The world of blockchain and cryptocurrency is constantly evolving. Decentralization allows for profound changes and improvements to how day-to-day operations occur. Vote-escrowed tokens, or Ve tokens, are a new trend that may change the governance landscape forever.
Understanding Vote-escrowed tokens
Most people may not be familiar with this novel term. Unfortunately, even the most diehard crypto enthusiasts cannot keep up with every new trend in real time.
Vote-escrowed tokens are a new type of cryptocurrency used to vote on proposals. A trusted third party holds these tokens in escrow and will only release them if certain conditions are met. It combines a traditional escrow system – such as the one for payments – with decentralized governance elements, such as those found in DAOs.
However, there is a twist to these assets. Vote-escrowed tokens are a new way of voting in which the voter first deposits their vote into an escrow account and can only retrieve it after a trusted party releases the vote. Doing so ensures that voters cannot change their minds or cancel their votes after they have been cast, which makes these tokens secure and reliable.
For the user, Ve tokens enable governance voting, earning staking rewards, and voting on boosts to certain token pools. Additionally, holders can select a lockup period for their assets, with longer lockups leading to more “token weight”. Curve was one of the first projects to introduce these tokens, and other projects followed. Unfortunately, the first generation of vote-escrowed tokens mainly allowed big players to consolidate control, warranting a different approach.
A Growing DeFi Trend
While it may take some time to see vote-escrowed tokens in a real-world scenario, they have become prevalent in decentralized finance. Most protocols and services in DeFi are governed in a decentralized manner. Community members holding governance assets can submit proposals and vote on other improvements. If a majority consensus occurs, changes will be implemented by the project’s developers.
The primary objective of these assets is facilitating better-coordinated governance and voting. Additionally, Ve tokens can provide a new incentive to users committed to the project rather than its rewards for monetary gain. It is also worth noting these tokens can be issued on top of other rewards, as DeFi is a very modular industry.
For example, Aura Finance builds on the Balancer ecosystem. With Ve tokens, it provides maximum incentives to Balancer liquidity providers. Those users can acquire auraBAL tokens, which they can stake to receive existing rewards from Balancer and Aura. Additionally, the vote-escrowed tokens allow Aura Finance to benefit from the voting power of users already staking Balancer tokens.
The composability of decentralized finance enables such intricate protocols to come to fruition. Aura Finance brings more value to Balancer – for those who want it – while benefiting from increasing governance power. It is a significant change that may write a new chapter for Decentralised Autonomous Organizations )DAs) and how users govern them.
A Positive Change When Done Well
There are many reasons for DeFi protocols to explore vote-escrow tokens.
First, they help align incentives between the protocol and token holders with the help of flexible lockup periods. The large accounts holding vast amounts of tokens are an essential part of this equation, assuming they commit to long lockup periods.
Second, they fuel DAO participation. Most DAOs have plenty of token holders and only select few voters or participants. Longer lockups with Ve tokens can yield extra votes, enabling users to speak up louder. That will, in turn, require long-term lockups.
However, vote-escrowed tokens need to overcome key challenges.
Locking up tokens longer can lead to illiquidity and may attract scammers and other orchestrators. Additionally, longer lockups wouldn’t necessarily prevent developers from dumping their token share from day one. As the users reduce liquidity, the developers have a monetary incentive to sell when prices are high. Plus, there is the “laissez-faire” attitude developers exacerbate may embrace, as the lockups give them more “time to deliver” without giving in their all.
The second generation of Ve tokens seems to solve some inefficiencies from the past. However, it remains a novel concept that requires solid long-term planning and thinking to be successful. Even so, vote-escrowed tokens are a welcome addition to the DeFi ecosystem. The era of Aura Wars and Balancer Wars has begun.