Why Time-Weighted Voting Corrupts Rate Decisions

Large token holders (whales) with multi-year lock-ups prioritize maximizing their ve-token yield over optimal protocol parameters. This leads to voting for artificially high rates to inflate bribes and emissions, draining the treasury and mispricing risk.\n- Incentive: Vote for +300-500 bps higher rates to boost bribe revenue.\n- Consequence: Accelerated token inflation and long-term value leakage.

The non-linear relationship between lock time and voting power (e.g., 4-year lock = 4x power) creates a steep power gradient. A small cohort of max-lock voters (often <5% of holders) can dictate rates for the entire protocol, silencing smaller, potentially more aligned participants.\n- Mechanism: Quadratic or linear vesting centralizes governance.\n- Result: Decisions reflect the time preference of a few, not the economic needs of the many.

Vote markets like Curve/Convex demonstrate how TWV turns rate decisions into a derivative financial game. Bribers (e.g., Frax, Lido) pay to direct emissions, making rates a function of bribe auction dynamics rather than fundamental risk assessment. The protocol's economic security is outsourced.\n- Entity: Convex Finance controls ~50% of Curve votes.\n- Symptom: $100M+ annual bribe market dictating APY.

Replace time-lock multipliers with performance-aligned staking. Voting power should be earned by providing accurate rate recommendations that minimize defaults and maximize protocol revenue, verified on-chain. Enable delegation to risk experts (e.g., Gauntlet, Chaos Labs) with skin-in-the-game.\n- Model: Floating power based on historical accuracy.\n- Outcome: Rates are set by proven risk models, not lock-up duration.

Protocols like Curve (veCRV) and Balancer (veBAL) tie governance power directly to token lock duration. This creates a governance-for-yield market where large voters (whales, DAOs) optimize for personal APR, not systemic stability. Their locked, non-transferable votes become a sunk cost, incentivizing them to push for maximum emissions to recoup opportunity cost, regardless of long-term inflation.

When voting power is illiquid and time-bound, rational actors vote to maximize their locked capital's yield, not the protocol's product-market fit. This leads to:\n- Emissions Misalignment: Incentives flow to deep, established pools (high TVL) rather than bootstrapping new, needed assets.\n- Stagnant Parameters: Proposals to reduce inflation or adjust fees are systematically voted down by the locked-in majority, creating governance capture.

Emerging models like Frax Finance's veFXS with gaugeless design and Solidly's bribe market evolution attempt to break the direct link. The fix is a governance primitive that separates:\n- Vote-escrow for rewards (yield rights).\n- Governance power based on reputation or activity (protocol rights).\nThis forces voters to consider long-term health, as their influence isn't a sunk cost tied to a specific yield farm.

Current metrics like TVL and APR are poor proxies for governance quality. Protocols need on-chain dashboards tracking:\n- Voter Concentration (Gini Coefficient): How decentralized is voting power?\n- Proposal Success Rate by Voter Size: Are small holders ever pivotal?\n- Emissions Efficiency: Yield per unit of real protocol volume (not farmed volume). Without this, corruption is invisible.

Protocols like Compound and Aave use ve-models (e.g., veCRV) to set liquidity mining rewards. Long-term lockers vote to direct emissions to their own positions, creating permanent yield cartels. This distorts capital efficiency and entrenches incumbents.

• Result: New pools or assets are starved of liquidity.
• Metric: Top 5 voters can control >60% of weekly emissions.

When voting power is tied to lock duration, a small cohort of long-term holders decides fee switches and treasury rates. Their incentive is to maximize protocol revenue (and their dividends) over user growth, leading to supra-optimal fee levels. This is a direct wealth transfer from active users to passive lockers.

• Result: Fees are set for extractive, not competitive, reasons.
• Example: Curve's gauge system directly ties fee revenue to veCRV holders.

Separate voting power from pure time commitment. Frax Finance uses veFXS but incorporates fraxferry for cross-chain governance. Better solutions include:

• Futarchy: Let markets predict outcomes of parameter changes.
• Conviction Voting: Power scales with sustained voting interest, not just lock time.
• Delegation to Experts: Token holders delegate voting power on specific topics (e.g., risk parameters) to recognized entities.
• Goal: Align decisions with protocol health, not locker dividends.

Mitigate the "set-and-forget" voting of lockers by making governance outcomes accountable. Inspired by Optimism's RetroPGF.

• Dynamic Weighting: Reduce voting power for addresses that consistently vote against measurable success metrics (e.g., TVL growth, fee volume).
• Retroactive Alignment: Allocate a portion of fees or tokens retroactively to voters who correctly supported high-growth initiatives.
• Effect: Rewards governance that actually benefits the ecosystem, not just capital parked the longest.