Lockonomics, or: How I Learned to Stop Worrying and Love the Dromes I got tired of explaining why @AerodromeFi @VelodromeFi were not ponzis but actually a brilliant superior model for accruing liquidity and rewarding long-term holders. So I wrote an article (link below)

The full article:

1) Here's how a basic DEX like Uniswap works — LPs get fees + incentives provided out of protocol by projects. The project token serves no role besides governance (RIP $UNI holders).

2) On the other hand, here's how the dromes work. LPs get the project token, in a quantity that is determined by project token lockers. Lockers get fees + "bribes" (3rd party project incentives) for the pools they vote to allocate tokens to.

3) If project token emissions are exactly equal to fees + bribes, this model is equivalent to the basic model. But lockers still make money!

4) That's because the token supply gets inflated, but only lockers get rewards. So as long as < 100% of the supply is locked, lockers are making money. In the dromes model, there is an inherent speculation tax on short-term holders (who get inflated) in favour of lockers.

5) In practice, the dromes have about 50% of their supply locked long-term. This means that the net (post-inflation) yield is half of what you see on the frontend.

6) Remember, this assumes: 1. market cap is constant 2. emissions = revenue (fees + bribes) Both can be false in practice.

7) First, the market cap is volatile, but hasn't been dropping in pace with inflation as a general trend. This makes total sense, because protocol revenue has been growing!

8) Second, the big kicker: emissions are higher than revenue. It's a ponzi!!!! 😡 No, it's not.

9) Why it's not a ponzi. The protocol is balanced when emissions = revenue. And the protocol can set the rate of emission (right now permissioned, will become permissionless later). So it can always be brought back to equilibrium.

10) Why emissions > revenue? To grow the protocol! Higher APY attracts LPs, higher liquidity attracts volume, hence more fees. This also incentivizes projects to use dromes for liquidity, as 1$ spent in bribes causes > 1$ in rewards to LPs, attracting more liquidity.

11) First, note that in the last few epochs, emissions < revenue! But emissions > revenue did work well, as Aerodrome has consistently grown in revenue and volume. Velodrome's metrics regressed a bit, but it outperformed on the Superchain ex-Base.

12) It's also notable that when emissions > revenue, lockers have been more than fully compensated for the emissions (i.e. the net APY post-dilution is positive).

13) Why lock? Locking effectively takes tokens out of circulation long-term, reducing sell pressure. This allows upside if the token trades on flow, and prevents people from selling with the market without taking a haircut.

14) Note however that at > 30% net (post-dilution) yield *right now* on Aerodrome, locked tokens effectively have a P/E ratio of 3.33... (Apple: 38, Nvidia: 51) It's basically the cheapest thing in DeFi, with the big caveat that you have to lock long-term.

15) So in summary: - If emissions = revenue, the dromes work just like Uniswap. - ... but lockers still make money on net because the non-lockers are being diluted with no compensation. - Emission control can always bring the protocol back to emissions = revenue. - It's rational to have emissions > revenue if this grows the protocol, ensuring higher levels of future fees. - Locking long-term reduces sell pressure.

16) I think the dromes model — aka "ve(3,3)" or "MetaDEX" — is brilliant, and I think it could be applied to other revenue-generating projects. I'm coining the term "lockonomics" for projects that follow this basic recipe: - Distribute yield via project token emission. - Distribute revenue to long-term project token lockers - ... ensuring net yield to lockers via short-term holders dilution. Letting lockers direct emissions is optional and doesn't work with every protocol, but is interesting because it can incentivize certain actors (e.g. projects with a token) to accumulate locked tokens.

17 / END) Read the whole article for a much deeper explanation, extra details, and fun anecdotes:

@BautiDeFi @AerodromeFi @VelodromeFi Also shout out to you for being one of the persons I talked to that caused me to write this post, and specifically our conversation caused me to pull the trigger! Appreciate the good open-minded debate!