DeFi Governance Revolution

Author: Pink Brains

Translation: Jiahuan, ChainCatcher

Over the past 12 months, the three major DeFi protocols have each moved away from the vote-escrow (ve) model. Pendle, PancakeSwap, and Balancer had different points of failure, but they ultimately reached the same conclusion.

ve tokenomics were once seen as DeFi’s ultimate answer: lock tokens, gain governance rights, earn fees, and incentivize permanent alignment. No centralized governance was required. Curve proved it could work. Between 2021 and 2024, dozens of protocols copied this model.

But now things have changed.

In these 12 months of 2025, three protocols with a combined TVL totaling billions of dollars concluded that this mechanism does more harm than good. The issue isn’t the theory itself—it’s the execution in practice: low participation rates, governance being hijacked, token emissions consistently flowing into liquidity pools that are losing, and at the same time token prices declining all the way as user numbers grow.

Pendle: vePENDLE → sPENDLE

Reasons for the failure

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

This mechanism, which should have aligned incentives, kept 80% of holders out. Even more striking is the data broken down to individual pools: more than 60% of the pools receiving emission rewards are loss-making on their own. A small number of high-yield pools subsidized most of the underperforming pools. Because voting power is highly concentrated, the emission rewards flowed to large holders—typically various wrapped assets—and then from those places to end users.

By comparison, Curve’s veCRV locking rate is about 50% or higher; Aerodrome’s veAERO locking rate is about 44%, with an average lockup period of roughly 3.7 years. Pendle’s 20% is indeed too low. Compared with the opportunity cost of capital in the yield market, the lockup incentives aren’t compelling enough; as of March, Aerodrome has distributed more than $440 million cumulatively to veAERO voters.

Alternative: sPENDLE

• 14-day withdrawal period (or instant withdrawal with a 5% fee)
• Algorithm-managed emission mechanism (cut by about 30% compared to before)
• Passive yield—vote only for key PPPs (core proposals)
• Transferable, composable, and can be re-staked
• 80% of revenue → PENDLE buybacks

sPENDLE is a liquid-staking token that is 1:1 pegged to PENDLE. Rewards come from buybacks supported by revenue, not inflationary emissions. The algorithmic model reduces the emission amount by about 30% and redirects it to profitable pools. Existing vePENDLE holders receive a loyalty bonus (up to a 4x multiplier, decaying over two years starting from the January 29 snapshot).

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

However, not everyone agrees with this decision. Curve co-founder Michael Egorov believes that ve tokenomics are one of the most powerful incentive-alignment mechanisms in DeFi.

PancakeSwap: veCAKE → Tokenomics 3.0 (burn + direct staking)

Reasons for the failure

PancakeSwap’s veCAKE is a textbook case of a “bribery-driven resource mismatch.” The Gauge voting system was hijacked by Convex-like aggregators—most notably Magpie Finance—which siphoned off emission rewards while contributing almost nothing to PancakeSwap’s actual liquidity.

The shutdown data makes everything clear: for liquidity pools that took away more than 40% of total emissions, their contribution to CAKE burning was under 2%. The ve model created a bribery market—aggregators extracted value from it—while the pools that truly generated fees were instead under-incentivized.

But the shutdown itself was also controversial. Michael Egorov called it the “most classic governance attack,” noting that PancakeSwap insiders used it to erase the governance rights of existing veCAKE holders and to force-unlock their tokens after voting. One of PancakeSwap’s largest holders, Cakepie DAO, challenged the vote on the grounds of procedural violations; ultimately, PancakeSwap provided Cakepie users with up to $1.5 million in CAKE compensation.

Alternative:

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

With revenue sharing canceled, 100% of fee revenue goes entirely to burning. Target: 4% annualized deflation, reaching 20% by 2030.

All locked CAKE/veCAKE positions are unlocked without loss, and a 6-month 1:1 redemption window is provided. Revenue sharing is redirected to burning, and the burn rate of key pools increases from 10% to 15%. PancakeSwap Infinity and the redesigned liquidity pool architecture were launched in parallel.

Results after the transition

• 2025 net supply decreases by 8.19%
• Achieved deflation for 29 consecutive months
• Permanently burned 37.6 million CAKE since September 2023
• Burned over 3.4 million CAKE in just January 2026
• Cumulative trading volume: $3.5 trillion (2025: $2.36 trillion)

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

Balancer: veBAL → gradual shutdown (DAO + zero emissions)

Reasons for the failure

Balancer’s failure was a chain-reaction collapse of governance hijacking, security vulnerabilities, and an economic meltdown.

First came the clash with a whale. In 2022, the whale “Humpy” manipulated the veBAL system, directing $1.8 million worth of BAL emissions to liquidity pools it controlled—CREAM/WETH—in just six weeks. In the same period, the revenue this pool generated for Balancer was only $18,000.

Then came the hack. A rounding vulnerability in Balancer V2’s swap logic was exploited across multiple chains, resulting in about $128 million stolen. TVL plunged by $500 million within two weeks. Balancer Labs once again faced legal risks it couldn’t afford.

Alternative:

• 100% of fees → DAO treasury
• BAL emissions reduced to zero
• Set fixed-price buybacks of BAL for exits
• Focus shift to: reCLAMM, LBP (liquidity bootstrapping pools), stable pools
• Streamline the team through Balancer OpCo

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

Martinelli admitted that tokenomics went wrong, but he noted that Balancer has still been generating real revenue over the past three months—over $1 million:

“The issue isn’t that Balancer doesn’t work. The issue is that the economic mechanisms around Balancer failed. These can all be fixed.”

