Why? Velodrome would survive just fine without incentives. It is the rate of ecosystem growth that would suffer. The cost of liquidity incentives would increase, putting strain on ecosystem treasuries. Projects would need to increase the rate at which they are spending their granted OP to close the gap, depleting governance funds faster and increasing OP sell pressure. And it’d make it harder for new projects to bootstrap and onboard, slowing the growth in economic activity and losing builders to other networks.
It would also put Governance in an awkward position where it is directing millions in incentives to multi-chain DEXs worth billions of dollars that are offering somewhere between $0 to a few hundred thousand in co-incentives, while passing on their only homegrown public good DEX’s offer to pump another $6.5mm in stimulus into the ecosystem.
According to the data shared by the Foundation on the Governance Grants to date, Velodrome actually attracted more TVL growth ($66mm) than all the governance grants combined ($60mm). Velodrome did this with a grant of 3mm in OP compared to the 40mm OP distributed by governance. You are essentially suggesting ending the most successful ecosystem growth program funded to date.
You are referring to the “lock bonus” here. The purpose of it is made explicit in the proposal, namely to lower barriers of entry for protocols seeking to invest and build in the Optimism ecosystem.
From the proposal:
To onboard new protocols to the Optimism ecosystem during uncertain times and in the face of competing incentives, we must ensure that they are able to bootstrap their liquidity in the most cost-effective method possible. At the same time, these incentives should be paired with mechanisms that require protocols to meaningfully invest in the ecosystem for the long term and thus discourage mercenary and exploitative behaviors.
Incentivizing the acquisition and locking of veVELO is an ideal strategy in this regard, as it requires a multi-year lock of capital in the ecosystem to receive the lock bonus and access Velodrome’s voting and revenue generation capabilities. It is to our knowledge the only currently running incentive program that requires the locking of capital in the Optimism ecosystem. Incentivizing locking lowers the underlying costs of building an initial veVELO position (by an average of ~25% ) while simultaneously giving any protocol the power to direct emissions and attract liquidity for the long term.
Whereas other incentives programs, particularly proposed by DEXs, focus on direct rewards to liquidity providers who have demonstrated a willingness to quickly exit ecosystems when they taper, this locking incentive requires protocols to lock their investment into ecosystem for four years to access the bonus. Indeed, it has already helped lead to $11.2mm (70% of all supply) being locked in the ecosystem for an average of 3.6 years, a feat we have not seen repeated by any other ecosystem incentive program and that isn’t currently possible for protocols like Curve who require you stake on mainnet.
These locked positions further increase the capital efficiency of their incentive programs, reduce the need for protocols to rely on external incentives (such as OP) long term, and actually drive revenue back to them (at a pace of over $10M a year returned to lockers atm).
If there are indeed second order positive effects on token price, it only would only serve to accelerate a flywheel designed to support the ecosystem: further lowering costs, deepening liquidity, increasing volume, attracting users, delivering more revenue to protocols.
In short, the more protocols locking value into the ecosystem the better off the ecosystem will be.
