Understanding ve(3,3)
Decentralized exchanges, or DEXs, are core components of the DeFi ecosystem, providing users with a way to trade tokens without intermediaries. But as these platforms grow, aligning the interests of various participants, such as liquidity providers, traders, and protocols, becomes essential to their success.
This alignment is a central aspect of ve(3,3) DEXs, a creative model that drives user cooperation for the benefit of all involved.
What is ve(3,3) and How Does It Work?
In traditional DEXs, liquidity providers deposit tokens to create pools that facilitate swaps. However, ve(3,3) DEXs go a step further, offering emission tokens as rewards to liquidity providers, who earn these tokens in exchange for their contributions. Yet, these emission tokens are often inflationary, which can erode their value over time.
The ve(3,3) model addresses this by introducing vote-escrowed tokens, or veTokens. Holders can lock up their emission tokens to receive veTokens, which grant them voting rights on where future emissions are directed. By voting for specific liquidity pools, veToken holders can ensure that emissions flow to pools with the highest demand, creating an incentive for liquidity providers to deepen these pools, leading to lower slippage and better trading conditions.
How ve(3,3) Creates a Flywheel Effect
In a ve(3,3) system, everyone’s objectives align around maximizing liquidity depth. Let’s say a protocol incentivizes a popular trading pair, such as $USDC/$STAR on Aerodrome. veToken holders can vote for this pool, which increases its emissions, attracting more liquidity providers to deepen the pool further. This results in more trading fees and swap activity, encouraging even more votes and emissions—a flywheel effect that continually strengthens the pool’s liquidity.
Adding further incentives, protocols and users can bribe veToken holders to vote for specific pools, ensuring the most liquid pools also receive the highest rewards. These bribes create an additional layer of alignment, as bribes only make sense if they yield at least an equivalent amount in emissions, ensuring that incentives are economically viable for all parties involved.
ve(3,3) in Action
This ve(3,3) structure aligns well with Sphere Finance's ecosystem, particularly through collaborations like those with Preon, which uses its own stablecoin, $STAR. By participating in pools like $USDC/$STAR, Sphere benefits indirectly through its $vePREON holdings and the fees generated by $STAR collateralization, creating a robust cycle of yield generation that benefits Sphere users over time.
For example, when Preon bribes the $USDC/$STAR pool, it encourages veToken holders to direct emissions to this pool, boosting liquidity for the benefit of Preon and other liquidity providers. This relationship exemplifies how Sphere and Preon leverage the ve(3,3) structure to align user incentives toward creating deep, efficient liquidity pools, driving yield back to holders within the Sphere ecosystem.
Why ve(3,3) Matters for DeFi Users
For DeFi users, ve(3,3) introduces a new model of cooperation and mutual benefit. It creates a sustainable, incentive-driven structure where all participants—liquidity providers, traders, protocols, and veToken holders—contribute toward shared liquidity goals. This model not only improves the functionality of DEXs but also maximizes yield potential for those willing to participate in long-term liquidity provision.
As the DeFi landscape continues to evolve, models like ve(3,3) are likely to become increasingly popular for their ability to balance incentives and stabilize token value. To explore how ve(3,3) dynamics can work for you, and to see the power of these aligned incentives firsthand, explore the Sphere ecosystem and explore innovative yield-generating opportunities with Dyson and Preon.
Ready to learn more? Visit our Discord community to stay updated on Sphere Finance’s latest strategies and developments.