Whether a lean DAO with zero incentives can maintain $158 million in TVL remains an open question. Worth noting: Balancer’s current market cap ($9.9 million) is already below its treasury funds ($14.4 million).

Why ve models fail: three paths

The three exits above are only symptoms; the real root cause is structural.

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

Failure path one: emissions must keep value. Token price drops → emission rewards lose value → liquidity providers leave → liquidity, trading volume, and fees fall → triggering more sell-offs. This is the classic death spiral—CRV, CAKE, and BAL all went through it.

Failure path two: lockups must be real. Once locked tokens can be wrapped into liquidity derivatives (Convex, Aura, Magpie), “lockup” loses its meaning and creates exploitable loopholes.

Failure path three: there must be real allocation problems. A ve model only works when the protocol needs to continuously decide where incentives flow (for example, for an AMM). Without that prerequisite, Gauge voting is just an unnecessary mechanical burden.

There is only one question for the diagnostic test: Does the protocol have real, recurring allocation problems—and can community-led emission allocation create significantly higher economic value than team-led allocation? If the answer is no, then ve tokenomics is merely adding complexity without adding value.

Fees/Emissions ratio

The fees/emissions ratio refers to the protocol’s fee revenue dollar value divided by the dollar value of its distributed emission rewards.

A ratio higher than 1.0x means the protocol earns more from liquidity than it pays out to attract it. Below 1.0x means it’s subsidizing trading activities at a loss.

Here’s a detail exposed during Pendle’s exit: the total ratio can mask the reality of individual pools. Pendle’s overall fee efficiency is above 1.0x (revenue greater than emissions), but when the team breaks it down into each pool, more than 60% of the pools are loss-making on their own. A small number of top-performing pools (possibly large stablecoin yield markets) subsidize all the others. Manual Gauge voting directed emissions to pools that benefited big voters rather than to pools that generated the most fees.

PancakeSwap is similar—only reflected in the CAKE burn dimension.

The contradiction in ve tokenomics

Ve tokenomics itself creates a contradiction: capital lockups are inefficient. Liquidity wrappers (Liquid lockers) solve this by packaging locked tokens into tradable derivatives—but while solving capital efficiency, they also create a centralized governance problem. This is the paradox at the core of every ve tokenomics setup.

In Curve’s case, this paradox produced a stable (though centralized) outcome. Convex holds 53% of all veCRV; StakeDAO and Yearn hold additional shares. Individual governance is mediated through vlCVX voting. But Convex’s interests are highly tied to Curve’s success—its entire business depends on Curve functioning properly. This centralization is structural, but not parasitic.

Balancer’s case is destructive. Aura Finance became the largest veBAL holder and the de facto governance layer, but lacked other strong competitors, allowing the hostile whale Humpy to independently accumulate 35% of veBAL and use game-based Gauge restrictions to extract emission rewards.

In PancakeSwap’s case, Magpie Finance and its aggregators seized Gauge voting power via bribes and directed emissions to pools that provide almost no value to PancakeSwap.

Ve tokenomics needs locked capital to operate, but locked capital is inefficient—so intermediaries appear to unlock it. And in the process, the governance rights that were originally dispersed through lockups end up being re-consolidated. Structurally, this model plants the seeds for being hijacked.

Curve’s counterargument: Why ve tokenomics still matters

Curve’s conclusion is that the number of tokens continuously locked in veCRV is about three times the amount that an equivalent burn mechanism could eliminate.

Scarcity based on lockup is structurally deeper than scarcity based on burn—it reduces supply and also creates governance participation, fee distribution, and liquidity coordination, not just a reduction in supply.

In 2025, Curve’s DAO canceled the veCRV whitelist and expanded governance participation. The protocol data is also impressive:

• Trading volume increased from $119 billion in 2024 to $126 billion in 2025
• Pool interaction volume more than doubled, reaching 25.2 million transactions
• Curve’s share of Ethereum DEX fees rose from 1.6% at the beginning of 2025 to 44% in December, up 27.5x

But there’s an important backdrop here: Curve has a unique position as part of the backbone of Ethereum stablecoin liquidity, and 2025 happened to be the year of stablecoins. There is genuine, organic demand for Gauge-guided liquidity—stablecoin issuers like Ethena structurally need Curve’s liquidity pools. This creates a bribery market grounded in real economic value.

Meanwhile, the three protocols that exited ve did not have this condition. Pendle’s core value is yield trading, not liquidity coordination; PancakeSwap’s core is a multi-chain DEX; Balancer’s core is programmable liquidity pools. None of the three had a structural reason for external protocols to compete for their Gauge emissions.

Key takeaways

Ve tokenomics hasn’t died completely. Curve’s veCRV is still running (2025 TVL around $3.05 billion, trading volume $126 billion, and crvUSD scale growing 3x to $361 million). Aerodrome’s ve(3,3) expanded to over $480 million in TVL, with annual fees of $260 million.

But this model only works when Gauge-guided emissions can create real liquidity-driven economic demand. Other protocols are turning toward buybacks supported by revenue, deflationary supply mechanisms, or liquidity-governance tokens.

DeFi may indeed need an entirely new incentive mechanism—something that truly and permanently ties the interests of protocols and token holders together.