The Benevolent Dictator
A case study into the revival of ve(3,3)
Power corrupts; absolute power corrupts absolutely. This adage holds true in politics, but what about in a decentralized, trustless financial system? Can dominating powers use their influence for good, or are they destined to fall from grace like so many past leaders? This research article by Jack McCarthy attempts to see if smart contracts and DAOs can be the secret weapon needed to fight against corrupted despots.
The one exception to the absolute power sterotype is that of a “Benevolent Dictator.” Throughout history these leaders have wielded absolute political power, yet ruled for the benefit of the population as a whole. These rulers, while autocratic, tend to produce economic and cultural prosperity. Take for example, Lee Kuan Yew, who along with the People’s Action Party ruled over Singapore from 1959 until 1990. Following the Island’s independence in 1965, under Yew the country rapidly grew from an agrarian society into one of the 4 Asian Tigers and now has the second highest GDP per capita in the world.
So what country does the benevolent dictator rule in this story? Dystopia Swap. A ve(3,3) decentralized exchange (dex) that improves upon all of Solidly’s downfalls. Different from other ve-dexes like Curve, Dystopia offers swaps for both stable and volatile token pairs. Meaning in one place, you can provide FRAX-WETH in a Uniswap v2 style AMM and DAI-USDC in Curve v2 style AMM.
Dystopia aims to incentivize trading fees rather than liquidity with the ve(3,3) model. Liquidity providers (LPs) receive $DYST token emissions as incentives and veDYST stakers receive trading fees for the pools they vote to direct emissions to. This creates a flywheel effect where the pools with the highest trading volumes receive the most votes, thus incentivizing LPs to deposit into these pools for the rewards. Increased deposits makes the best trading experience for users since they experience low slippage.
In just over three weeks since emissions began, Dystopia has seen a peak of $28M TVL flow in (now at $14M), over $1M in trading volume each day, all while offering over 20% APY on popular stablecoin pairs. Expect to see the daily volume jump rapidly in the very short future, as integrations with dex aggregators such as 1inch and Paraswap have just been completed in the past two days.
Now if Dystopia is the country in this case, we still need a benevolent dictator to complete the story. Rather than subverting the existing power structures to assume its power, this Dictator was bestowed the right to rule from its loyal allies.
It all begins with Dystopia’s initial token distribution, which gave 100% of the initial token distribution to powerful allies in the form of 4 year locked veNFTs. While these allies received 100% of the ammunition supply leading up to the war, their firepower will be depleted through $DYST emissions, ultimately getting diluted to just 20% of the total supply after 4 years based on emissions projections. (given 90% $DYST is staked)
First week with 100% supply in the Allies’ hands before emission:
- The Polygon Ecosystem DAO — 55%
- Genesis Liquidity Stablecoin Providers (FRAX & QiDAO — 20%
- 26 Polygon native dApps that qualified for Polygon Liquidity Mining 2.0–25%
By the end of 4 years the 20% distribution will be:
- The Polygon Ecosystem DAO — 11%
- Genesis Liquidity Stablecoin Providers (FRAX & QiDAO) — 4%
- 26 Polygon native dApps that qualified for Polygon Liquidity Mining 2.0–5%
So initially, each dApp received 0.96% of the total supply, which will eventually decrease to a minimum of 0.19% . This gave each Polygon dApp far more than the 0.2% threshold needed for whitelisting their native tokens for emissions eligibility at the beginning. Once whitelisted, these protocols can use their veNFTS to direct $DYST emissions to their liquidity pools at absolutely no cost to themselves.
More importantly, it gave the Polygon Ecosystem DAO 55% of the supply initially, until it reduces to 11% over time. A full 57x more voting power than any single dApp. Tyrannical? No. Extreme Power? Yes.
The Great Leader
Our story continues with our main character, the Polygon D(ictator)AO. So who is this mystery cabal? Currently, the Polygon Ecosystem DAO is run by a multisig of 6 doxxed DeFi leaders from Polygon, Aave, Frax, QiDao, and Dystopia. However, to further embrace being a community owned dex, the DAO will decentralize and be run by a Grants Committee voted upon by veDYST holders that will serve on 1 year cycles.
