DeFi Governance Revolution

Author: Pink Brains

Compiled by: Jiahua, ChainCatcher

In the past 12 months, the three major DeFi protocols have successively abandoned the vote-escrow (ve) model. Pendle, PancakeSwap, and Balancer each had different breaking points, but ultimately reached the same conclusion.

The ve token economics was once seen as the ultimate answer for DeFi: lock tokens, gain governance rights, earn fees, and incentivize permanent alignment. No need for centralized governance. Curve proved it could work. Between 2021 and 2024, dozens of protocols replicated this model.

But now the situation has changed.

In the 12 months of 2025, three protocols with a total TVL of several billion dollars determined that this mechanism has more disadvantages than advantages. The problem lies not in the theory itself, but in its implementation: low participation rates, governance being hijacked, continuous token inflation flowing into losing liquidity pools, and while user numbers grow, token prices keep falling.

Pendle: vePENDLE → sPENDLE

Reasons for Collapse

The Pendle team disclosed that despite a 60-fold increase in revenue over two years, the participation rate of vePENDLE is the lowest among all ve models—only 20% of the PENDLE supply is locked.

This mechanism, which was supposed to align incentives, has kept 80% of holders out. The truly shocking data comes from breaking it down to individual pools: over 60% of the pools receiving inflation rewards are losing money when viewed individually. A few high-yield pools subsidize the majority, dragging down the overall performance. Due to the highly concentrated voting power, inflation rewards flowed to large holders—usually in various wrapped assets—who then distributed them to end users.

In comparison, Curve's veCRV lock-up rate is about 50% or more, Aerodrome's veAERO lock-up rate is about 44%, with an average lock-up period of about 3.7 years. Pendle's 20% is indeed too low. Relative to the opportunity cost of capital in the yield market, the appeal of lock-up incentives is insufficient; as of March, Aerodrome has allocated over $440 million to veAERO voters.

Alternative: sPENDLE

• 14-day withdrawal period (or pay a 5% fee for instant withdrawal)
• Algorithmically managed inflation mechanism (reduced by about 30% from the original)
• Passive income, voting only on key PPP (core proposals)
• Transferable, composable, and can be re-staked
• 80% of revenue → PENDLE buyback

sPENDLE is a liquid staking token, pegged 1:1 to PENDLE. Rewards come from income-supported buybacks, not inflationary issuance. The algorithmic model reduces the issuance amount by about 30%, while redirecting it to profitable pools. Existing vePENDLE holders receive loyalty bonuses (up to a 4x multiplier, decaying over two years from the snapshot on January 29).

Notably, a wallet associated with Arca quietly accumulated over $8.3 million worth of PENDLE within six days of the announcement.

However, not everyone agrees with this decision. Curve founder Michael Egorov believes that ve token economics is one of the most powerful mechanisms for aligning incentives in DeFi.

PancakeSwap: veCAKE → Tokenomics 3.0 (Burn + Direct Staking)

Reasons for Collapse

PancakeSwap's veCAKE is a textbook case of "bribery-driven resource misallocation." The gauge voting system was hijacked by Convex-like aggregators—most notably Magpie Finance—which siphoned off inflation rewards but contributed almost nothing to PancakeSwap's actual liquidity.

Data before the shutdown tells the story: liquidity pools that took over 40% of the total inflation contributed less than 2% to CAKE burns. The ve model created a bribery market, where aggregators extracted value, while the pools that actually generated fees were under-incentivized.

However, the shutdown itself was also controversial. Michael Egorov called it "the most classic governance attack," pointing out that insiders used it to erase the governance rights of existing veCAKE holders and could force unlock their tokens after voting. One of PancakeSwap's largest holders, Cakepie DAO, questioned the vote on grounds of procedural violations, ultimately leading PancakeSwap to offer up to $1.5 million in CAKE compensation to Cakepie users.

Alternative:

• 100% of fee income → CAKE burn
• Team directly manages inflation
• 1 CAKE = 1 vote (simplified governance)
• About 22,500 CAKE/day (target reduced to 14,500)

Cancelling revenue sharing, 100% of fee income is used for burns. Goal: annual deflation of 4%, reaching 20% by 2030.

All locked CAKE/veCAKE positions are unlocked without loss, providing a 6-month 1:1 redemption window. Revenue sharing is redirected to burns, with the burn rate for key pools increased from 10% to 15%. PancakeSwap Infinity is launched alongside the redesigned liquidity pool architecture.

Post-Transformation Results

• Net supply decreased by 8.19% in 2025
• Achieved deflation for 29 consecutive months
• Permanently burned 37.6 million CAKE since September 2023
• Over 3.4 million burned just in January 2026
• Cumulative trading volume of $3.5 trillion (projected $2.36 trillion for 2025)

The deflation data looks good, but $CAKE still hovers around $1.60, down 92% from its all-time high.

Balancer: veBAL → Gradual Shutdown (DAO + Zero Inflation)

Reasons for Collapse

Balancer's failure is a chain collapse of governance hijacking, security vulnerabilities, and economic collapse.

First came the confrontation with whales. In 2022, the whale "Humpy" manipulated the veBAL system, directing $1.8 million worth of BAL inflation to its controlled CREAM/WETH liquidity pool within six weeks. During the same period, this pool generated only $18,000 in revenue for Balancer.

Then came the hacking. A rounding vulnerability in Balancer V2's exchange logic was exploited across multiple chains, resulting in about $128 million being stolen. TVL plummeted by $500 million within two weeks. Balancer Labs faced unbearable legal risks again.

