A Solidly Study: Pioneering DEX Incentives

An Intro to Solidly

In February 2022, Andre Cronje introduced the Solidly DEX to the Fantom ecosystem. At first glance, this seemed like a quick copy and paste of the Curve/Convex model with a different flavor of the same Ponzi. The market assigned a similar sentiment to the DEX, where TVL peaked at $2B within a week, and embarked on a quick voyage to death within a month. However, Solidly introduced principles that sought to resolve common issues seen across nearly every DeFi protocol to date:

• Expensive Pool Two emissions subsidize mercenary liquidity and results in declining governance token prices.
• Incumbents in the Curve/Convex and Balancer/Aura ecosystems already control material portions of emissions, making it more difficult for newer protocols to utilize bribes.
• The token was the principal product. DEX revenue was a carrot dangled on a string.
• A liquidity “cold start” problem, where initial liquidity for a governance token is too low for participants to enter and kick off protocol activity.

In contrast to legacy DEXs, such as Uniswap or Sushi, the Solidly model distributes 100% of generated fees to governance token holders. Liquidity providers earn 100% of protocol emissions and LP bribes. Governance token holders can vote-escrow lock (similar to CRV) tokens in exchange for an NFT receipt to vote on and receive emissions and bribes. Longer lock times result in higher voting power, revenue share, and protection from dilution. Voting for specific pairs entitles the holder to fees specifically generated from their selected pairs, and LPing in the same token pair results in a boost in emissions. This creates a flywheel where deeper liquidity and lower slippage offers an optimized trading experience, which attracts more trading volume and ultimately more fees. In addition, governance token holders can further incentivize the pairs they want. All in all, the Solidly system utilizes these mechanisms to align protocol emissions with fees generated versus aligning emissions with dormant liquidity.