Published in · 5 min read · Dec 15, 2021
Angle Protocol is up to a major upgrade of its governance system. In this series of articles, we explore the changes of the system and see how they have been designed to incentivize mutually beneficial interactions within the protocol.
In this first article, we focus on the upcoming locking mechanism of the ANGLE token and its advantages for the protocol and its stakeholders.
One issue of the classic liquidity mining programs like the one in place today with Angle is the presence of “parasite” liquidity, coming to farm the reward tokens and dump them on the open market as soon as they are claimed. It adds sell pressure to the token price from people not interested in holding the protocol’s governance token for the long-term.
This can happen as tokens distributed are not locked or vested in any way to align time preference of farmers with that of the protocol.
The potential solutions could be:
- Vest rewards or unlock them at a later date
- decrease rewards
- incentivize farmers to lock rewards (gov token) themselves
The only effect of solution (1) is to delay the price dump, and solution (2) decreases emissions, reduces APY and reduces distribution, which is not ideal either. The third option, though less obvious to put in place, is to align stakeholders (farmers) time-horizons with that of the protocol, by incentivizing them to lock tokens through boosted rewards and interests redistribution.
This is what the veTokens model already implemented by Curve (veCRV) and FRAX (veFXS) are all about. Starting from early January, Angle will implement the same system and introduce a veANGLE token (“voting-escrowed ANGLE”) becoming the new means of governance of the protocol.
Below we explain in more details how locking ANGLE and veANGLE tokens work, as well as how having a locking mechanism can benefit ANGLE tokenomics, token holders, and the protocol itself.
To get those boosted rewards, interests from the protocol, and voting power, users will need to lock ANGLE into veANGLE for a period ranging from 1 week to 4 years. The longer ANGLE are locked, the more veANGLE can be obtained, leading to a bigger share of rewards and interests, and more voting power. With time, as the unlocking date gets closer, each address’s veANGLE balance decreases to reflect this reduction in remaining lock time.
ANGLE’s locking mechanism will work like CRV/veCRV one:
One other important property of veANGLE tokens is that they are not transferrable. Once ANGLE tokens are locked into veANGLE, there’s no native way of getting rid of this commitment to the protocol.
The first direct effect of this mechanism is that it aligns the time-horizons of stakeholders, whether they are farming the token or participating in governance, with that of the protocol. The long-term supporters of the protocol, locking tokens for a longer period of time, will be rewarded accordingly by boosted rewards, interests redistribution, and more voting power. More short-term oriented people, with smaller veANGLE balance, will receive less of those.
The second effect is that profit maximization stakeholders will have to switch their time-horizon from short to long-term. If they want to keep maximizing rewards, they will be forced to get involved in the protocol’s governance, and keep its best interests at heart for the long-run as they are tied to its success. Farming passively as they were before will become sub-optimal. Thanks to this, the involvement and care in the governance of the protocol should increase.
As a result, the main stakeholders of the protocol are now committed to its long-term success, and every stakeholder is financially incentivized to commit long-term as well. This should help shift the token holders involved in governance towards long-term thinking, which is more beneficial for the protocol as a whole.
Another benefit of this locking mechanism is the reduction of the short-time sell pressure on the governance token. As stakers are required to lock ANGLE for a significant amount of time, turning it into untransferable veANGLE, it reduces the ANGLE supply available to be sold in the market.
Tokens that would previously be sitting idle, waiting to be sold, are now locked. Additionally, the quantity of ANGLE locked should increase over time as more people want to stake on the platform. This creates a positive feedback loop reducing the effect of the high liquidity mining distribution.
Looking at the CRV/veCRV and FXS/veFXS can tell us a little bit about the success of such models. We see that 42.58% and 86% of each tokens circulating supply are locked in veTokens, for an average of 3.6 years and 1.1 year respectively! This represents more than $1B in locked tokens for these two protocols only. These are very significant numbers, and show how much users understand and are interested by this kind of tokenomics. Indeed, when looking at veCRV supply over time (March 2021 — present) we see a constant uptrend in locked tokens, which reflects an increase both in number of tokens locked and mean lock time.
In this piece, we broadly detailed why this locked tokens model could be so beneficial for both token holders and the protocol. In short, having to lock ANGLE for an amount of veANGLE depending on the lock time adds an interesting time variable to the incentives redistribution and voting power. This aligns the protocol and its stakeholders time-horizons towards the long-term success of the protocol.
Another major benefit of this design is that, by financially incentivizing locking tokens, a big share of the token’s supply will end up locked instead of being sold, reducing the natural sell pressure happening with big liquidity mining incentives.
Now that we know the advantages of a locked-tokens model, in a second articles we will dig into the boosted rewards and interests redistribution system that constitute the main incentives for locking tokens.
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This article is not intended to provide legal, financial or investment, or other advice and we recommend that you do not rely on, and do not make any financial or other decision based, on this article.
