ve(3,3) profitability in the bull market

A look back at my old predictions, and a look forward to new catalysts

Six months ago I wrote ve(3,3) DEXes: a profitability analysis.

Six months is a long time in crypto. The market has drastically changed. Let’s evaluate the main points raised at that article, how these have played out, and look forward to how ve(3,3) will continue to evolve.

I will again use THENA, the ve(3,3) DEX on BNB, to provide concrete examples. If the points in this article are too complex, read the previous article first for much more explanation.

1. Calculating protocol profitability

A financial analysis is what separates gambling from an educated investment. DEX profitability analysis or related outcomes such as P/E ratios are common on crypto twitter. But often, they are incorrect.

On a ve(3,3) DEX:
profitability = revenue — ((emissions-rebase)*token price)

Revenue is defined as trading fees + bribes. To be complete, other financial value flowing to the token locker should also be considered revenue, such as airdrops and lock incentives.

Example of a profitability analysis: epoch 62 on THENA. Note that 10% of trading fees goes to theNFT holders instead of veTHE voters. Only do profitability analysis if you really know the protocol and know the numbers are correct (don’t blindly trust every value on a dashboard, confirm with community if needed)

Now it should be noted that a profitable epoch does not mean you should buy the token or that an unprofitable epoch means you should not buy the token. It is just a profitability analysis over an epoch, which is just a single data point.

You probably should take the historical pattern into account and especially your future expectation. The latter is dangerous because it can become wishful thinking. A good question to ask is: do I have a good reason to believe that the ve(3,3) DEX will increase its relative dominance on its chain?

For example, a bull market is not a good argument. In a bull market, almost all coins will go up. You need to know if the token will outperform. Two example of better arguments:

• “THENA is the biggest DEX on BNB without a Binance listing. I think it’s a matter of time before it happens. And I’ve seen the massive impact on Aerodrome’s stats and price when Coinbase started supporting them.”
• “Soon THENA will have Algebra V4 tech. I think that will give them an edge against the tech the competitor DEXes have on the BNB chain.”

Ideally, you have a combination of factors to determine whether to invest or not. For example, the combination of a profitability analysis showing that the ve(3,3) token is underpriced based on current revenue, a historical pattern that gives some confidence it’s not an outlier epoch, and promising upcoming catalysts.

2. Autocompounding liquid wrappers are underappreciated

THENA has their token $THE that can be locked. Partner protocol Liquid Driver provided a liquid wrapper liveTHE with the following characteristics:

• Liquid
• No need to manually vote each week
• Auto-compounds
• Unlikely to permanently depeg due to exit option for underlying veTHE.

Current liveTHE staking APR.

It’s important to understand the auto-compounding nature. liveTHE uses its underlying veTHE to vote, with voting rewards used to market buy $THE. Subsequently, that $THE is locked to mint new liveTHE, which is distributed to the liveTHE stakers. Therefore, liveTHE represents weekly $THE buy and lock pressure THE. Essentially, liveTHE is an opt-in to accumulate more $THE every week.

At the time of my previous article, the liveTHE dominance was 23% (liveTHE dominance is the liveTHE to veTHE ratio expressed as a percentage). In combination with the other stats at that time (specifically revenue, emissions, rebase, token price, and locking ratio), I showed how the weekly buy pressure from liveTHE single handedly compensated for the total weekly protocol cost.

Six months ago, live single handedly offset all sell pressure on Thena

Because of liveTHE’s auto-compounding nature, I predicted that the liveTHE dominance would continue to go up. And indeed, liveTHE dominance has been up only (from 23% to 32%).

liveTHE dominance has been up only. This represent continuous growth in the buy and lock pressure on $THE

As a result, the relative $THE buy pressure has increased every week. This in combination with the absolute increase in revenue, has resulted in an exponential increase in absolute $THE buy and lock pressure each epoch. The THENA community now is fully aware of this flywheel, with the community drooling at the new buyback records every week. Ofcourse, this flywheel has massively boosted the $THE price.

There are still some ve(3,3) teams that seem to believe that a veNFT split function is detrimental. They state some potential concerns, but those are simply (net) wrong. While the live-product can be used as an exit mechanism, the data simply shows that it results in massive net buy and lock pressure on the underlying token. Without live-wrapper or a similar mechanism like Velodrome’s Relay in place, it’s just much more difficult to invest in a ve(3,3) token even if the DEX is profitable. You want to know there is consistent buy and lock pressure and you’re fully liquid.

3. Bribes close the gap

When the trading fees during an epoch are lower than the value of the emissions, it’s extremely capital efficient for protocol to bribe token holders for their votes. We discussed that this should help close the profit gap and ensure that epochs should be close to a net balance even when trading fees are low (if there are no fundamental problems). This bribe concept is hugely beneficial for partner protocols and the DEX in a bear market where trading fees are relatively low.

When trading fees are lower than the emissions going to LPs, bribes are capital efficient. This makes it likely that the profit gap is largely closed.