“With great power comes great responsibility” — Spiderman’s Uncle or something like that
While giving the DAO massive power, Dystopia ensured there were guard rails such that the DAO always acts in the best interest of the community and Dystopia users. The DAO must vote for the highest performing pools based on volume, which in turn generate the most trading fees. This guarantees that rewards will always flow to popular pools regardless of targeted bribes and/or how users and dApps vote.
More so, all the trading fees earned by the DAO will be used for grants within the Polygon DeFi ecosystem to support new native projects and builders. In this way, using Dystopia as Polygon’s main dex ensures future growth for the entirety of Polygon DeFi. It was specifically designed to act as a community based dex for users and projects alike. Initially, the DAO will hold 50% of the grant voting power and veDYST holders will have the remaining 50%. During these voting stages, the DAO will deposit the funds into LP positions in order to compound the yield and earn $DYST to increase its potential for generating grants.
The DAO is bestowed with significant power — major influence on voting for pool emissions and 50% voting majority on grant allocation — but is this a bad thing? No, by embracing the role of Benevolent Dictator, Dystopia is able to create a unique selling point that differentiates itself from other dexes. When deciding between what dex to use, if they both have the same swap fees and deep liquidity, the one that generates benefit for the entire DeFi ecosystem will be used. When deciding what dex to LP into, if they both have high performing pools with similar volumes, the dex that is guaranteed to distribute emissions from a benevolent dictator will be used. Through its veNFT allocation to the Polygon Ecosystem DAO, Dystopia is that uniquely positioned dex.
Other than the purposeful allocation to the DAO, Dystopia’s airdrop to the 26 polygon dApps ensured that each DAO received the same amount. Dictators and socialism, a match made in heaven (or maybe hell)! While throughout history this pairing has not been successful, in a world run by code rather than military might, the outcomes shall prove to be much different. In fact, this equal distribution is incredibly important for the effectiveness of the $DYST rewards as incentives.
One of the obvious benefits of an equal distribution is each protocol beginning with the same ability to draw in liquidity deposits for their respective token pools. Every protocol needs deep liquidity for seamless trading of its native tokens, and if one protocol dominates the control of emissions, then users are incentivized to deposit in only that single pool. This initial emissions equilibrium enables both newer and established protocols to have a fighting chance at utilizing Dystopia for their liquidity needs. Of course, projects and DAOs can provide their own liquidity to earn $DYST, or purchase more $DYST to increase their voting power, but beginning with an even playing field, then seeing how each project adapts will be an interesting social experiment that plays out.
Oligarchy vs Socialism?
Velodrome, another ve(3,3) dex that launched on Optimism after Dystopia’s release, similarly gave locked veNFTs to protocols on their chain, but opted for an unequal distribution. Velodrome decided to give each protocol a subjectively determined amount. This distribution style massively benefits the established blue-chip protocols that receive more of the initial distribution, while hurting the upcoming native projects that can drive new and unique innovations during this bear market.
Since Veldrome’s launch, Dystopia has maintained a stable TVL within the $15–25M range, all while enduring the worst bear market in recent times. Conversely, Velodrome saw a massive run up in TVL initially, peaking at just under $50M, but has since dropped below Dystopia on its down only trend.
Both Polygon ($MATIC) and Optimism’s ($OP) native tokens dropped by 38% and 41% respectively since June 10th, when the market began to crash. $WMATIC makes up 9.92% of Dystopia’s TVL, while $OP makes up 5.99% of Velodrome’s TVL, meaning that the recent drop in native token prices cannot explain this massive performance gap. Rather, three more nuanced differences stick out to me as answers for why Dystopia has outperformed Velodrome: Emissions, Benevolent Dictator, and Yield Optimizers.
The preferable emissions schedule of Dystopia is a function of the amount of $DYST staked. A higher percent of the tokens staked leads to lower emissions, and thus dilutes $DYST holders slower. Velodrome opted instead for beginning with 15M $VELO in emissions (3.75% of initial supply), which then decay at a rate of 1% each week. The added incentive for $DYST holders to stake, in order to avoid dilution, comes with added benefits, such as boosted $DYST rewards for stakers who also provide liquidity. Velodrome lacks this extra flywheel effect for increasing liquidity, while Dytopia’s emissions are entirely designed around it.
