DeFi Governance Revolution

By: Pink Brains

Translation: Jiahuan, ChainCatcher

Over the past 12 months, three major DeFi protocols have each, in succession, abandoned the vote-escrow (ve) model for governance. Pendle, PancakeSwap, and Balancer each had different failure points, but they ultimately reached the same conclusion.

ve tokenomics was once viewed 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, 3 protocols with combined TVL in the billions concluded that this mechanism does more harm than good. The issue isn’t the theory itself, but the real-world execution: low participation rates, governance being hijacked, token emissions continuously flowing into liquidity pools that generate losses, and—while user numbers grow—token prices steadily falling.

Pendle: vePENDLE → sPENDLE

Reasons for the collapse

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

A mechanism that was supposed to align incentives instead kept 80% of holders out. Even more startling are the post-breakdown-on-a-per-pool basis data: more than 60% of the pools receiving emission rewards are, on their own, loss-making. A small number of high-yield pools subsidize the majority of pools that drag down the overall result. Because voting power is highly concentrated, emission rewards flow to large holders—typically various wrapped assets—which then distribute them 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 lock duration of around 3.7 years. Pendle’s 20% is indeed too low. Relative to the opportunity cost of capital in yield markets, the incentive to lock is not compelling; and as of March, Aerodrome has distributed more than $440 million in total to veAERO voters.

Alternative solution: sPENDLE

• 14-day withdrawal period (or instant withdrawal with a 5% fee)
• Emission mechanism managed by an algorithm (about 30% reduction from the original)
• Passive yield—only participants of key PPPs (core proposals) get to vote
• Transferable, composable, and re-stakeable
• 80% of income → PENDLE buyback

sPENDLE is a liquid staking token anchored 1:1 to PENDLE. The reward source is buybacks supported by revenue, not inflationary emissions. The algorithmic model reduces the emission amount by about 30% while redirecting it to profitable pools. Existing vePENDLE holders receive a loyalty bonus (up to a 4x multiplier, decaying over two years starting from the Jan 29 snapshot).

It’s worth noting that a wallet associated with Arca quietly accumulated more than $8.3 million worth of PENDLE within six days after the announcement.

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

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

Reasons for the collapse

PancakeSwap’s veCAKE is a textbook case of a “bribery-driven capital misallocation.” 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 data before shutdown says it all: for the liquidity pools that took away more than 40% of total emissions, their contribution to CAKE burn was less than 2%. The ve model created a bribery market; aggregators extracted value from it, while the pools that truly generate fees were instead under-incentivized.

That said, this shutdown itself is also controversial. Michael Egorov called it “the most classic governance attack,” pointing out that PancakeSwap 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, challenged the vote citing procedural violations. Ultimately, PancakeSwap provided Cakepie users with up to $1.5 million in CAKE compensation.

Alternative方案:

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

With revenue splitting canceled, 100% of fee revenue is used for burning. The 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 splitting is redirected to burn; the burn rate of key pools increases from 10% to 15%. PancakeSwap Infinity and the redesigned liquidity pool architecture are released in sync.

Results after the transition

• Net supply decreased by 8.19% in 2025
• Achieved deflation continuously for 29 months
• Permanently burned 37.6 million CAKE since Sep 2023
• Burned more than 3.4 million CAKE just in Jan 2026
• Cumulative trading volume: $3.5 trillion (with $2.36 trillion in 2025)

The deflation data looks promising, 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 collapse

Balancer’s failure was a cascading chain collapse of governance hijacking, security vulnerabilities, and economic collapse.

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

Then came the hack. A rounding vulnerability in Balancer V2’s redemption logic was exploited across multiple chains, and about $128 million was stolen. TVL dropped by $500 million within two weeks. Balancer Labs again faced untenable legal risk.

Alternative方案：

• 100% of fees → DAO treasury
• BAL emissions reduced to zero
• Set a fixed-price buyback 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 incentives is stepping off the historical stage.

Martinelli admitted that tokenomics had gone wrong, but he pointed out that Balancer had still been generating real revenue in the past three months, exceeding $1 million:

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

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

Why ve models fail: three pathways

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 their value. If the token price falls, emission rewards devalue → liquidity providers exit → liquidity, trading volume, and fees decline → more sell-offs are triggered. This is a classic death spiral—CRV, CAKE, and BAL have all gone through it.

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 a real distribution problem. The ve model only works when the protocol needs to continuously decide where incentives should flow (e.g., AMMs). Without this premise, Gauge voting is merely an unnecessary mechanism burden.

The diagnostic test has only one question: Does the protocol have real and repeatedly occurring distribution problems, and can community-led emission distribution create significantly higher economic value than team-led distribution? If the answer is no, then ve tokenomics is only adding complexity without adding value.

Fees/Emissions Ratio

The fees/emissions ratio refers to the dollar value of fees generated by the protocol 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 liquidity. Below 1.0x means it’s subsidizing trading activity at a loss.

Here’s a detail exposed when Pendle exited: the total ratio can mask what’s truly happening at the level of individual pools. Pendle’s overall fee efficiency is above 1.0x (revenue exceeds emissions), but once the team breaks it down to each pool, more than 60% of pools are loss-making on their own. A small number of standout pools (possibly large stablecoin yield markets) subsidize all the other pools. Manual Gauge voting directed emissions toward pools favorable to big voters—not toward pools that generate the most fees.

PancakeSwap’s situation is similar, except it shows up in the CAKE burn dimension.

The contradiction of ve tokenomics

Ve tokenomics itself creates a contradiction: capital locking is inefficient. Liquidity wrappers (Liquid lockers) solve this by packaging locked tokens into tradable derivatives—but while addressing capital efficiency, they also create a governance-centralization 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, while 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, not parasitic.

Balancer’s case is destructive. Aura Finance becomes the largest veBAL holder and the de facto governance layer, but with a lack of other strong competitors, the hostile whale Humpy independently accumulated 35% of veBAL and extracted emission rewards by constraining the Gauge through game theory.

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

Ve tokenomics needs locked capital to function, but locked capital is inefficient. So intermediaries appear to unlock it, and in doing so, they re-concentrate the governance rights that were originally meant to be dispersed through locking. Structurally, this model plants the seeds for its own hijacking.

Curve’s counterpoint: why ve tokenomics still matters

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

Rarity based on locking runs deeper structurally than rarity based on burning—it not only reduces supply, but also generates governance participation, fee distribution, and liquidity coordination, rather than merely cutting supply.

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

• Trading volume rose 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 jumped from 1.6% at the start of 2025 to 44% in December, increasing 27.5x

But there’s an important context here: Curve occupies a unique position at the backbone of Ethereum stablecoin liquidity, and 2025 happens to be the year of stablecoins. There is a real, organic demand for Gauge-guided liquidity—stablecoin issuers like Ethena structurally need Curve liquidity pools. This creates a bribery market based on genuine economic value.

Meanwhile, 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 DEXs; Balancer’s core is programmable liquidity pools. None of the three had a structural reason for external protocols to urgently compete for their Gauge emissions.

Key takeaways

Ve tokenomics hasn’t fully died. Curve’s veCRV is still running (2025 TVL around $3.05 billion, trading volume $126 billion, with crvUSD 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 create real liquidity demand based on economic value. Other protocols are shifting toward buybacks supported by revenue, deflationary supply mechanisms, or liquidity-governance tokens.

DeFi may indeed need an entirely new incentive mechanism—one that truly binds the interests of protocols and token holders over the long term.