Bull market: from bribes to voting incentives?

Since the previous article six months ago, the market has completely changed. With the recent BTC ATH, it’s clear we’re in a bull market. Many ve(3,3) tokens are up massively over the last couple of weeks, and new ATH in trading fees happen daily. This is absolutely great, but it also introduces new challenges.

THENA revenue. On a good ve(3,3) DEX in the bull market, fees should exceed emissions to LP and greatly exceed bribes. Source

Looking at THENA’s revenue over time, it’s clear that total revenue has increased recently as the bull market intensifies. But it’s interesting to see that the bribes are only a minor contribution to revenue. In the bear market, we saw the opposite: fees were a minor contribution to revenue. How can we explain this?

Remember how bribes were capital efficient when epochs would be at a loss based on trading fees alone? Well right now, trading fees exceed the emissions value in the good ve(3,3) DEXes. This means that bribing is not very capital efficient anymore.

Bribes become less capital efficient when trading fees exceed the emission value. In the bull market, partner protocols have a need for an alternative voting incentive tool.

Because of the much lower capital efficiency, protocols will bribe less during such conditions. Note that capital efficiency is a very important factor, but not the only reason to bribe on a ve(3,3) DEX. For example, it is beneficial for a partner protocol to have their liquidity on a DEX where their token is exposed to a massive amount of users. In addition, hosting best-in-class liquidity solutions is not easy or cheap. It requires constant dev power to keep up with the latest developments (e.g. new pool types) and constant BD power to partner with ALMs.

Nevertheless, it’s a shame that bribes become less capital efficient at the time where protocols technically have the most budget to bribe. In addition, the bull market is also the period where retail starts coming back to the market, so it’s also the time where you want the most exposure to people who are especially willing to take risks due to market sentiment. So ideally, you would have another mechanism in place that allows partner protocols to put their funds to good use and generate revenue for the ve(3,3) DEX.

Bribes are likely capital inefficient when the ve(3,3) token is underpriced based on revenue. So an argument could be made that the partner protocols may want to use at least a part of their bribe budget to buy and lock the ve(3,3) token. Using POL to farm $THE and lock it also becomes more attractive compared to a bear market.

Decentralized trading competitions as a novel voting incentive tool

THENA is yet again first to market with an innovative application. ARENA will launch soon and allow anyone to create a web3 identity and create permissionless decentralized trading competitions.

ARENA sneak peak. Launch ETA: SOON

Protocols may incentivize a trading competition with prizes for their pools on THENA. This will attract tons of volume to their pools. In addition to deep liquidity, high volume is another important metric for whales to feel comfortable they can invest in a project. Moreover, this volume will generate trading fees that direct emissions to the pool. In a bull market where fees were already exceeding emissions, it’s likely this generates more capital efficient means of driving voting incentives than bribes.

Partner protocol can host trading competitions themselves. But trading competitions are also well suited for collaboration between protocols and key opinion leaders (KOL), aka influencers. For example, the protocol may use a different KOL every week to run a trading competition. That way, they get massive exposure in the bull market, the time where people are open to investing in new projects.

Thus, decentralized trading competitions will provide a novel “bull market” capital efficient voting incentive tool. It’s absolutely great that some ve(3,3) DEXes have trading fees that exceed their emissions cost to LPs. But total revenue could be so much greater if they have capital efficient solutions to drive voting incentives in a bull market. Decentralized trading competitions have that potential. Not all details have yet been released. So, it’s difficult to estimate how big of a catalyst this will be. But conceptually it is great and another example of THENA being first to market with a new solution.

On a profitable ve(3,3) DEX, trading competitions may be more capital efficient than bribes. Partner protocols should also consider investing a small amount of their budget in the ve(3,3) token when it’s underpriced.

In addition, decentralized trading competitions will not be limited to the spot DEX, but also supercharge their perp DEX alpha. And ARENA is not limited to just hosting decentralized trading competitions, it will be so much more eventually.

I cannot wait to see the ARENA release and see how it performs. As long as ve(3,3) DEXes continue to evolve and solve additional problems better than more traditional DEXes, their dominance will continue to grow.

Conclusions

Many ve(3,3) DEXes are doing very well in the bull market. I hope my articles on ve(3,3) profitability give you some tools to evaluate if specific ve(3,3) DEXes have solid fundamentals and whether to invest in them or not.

I challenge everyone to check their assumptions:

• “All DEX tokens trend towards zero because they are highly inflationary”
• “A liquid wrapper likely increases sell pressure”
• “The only ve(3,3) DEXes that do well have received support from their related chain/CEX”

I also challenge everyone to comprehensively write down their own investment thesis in an article like this. It will greatly help you crystallize your thoughts, force you to actually collect the data, anticipate counterarguments, and will result in community feedback to challenge your own biases.

I’m not going to respond to low effort “My DEX will 10x” tweets. But if you write a comprehensive analysis, I’ll be happy to respond. Tag @remember_the_n