Additionally, Velodrome lacks the community based connection that Dystopia so strongly clings to. Velodrome airdropped 60% of the $VELO supply to Optimism users, while Dystopia gave 55% of its supply to the Polygon DAO. The issue with airdropping to a handful of ecosystem users is that they have the potential to be parasitic and simply sell off the airdrop immediately. These users have no connection to the protocol and are oftentimes more than happy to cash out a free check. Dystopia, however, wanted the airdropped tokens to go to interested parties. While no Polygon users saw direct financial benefits from the large airdrop to the DAO, the Benevolent Dictator has agreed to permanently re-lock its veNFT for the maximum length of 4 years. This removes a massive portion of the available $DYST supply, keeping the price-action as healthy as possible for an emissions based project. Through the Benevolent Dictator role, the Polygon DAO indirectly incentivizes users to deposit liquidity and earn $DYST, knowing that the emissions will actually maintain value due to the permanently low supply.
The last competitive advantage lies in the protocols building on top of Dystopia. Penrose, a yield optimizer for Dystopia, plays the same role as Convex in the Curve ecosystem. Penrose allows users to deposit their $DYST for a liquid staked version of the asset, $penDYST. Penrose then locks this protocol-owned $DYST for the maximum 4 years. This ensures that users who stake their Dystopia LP positions on Penrose earn the maximum possible boosted $DYST rewards along with $PEN emissions on top. Velodrome’s design does not currently support yield optimizers, but users may demand this innovation in the future. For the meantime, the lack of yield optimizers prevents Velodrome users from utilizing the type of composability that the Dystopia ecosystem currently offers.
Looking forward 6 to 12 months, TVL and daily volumes can be surface level indicators to compare which distribution style was more effective, however an essential but often overlooked metric to look at will be the innovations that arise as a result of each dex.
The veNFTs allow for projects to incentivize liquidity without having to dilute their own native token. Non-diluting emissions are a massive gift to these protocols, allowing them to test new ideas at zero cost. Take for example Curve, where DAOs and protocols had to either accumulate $CRV and/or $CVX or spend thousands of dollars in bribes to drive emissions to their pools for liquidity. Spending massive amounts of protocol owned liquidity to test out a new mechanism or product would be ludicrous for any project through Curve, but Dystopia provides this same mechanism for absolutely free.
So what innovations have we seen already in two weeks since the emissions began? VESQ, a reserve currency on Polygon, proposed a method for easily creating their own stablecoin by leveraging $DYST emissions. Simplifying the blog post, VESQ can issue bonds for its native $VSQ token in return for $MAI and $DAI. Following an even accumulation of both assets, VESQ would use half of the accumulated $MAI/$DAI to mint $vUSD, their new stablecoin. Since VESQ received a veNFT from Dystopia, it can use its voting power to not only whitelist and create a gauges for $vUSD/$DAI and $vUSD/$MAI, but also vote for $DYST rewards to go to the LP’s of the pools. With incentives in place, demand for $vUSD will be created, and VESQ can allow users to permissionlessly mint $vUSD up to a certain threshold. Hence, with 0 expenditure, VESQ can ensure that the users of $vUSD are compensated for their participation in the liquidity pools. This mechanism not only creates new value for $vUSD holders but also the $VSQ holders, showing how simple value creation through Dystopia can be for the 26 dApps that received veNFTs.
While we won’t see 25 more stable coins created through this mechanism, each protocol can leverage the $DYST emissions to reinforce its current model or try something brand new at zero cost. With an overarching Benevolent Dictator that supports the Polygon DeFi ecosystem by directing emissions to burgeoning and well-performing liquidity pools, alongside a socialist airdrop, Dystopia may provide the necessary roadmap for other chains to create community based decentralized exchanges. But don’t take our word for it, let’s let the innovation speak for itself.
Author, Jack McCarthy, is a Decentralized Finance (DeFi) Analyst at Polygon, highly interested in designing premier tokenomics designs and real world applications of DeFi. Also, he is currently the Co-President of Boston College Blockchain Club, while studying finance and business analytics at the Carroll School of Management. Feel free to reach out on twitter @offdeblockchain