Alternative:

• 100% of fees → DAO treasury
• BAL inflation reduced to zero
• Set fixed price buybacks for BAL for exits
• Focus shifted to: reCLAMM, LBP (Liquidity Bootstrapping Pool), stable pools
• Streamline the team through Balancer OpCo

The old DeFi model built around token rewards is exiting the historical stage.

Martinelli acknowledged that there were issues with the token economics but pointed out that Balancer still generated actual revenue over the past three months, exceeding $1 million:

"The problem is not that Balancer doesn't work. The problem is that the economic mechanisms around Balancer have failed. These are fixable."

Whether a zero-incentive streamlined DAO can maintain a TVL of $158 million remains an open question. Notably, Balancer's current market cap ($9.9 million) is lower than its treasury funds ($14.4 million).

Why the ve Model Fails: Three Paths

The three exits mentioned above are merely symptoms; the real cause is structural.

A recent analysis by Cube Exchange dissected three failure paths of the ve token model.

Failure Path One: Inflation Must Maintain Value. Token prices drop → Inflation rewards devalue → Liquidity providers exit → Liquidity, trading volume, fees decline → Triggering more sell-offs. This is the classic death spiral, experienced by CRV, CAKE, and BAL.

Failure Path Two: Locking Must Be Real. Once locked tokens can be wrapped into liquidity derivatives (Convex, Aura, Magpie), "locking" loses its meaning and creates exploitable loopholes.

Failure Path Three: There Must Be Real Allocation Issues. The ve model only works when the protocol needs to continuously decide where to direct incentives (e.g., AMM). Without this premise, gauge voting becomes just a meaningless mechanism burden.

The diagnostic test has only one question: Does the protocol have real and recurring allocation issues, and can community-led inflation allocation create significantly higher economic value than team-led? If the answer is no, ve token economics only adds complexity without adding value.

Fee/Inflation Ratio

The fee/inflation ratio refers to the dollar value of fees generated by the protocol divided by the dollar value of its distributed inflation rewards.

A ratio above 1.0x indicates that the protocol earns more from liquidity than it pays to attract liquidity. Below 1.0x means it is subsidizing trading activity at a loss.

There is a detail that was exposed during Pendle's exit: the total ratio can obscure the real situation of individual pools. Pendle's overall fee efficiency exceeds 1.0x (revenue greater than inflation), but when the team breaks it down to each pool, over 60% of the pools are losing money when assessed individually. A few outstanding pools (possibly large stablecoin yield markets) subsidize all the rest. Manual gauge voting directs inflation to pools favorable to large voters rather than those generating the most fees.

PancakeSwap's situation is similar, only reflected in the CAKE burn dimension.

The Contradiction of ve Token Economics

Ve token economics creates a contradiction: capital locking is inefficient. Liquidity wrappers (liquid lockers) solve this problem by wrapping locked tokens into tradable derivatives—but in solving the capital efficiency issue, they create governance centralization problems. This is the paradox at the core of every ve token economics model.

In Curve's case, this paradox produced a stable (albeit concentrated) result. Convex holds 53% of all veCRV, with StakeDAO and Yearn holding additional shares. Individual governance intermediates through vlCVX voting. However, Convex's interests are highly tied to Curve's success—its entire business relies on Curve operating normally. This centralization is structural, but not parasitic.

Balancer's case, however, is devastating. Aura Finance became the largest veBAL holder and de facto governance layer, but the lack of other strong competitors allowed the hostile whale Humpy to independently accumulate 35% of veBAL and extract inflation rewards through gauge restrictions.

In PancakeSwap's case, Magpie Finance and its aggregators seized gauge voting rights through bribery, directing inflation to pools that provided almost no value to PancakeSwap.

Ve token economics requires locked capital to operate, but locking capital is inefficient, leading to intermediaries emerging to unlock it, while in the process, re-concentrating governance power that was originally decentralized through locking. This model structurally lays the groundwork for its own hijacking.

Curve's Contrarian View: Why ve Token Economics Still Matters

Curve's conclusion is that the number of tokens continuously locked in veCRV is about three times the amount that can be eliminated by an equivalent burn mechanism.

The structural scarcity based on locking is deeper than that based on burning—it reduces supply while also generating governance participation, fee distribution, and liquidity coordination, not just cutting supply.

In 2025, Curve's DAO canceled the veCRV whitelist, expanding governance participation. The protocol's data is equally impressive:

• Trading volume grew from $119 billion in 2024 to $126 billion in 2025
• Pool interactions more than doubled, reaching 25.2 million transactions
• Curve's share of Ethereum DEX fees surged from 1.6% at the beginning of 2025 to 44% in December, a 27.5-fold increase

But there is an important background: Curve occupies a unique position as the backbone of Ethereum stablecoin liquidity, and 2025 happens to be the year of stablecoins. There is a real, organic demand for gauge-directed liquidity—issuers of stablecoins like Ethena structurally need Curve liquidity pools. This creates a bribery market based on real economic value.

The three protocols that exited ve do not have this condition. Pendle's core value is yield trading, not liquidity coordination; PancakeSwap's core is multi-chain DEX; Balancer's core is programmable liquidity pools. None of them have a structural reason for external protocols to compete for their gauge inflation.

Key Points

Ve token economics is not dead. Curve's veCRV is still running (2025 TVL around $3.05 billion, trading volume $126 billion, crvUSD scale increased threefold to $361 million). Aerodrome's ve(3,3) expanded to over $480 million in TVL, with annual fees reaching $260 million.

But this model only works when gauge-directed inflation can create real liquidity economic demand. Other protocols are shifting towards income-supported buybacks, deflationary supply mechanisms, or liquidity governance tokens.

DeFi may indeed need a completely new incentive mechanism, something that truly binds the interests of protocols and token holders in the long term.

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