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DeFi Projects Embrace Vote Locking Governance Tokens to Boost Valuations

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Vote locking governance tokens is the new hotness for decentralized finance protocols.

DeFi had a good 2021 but the tokens underlying the big protocols did not. DeFi tokens have been hammered, and many of their investors are wondering if they shouldn’t have just bought and held ETH instead. 

Founders and DAOs are looking for ways to enhance the value of their tokens.  More seem to be following the lead of Curve Finance, which has required DAO participants to lock their CRV tokens up to participate in governance ever since the governance token came out in 2020.

Vote Locking System

The community behind the top yield aggregator, Yearn Finance, recently decided to follow Curve’s lead and shift to a vote locking system, but it’s only the latest in a growing string of projects to do so.

The algorithmic stablecoin project Frax Finance switched to requiring vote locking long ago. Doing so “coordinates people’s long term outlook by letting them all lock their tokens up to 4 years permanently so that people can see on-chain that there’s a VERY LARGE amount of people bought into this thing and have sunk costs here,” Sam Kazemian, Frax’s founder, told The Defiant over Telegram.

For users, staking is appealing because it tends to come with enhanced yield. For example, Yearn has already been using its protocol profits to buy its governance token, YFI, off the open market. Once this new proposal has been implemented by Yearn’s developers, purchased YFI will be distributed proportionally to all stakers.

Several other protocols have already opted to take a yield-enhancing vote locking approach to governance.

The aforementioned Frax was early. Another early adopter was Pickle Finance. Pickle is a yield aggregator somewhat in the Yearn universe. It launched its own version of a locked voting token it calls DILL in 2021, in collaboration with Yearn creator Andre Cronje. DILL holders share 45% of the profits the Pickle project earns as well as boosted rewards in new PICKLE emissions.

Another yield aggregator, yAxis, has also moved to vote locking with its third version, launched late last year. Staking the YAXIS token provides voting rights and a boost to the users rewards in different pools. It can boost them as much as 2.5X.

Protocol Profits

“We’re seeing the proportion of YAXIS tokens locked continuing to grow. It’s at 40% or so now, with a bias towards longer lock times,” Mr. Mister from the Y-Axis team told The Defiant over Discord. 

Vesper Finance, a protocol for passively growing holdings, also uses staking for users to grow their holdings of its native token, VSP. To vote on Vesper upgrades, users need to hold staked VSP (vVSP). The staked version also earns protocol profits. All profits on Vesper’s other pools are converted to VSP via Uniswap and distributed to stakers.

Not every protocol binds voting and earnings.

Compounding Effects

BarnBridge Finance provides an incentive to lock tokens, but it only increases voting power. Users can vote their BOND token without staking, and staking doesn’t have yield. Similarly, Ribbon Finance is in the middle of a discussion to implement locking for voting, but it doesn’t come with a share of Ribbon’s protocol profits, according to co-founder Julian Koh.

Regardless, Kazemian argued that it’s the lock that really matters. 

“That allows a community to form and attention to stay on a particular protocol as its ecosystem is built out. This has compounding effects as it builds on top of itself and more and more people’s attention is locked,” Kazemian said.

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