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x(3,3) Tokenomics - Evolution of DeFi Incentives

The foundation of Koan Protocol is a next-generation tokenomics model called x(3,3), which aims to overcome the drawbacks of earlier models like ve(3,3) and build a more robust, dynamic, and user-centric ecosystem.

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The Roots: Understanding ve(3,3)

To understand x(3,3), we must first look at its predecessor, ve(3,3). Pioneered by Andre Cronje, the ve(3,3) model was a groundbreaking attempt to solve the “DEX Trilemma”: the challenge of aligning incentives between traders, liquidity providers (LPs), and token holders. The two core concepts of ve(3,3) were:
  • Vote Escrow (ve): This system tied a user’s voting power not just to the number of tokens they held, but also to the length of time they locked those tokens. The longer the lock, the greater their governance power and rewards. This created a strong incentive for long-term commitment.
  • Rebase: This mechanism protected long-term stakers from dilution by regularly minting new tokens to their locked positions. This ensured their ownership percentage remained the same even as the total token supply increased.

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The Flaw in the Design

While ve(3,3) was a significant step forward, it had a major flaw: the absence of an exit mechanism. Users were forced into multi-year locks to participate fully. This created a high-friction system with two major problems:
  • Dead Voting Power: Users who locked their tokens but later became inactive still held significant influence, even if they were no longer contributing to the protocol.
  • Forced Commitment: The model relied on static, forced commitments rather than rewarding ongoing, active participation. If a user wanted to exit, they were locked in and couldn’t leave without forfeiting their tokens.

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The Koanprotocol Solution: The x(3,3) Model

x(3,3) is a fundamental reimagining of ve(3,3). It removes the need for mandatory token locks and replaces them with powerful, organic incentives that reward users based on their active contribution.
  1. The Exit Rebase: A Player vs. Player (PvP) System: Instead of minting new tokens to prevent dilution, our xKOAN stakers are protected by a unique “Exit Rebase” or PvP mechanism. When a user decides to exit their xKOAN position early, they must forfeit a portion of their tokens. 100% of these forfeited tokens are streamed directly to the existing xKOAN stakers, proportional to their position. This creates a self-reinforcing system:
    • Users are strongly incentivized to stay, as exiting early means a penalty.
    • The system naturally concentrates ownership among the most committed, active participants.
    • Rewards scale with the protocol’s activity—the more users that exit, the more value is redistributed to those who remain.
  2. Rewarding Value Creation: Emission Distribution: In the x(3,3) model, all token emissions are distributed through xKOAN. This gives stakers direct control over where rewards are allocated, ensuring value flows to the most productive parts of the ecosystem.
    • Voter Incentives: Each week, xKOAN stakers vote on which liquidity pools to direct KOAN emissions to. These voters are rewarded with both a portion of the pool’s swap fees and incentives from other protocols that want to attract liquidity.
    • The Voting Flywheel: This system creates a powerful flywheel effect:
      • High-performing pairs generate more fees.
      • xKOAN stakers are more incentivized to vote for these pairs.
      • Increased emissions attract deeper liquidity to the pools.
      • Deeper liquidity leads to more volume and fees, restarting the cycle.
    This puts emission control directly in the hands of the community, ensuring capital is allocated efficiently.

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The Trilemma Solved: x(3,3) vs. Other Models

x(3,3) provides a more fluid and accessible system that benefits all participants: The history of decentralized finance has been a continuous effort to solve the “DEX Trilemma”—the challenge of aligning incentives between traders, liquidity providers, and token holders. While previous models attempted solutions, our x(3,3) model is a fundamental leap forward, creating a more fluid and accessible system that benefits all participants without forcing them into long-term commitments.
Uniswapve(3,3) (e.g., Aerodrome)Koan Protocol x(3,3)
TradersBenefits from deep liquidity, but still suffers from slippage and no token alignment.Benefits from deep liquidity, but the ecosystem can become static over time.Benefits from Koan’s dynamic fees and deep liquidity, leading to best price execution and low slippage.
Liquidity ProvidersEarn fees based on trading volume, but capital is inefficiently distributed.Forced into long-term lock-ups to earn fair rewards and are unable to exit.Earn token emissions based on liquidity productivity and can exit at any time.
Token HoldersNo alignment with LPs or traders, and vulnerable to “vampire attacks.”Forced to lock tokens for years to earn rewards, creating a high-friction system with no exit.Can exit anytime. Rewards come from protocol fees and exit penalties, aligning them with the protocol’s long-term success.

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Dynamic Fees and Fee Distribution

To further optimize the user experience, Koan Protocol’s fees are not static. Our algorithm automatically adjusts fees based on real-time market conditions like volatility and trading volume. This ensures that fees are fair and competitive, particularly during volatile periods where liquidity providers face greater risk.

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Fee Distribution:

  • 100% of protocol fees flow directly to xKOAN holders. This ensures that the value created by the protocol goes to its most committed participants.
  • Fee-Splits: Our system allows for configurable fee-splits per pool. This enables protocols to create custom reward mechanisms, such as a creator fee for a memecoin or a dedicated incentive for a specific community, further aligning incentives across the ecosystem.
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