rewards - Incentives and benefits to stakeholders
Now that we’ve explored ways to earn DeFi rewards, let’s dive into the various incentives that users can receive for holding, locking, or staking tokens. These include fee discounts, increased yields for liquidity providers, exclusive protocol features, revenue sharing, token issuance, and gauge voting.
Agreement Fee Discounts
Many platforms offer discounts to users based on their token holdings and actions. For example, Aave borrowers can lower their interest rates by staking AAVE tokens, while Premia users with more than 2.5 million vxPREMIA tokens can receive a 60% discount on fees. On PancakeSwap, transaction fees can be reduced by 5% when paying with CAKE tokens. Planet offers three tiers of yield-enhancing discounts by staking GAMMA tokens. HEGIC token holders receive a 30% discount on hedging contracts, and staking APX tokens in the ApolloX DAO can reduce transaction fees.
Revenue Sharing
Revenue sharing can be a powerful incentive, and many protocols now distribute a portion of their revenue to users who stake or lock their tokens, aligning their interests with the success of the platform and rewarding contributions to network growth.
Most voting escrow protocols share revenue with stakeholders on a pro rata basis, with protocols like Curve, Convex, Ellipsis, Platypus, PancakeSwap, DeFi Kingdoms, Planet, Prisma, MUX Protocol, Perpetual Protocol, Starlay, Cream, Frax, QiDAO, Angle, ApolloX, UwU Lend, Premia, Ribbon, StakeDAO, Yearn, Balancer, Alchemix, Y2K, dForce, Solidly, Velodrome, and Thena all distributing a portion of protocol revenue. Typically around 50% of fees go to shareholders, but governance votes frequently update these distributions to emphasize the importance of voting rights. Some exceptions in the voting lock group include Hundred, Burrow, and Sushiswap. Typically, protocol fees are distributed pro rata among stakeholders. However, a few protocols like Starlay, Solidly, Velodrome, and Thena distribute revenue based on stakeholder votes for specific gauges.
Regarding soft lock protocols, most include revenue sharing. Some protocols that adopt voting rights lock systems (such as Beethoven X, Benqi, Yeti, and Platypus) will factor in the lock period and number of tokens to determine the stakeholder’s revenue share.
In contrast, Aave, GMX, Gains, HMX, IPOR, Astroport, Camelot, Abracadabra, Tectonic, Tarot, SpookySwap, Liquity, Moneta DAO, Reflexer, XDeFi, and Hegic distribute returns based solely on the number of staked tokens.
Some protocols like Lyra, Thales, and Notional do not share revenue but reward users who soft-lock and secure their platforms through inflation emissions.
Inflation Emissions
Regarding inflation emission, many protocols allocate reserved community governance tokens to liquidity providers and active users to incentivize their participation. While most protocols reserve token emissions for LPs, lenders, and farmers, some protocols use them to reward stakeholders.
As mentioned earlier, Lyra, Thales, and Notional chose inflation emissions instead of revenue sharing, and SushiSwap also eliminated revenue sharing in its January 2023 token economics redesign. In some cases, both revenue sharing and inflation emissions are distributed to stakeholders. Protocols implementing ve(3,3) token economics mechanisms (such as Solidly, Velodrome, and Thena) all follow this approach.
Additionally, Aave, Planet, MUX Protocol, PancakeSwap, and Perpetual Protocol offer emission-based rewards alongside revenue sharing.
Protocols such as GMX and HMX also reward stakers with escrowed GMX and HMX, which are tokens that need to go through a one-year vesting period before becoming real GMX or HMX.
Measure voting
Voting escrow generates gauge voting, where smart contracts accept deposits and emit tokens to reward depositors. Gauge voting enables stakeholders to influence emission distribution, guiding the allocation of newly minted tokens in the ecosystem. This control over emission plays a key role in shaping the development and direction of the protocol.
Many protocols that use voting escrow support metered voting, including Curve, Convex, Ellipsis, Platypus, Hundred, Starley, Prisma, Frax, Angle, Premia, Ribbon, StakeDAO, Yearn, Balancer, Beethoven X, Alchemix, Y2K, Solidly, Velodrome, and Thena.
