veToken (Vote-Escrow Token)

The veToken model was pioneered by Curve Finance in 2020 with veCRV. The problem Curve faced was classic DeFi governance failure: CRV token holders had little incentive to lock tokens long-term and participate in governance. The vote-escrow model solved this by requiring users to lock CRV (1 week to 4 years) to receive veCRV, a non-transferable 'locked voting token' that decays linearly to zero over the lock period. veCRV holders gain: boosted CRV farming yields (up to 2.5x), a share of 50% of Curve's trading fees, and most importantly, voting power to direct CRV emissions ('gauge weights') to specific liquidity pools.

The gauge weight system created the 'Curve Wars' — one of the most fascinating economic competitions in DeFi history. Because veCRV holders could vote to direct CRV emissions to their preferred pools, competing protocols (Convex, Yearn, StakeDAO, Badger) began aggressively accumulating veCRV to vote for their pools, attracting liquidity and earning outsized rewards. Convex Finance (launched 2021) became the most powerful veCRV accumulator, controlling over 50% of all veCRV by mid-2022, effectively becoming the meta-governor of Curve. To influence Convex's votes, protocols then competed to acquire CVX tokens — a 'meta-governance' layer.

The veToken model spread widely: Balancer adopted veBAL (80/20 BAL/ETH locked), Frax uses veFXS, Velodrome on Optimism (and Aerodrome on Base) use veVELO/veAERO. The model works best when the underlying protocol generates genuine revenue that can flow to veTtoken holders. Velodrome/Aerodrome became the dominant DEX on their respective L2s using a refined ve(3,3) model that combines vote-escrow with rebase mechanics to reduce dilution.