In contrast, protocols such as Perpetual Protocol, Burrow, MUX Protocol, and QiDao do not use metered voting. In addition, Euler Finance allows EUL holders to determine EUL liquidity incentives without pre-locking tokens, but they need to soft-lock tokens in the gauge to exercise their rights.
Additional benefits
Protocols in DeFi often go beyond direct revenue sharing or token emission to provide additional rewards and benefits to users.
Similar to metered voting, many protocols that follow veToken tokenomics will increase emissions for users who stake liquidity in gauge, notable examples include Curve Finance, Ellipsis, Platypus, Hundred, Prisma, Frax, Angle, Ribbon, StakeDAO, Yearn, Balancer, Solidly, and Starley.
Some protocols offer higher yields without metered voting, Burrow increases lending and supply returns, PancakeSwap enhances liquidity mining returns for LP tokens, Lyra increases LP treasury rewards, Thales increases emissions for active participants, Planet increases LP rewards, and ApolloX increases trading rewards.
Some protocols take a personalized approach to providing benefits. Camelot, for example, offers a plugin system where stakeholders can choose their benefits from options such as sharing revenue, increasing liquidity farming emissions, or accessing the Camelot Launchpad.
DeFi Kingdoms offers in-game items as a unique advantage, while Osmosis offers superfluid staking (as mentioned above, this is a method by which LP tokens can be staked in the network to simultaneously receive rewards for securing the ecosystem and providing liquidity).
Governance Tokens
In some DeFi protocols, tokens may lack direct utility such as revenue sharing, but retain value through participation in governance. Notable examples are COMP and UNI, whose primary value lies in governance. These tokens enable users to influence the direction of the protocol, where the type of protocol seems to play an interesting role. For example, DEX governance tokens are generally valued higher, even if they have fewer value capture mechanisms, and are better than tokens in other categories. These tokens account for a smaller proportion of DeFi's TVL. The possibility of protocol success, token appreciation, and even the promise of future utility are enough to be motivations for holding such governance tokens.
LDO is Lido's governance token, and holders can actively participate in decision-making by voting on key protocol parameters to manage the large Lido DAO treasury. Similarly, Compound's COMP token holders can vote on governance proposals or delegate their tokens to trusted representatives. Uniswap's UNI token is its governance token with a market value of more than $3 billion. UNI holders have the ability to vote, influence governance choices, manage the UNI community treasury, and determine protocol fees.
Other protocols that have not created specific reward mechanisms around their tokens include:
Orca, a decentralized exchange on the Solana network;
Synapse (SYN), a cross-chain liquidity network that effectively integrates 18 different blockchain ecosystems;
Hashflow (HFT), a gamified DAO and governance platform that allows participation in cross-chain decentralized exchanges;
StakeWise (SWISE), a liquid staking platform that focuses on decentralized governance and plays an important role in the Ethereum ecosystem;
Reward Distribution
Previously, we divided protocol rewards into five categories: discounts, perks, voting rights, inflation emission, and protocol revenue sharing. The first three reward types are fixed in their distribution methods, while inflation emission and revenue sharing can take a variety of forms.
Inflationary emission rewards mainly take the form of minting governance tokens, such as AAVE, LYRA, and SUSHI. However, some protocols provide inflationary emissions in the form of yield-generating tokens, where the number of original protocol tokens received upon redemption exceeds the number initially minted.
These include Astroport, Abracadabra, Tarot, and SpookySwap, where the appreciation in value of yield-generating tokens may come not only from inflation but also from protocol revenue. Other protocols distribute revenue in raw form, such as fees paid in ETH, or many protocols use a buyback mechanism to buy back their own tokens from the external market to increase their value and then redistribute them to stakeholders.
Many protocols have chosen a buyback and redistribution mechanism, such as Curve (CRV), Convex (cvxCRV), Perpetual Protocol (USDC), Cream (ycrvlB), Frax (FXS), QiDAO (QI), Angle (sanUSDC), Premia (USDC), Ribbon (ETH), StakeDAO (FRAX3CRV), Yearn (YFI), Balancer (bb-a-USD), Beethoven X (BEETS), Gains (DAI), HMX (USDC), IPOR (IPOR), Abracadabra (MIM), DeFi Kingdoms (JEWEL), PancakeSwap (CAKE), Planet (GAMMA).
Other protocols reward stakeholders directly in accumulated tokens, such as GMX, Ellipsis, Platypus, Starlay, Solidly, Velodrome, Thena, and Liquity.
In addition, some protocols implement token burning. Instead of redistributing repurchased protocol tokens, they burn some of them to reduce the circulating supply, increase scarcity, and hopefully increase the price. By holding tokens, users indirectly earn protocol revenue because the protocol uses accumulated rewards to remove these tokens from circulation.
Some of the protocols conducting token burns include Aave, Gains, Camelot, Starlay, PancakeSwap, UwU Lend, Planet, MakerDao, Osmosis, SushiSwap, Reflexer, Frax, and Thales.
Conclusion
While the distribution of protocol categories covered in this article may not fully reflect the current state of the entire DeFi field, some key insights can still be drawn from it.
Specifically, the article mentions 14 lending protocols, 20 DEXs, 5 derivatives protocols, 7 options protocols, 5 liquid collateralized derivatives (LSD) protocols, 10 CDP protocols, and 9 other protocols. Of course, protocols with similar characteristics are also analyzed but not explicitly mentioned.
Among them, DEX tends to lock, especially in the context of the voting custody model, while lending and CDP platforms show a preference for soft lock. However, some CDP protocols still use hard lock. The reason behind this difference may be that DEX has a greater demand for liquidity than other protocols. Lending and CDP protocols usually strike a balance between liquidity supply and demand. Because when the demand for loans is high, there is usually enough supply to meet the demand because the interest rate is adjusted accordingly. In contrast, the main source of income for DEX liquidity providers is transaction fees, and it may be challenging to compete with mature DEXs.
Therefore, DEXs often use inflationary incentives and manage token supply through locking mechanisms. Generally speaking, soft locks are the more common approach in DeFi protocols, but there are some notable exceptions among the top DEXs. This trend is not only affected by the category of the protocol, but also by its launch time and reputation. Many of today's leading DEXs are among the earliest DEXs. The decision to lock governance tokens in a mature protocol is very different from the decision to lock tokens in a newer, often experimental protocol.
Today, most protocols that use lock-up mechanisms choose to reward users in the form of shared revenue rather than relying on inflationary token emissions. This shift represents a significant improvement over the past few years, allowing protocols to consistently incentivize users to act in ways that benefit the community as a whole. This is the clearest way to align incentives, although its long-term viability remains uncertain due to regulatory concerns.
Token destruction is the most commonly used method when distributing revenue. From an economic perspective, it seems more logical to buy back and redistribute tokens on demand, such as distributing them to token holders who play a more important role in the protocol. However, from a regulatory perspective, buying back and destroying tokens is the simplest way to return protocol revenue to token holders without making it look like a dividend distribution and potentially causing the token to be classified as a security. Although this approach has been effective for some time, the future of this mechanism remains uncertain. In addition, some protocols are also greatly influenced by the token economics they endorse at the time of listing or token update. The emphasis on actual returns and revenue sharing is the mainstream narrative in DeFi, which is not only influenced by the protocol, but also by broader market conditions. For example, it is difficult for us to imagine that a token that needs to be locked for four years will have much appeal.
The voting-hosted token model has evolved into the most comprehensive approach, including not only token lock-ups but also voting rights, incentive management, and revenue sharing.
Despite this, prominent protocols often grant voting rights through tokens without a clearly defined value capture mechanism. While governance power has significant value, this approach is not feasible for smaller or recently launched protocols, and even if these protocols quickly gain adoption and contribute to the DeFi community, whether they can stand the test of time remains the biggest challenge.
