Gold and wealth are the main causes of war. - Tacitus

On October 13, Lybra officially announced the official launch of Lybra War and took it as the next phase of strength.

Looking back at the previous Curve War and Pendle War, we can see that the entire ecosystem has grown significantly under the Defi War model. This article will combine the most classic Curve War to disassemble the basic mode of Defi War. It also analyzes Lybra itself, the execution method of Lybra War, and the participants from a high to low perspective, analyzes the mechanism of Match Finance, the only one that openly participates in Lybra War, and conducts an in-depth deduction of this upcoming Lybra governance war.

What do we gain if we build a Crypto war machine?

TL; DR

• If an ecosystem wants to start a governance war, it usually needs an underlying protocol with sufficient liquidity to attract externalities; The second-layer protocol accumulates governance rights through yield boosting of governance tokens and creates a more efficient governance channel; Third-party protocols pay benefits to obtain the liquidity of the underlying protocol and provide externalities for system operation; Bribery agreements provide a bribery channel for short-term liquidity;
• Usually, after the underlying protocol decentralizes the incentive distribution right, it will create an ecological niche for the second-layer protocol, and the governance right war will officially begin;
• Looking back at previous governance wars, such as Curve War and Pendle War, both of which have led to significant ecological growth.
• Lybra is struggling with growth and has chosen to start a governance war as its next strategic step. Based on this, create a layer 2 protocol niche with a valuation of not less than $20m.
• Match Finance, as the only protocol to enter Lybra War, solves the eUSD and dLP matching problem for yield boosting; And released its own wrapped esLBR, mesLBR, which can be directly compared to cvxCRV.

Curve War: Crypto’s First Governance War

As the Old Testament Ecclesiastes says:

"What has been done will be repeated; What has been done will be done afterwards, and there is nothing new under the sun. ”

Only by seeing the past can we foresee the future. It is extremely necessary to review the most classic Curve War, so as to dig out the core and essence of Defi War.

Curve has accumulated a large amount of sustainable liquidity through the VE model on the platform with its first-mover advantage, and issued incentive distribution rights, that is, platform liquidity induction rights, to DAOs under the VE model. In this way, the demand for liquidity for third-party protocols translates directly into the demand for voting rights represented by veCRV. For third-party protocols with long-term liquidity needs, such as FRAX, Terra, etc., they will choose to buy CRV to lock up positions and continue to vote for themselves; For short-term liquidity needs, third-party protocols will bribe veCRV lockers in the bribery agreement in the next voting to increase the incentives in their own liquidity pool, thereby directing liquidity to their own pool.

Correspondingly, in order to compete for control of liquidity on Curve, layer two protocols such as Convex, Yearn, and StakeDAO have all issued their own wrapped veCRV, on which the revenue attribute and the governance attribute are separated. Initially Yearn Finance and Stake DAO were the main players in Curve, mechanically selling CRVs as soon as they received CRV rewards.

After Convex entered the market, the mechanism was further optimized, and the yield boosting of veCRV was used to absorb CRV. Specifically, there are two aspects, at the level of income attributes, veCRV is permanently locked to cvxCRV on Curve when the user deposits to obtain the maximum return, in addition to CVX token rewards, to maximize the return, and since veCRV cannot be withdrawn, the cvxCRV issued by Convex actually provides veCRV locker with exit liquidity; At the level of governance attributes, due to the excellent yield attribute, Convex has accumulated a large number of veCRVs and has actually become the main distributor of liquidity on Curve, and third-party protocols that have demand for liquidity in Curve can purchase CVX tokens to penetrate Curve, and will also provide bribe funds to Convex to obtain short-term liquidity on Curve.

With excellent mechanism design, Convex’s TVL quickly reached the billion-dollar level, and the cumulative amount of CRV reached 48.80%

(Source: Convex War, which is on top of Convex, also followed, and will not be repeated here.)

The Nature of Gears of War: Defi War’s Abstract Framework Interpretation

If we disassemble the Defi War’s model, then it is essentially the process of competing for the allocation right of the underlying protocol for the platform business after the incentive allocation right is issued to the DAO. **

In this process, there are the following participants: the underlying agreement, the second-layer agreement, the third-party agreement (hereinafter referred to as the third-party agreement) with business needs in the process of benefit distribution of the underlying agreement, and the tool agreement. Specifically:

Underlying Protocol: The underlying protocol generally exists as a liquidity attraction and storage platform. Layer 2 protocol: Build product logic on top of the underlying protocol, usually the underlying protocol will make some constraints in order to control token emissions, and the Layer 2 protocol will be presented to users as yield boosting on top of this. Third-party agreement: The platform business partner of the underlying protocol, on which a liquidity pool is opened. Bribery Agreements: Provide a bribery channel to help third parties negotiate bribes. Such as Votium, Hidden hand and other platforms.

To become the source of Defi War, what are the conditions required for the underlying protocol

In European history, the Balkans are an inescapable topic for the study of European wars. Thanks to the intricate geopolitical and religious factors, from ancient times to modern times, it has almost always become the source of some major wars, and has even been dubbed the “powder keg of Europe” by war historians. For this reason, the Balkans have become an excellent reference for scholars to study the elements of war.

In order to attract and maintain liquidity, the underlying protocol usually needs to have its own excellent product design, with more staking pools on the platform, and uses the VE model or its variant ES model to distribute the incentives between the pools, so as to attract sufficient externalities.

In the ve model, the user obtains veToken by locking the token, which is not transferable. The longer the lock time, the more veTokens are obtained, and the corresponding proportion of voting rights are obtained according to the proportion of users holding veTokens, which can determine the distribution of token emission incentives between business pools. The reward emitted by the protocol in the es model is esToken with an unlock period, and the exit during the unlock period will deduct a corresponding percentage of the share, thereby incentivizing real users to participate.

As the pioneer of the ve model, Curve has accumulated a large amount of sustainable liquidity in the platform through CRV incentives under the ve model. In order to reduce the secondary selling pressure caused by token emissions, Curve decentralizes its incentives for CRV emissions among many liquidity pools to ve(es) token lockers to increase its value capture.

Pendle is smaller than Curve, but as a yield trading platform for interest-bearing assets, the mechanism design of PT+YT separation makes it have high potential under the current situation of increasing types of interest-bearing assets. Also using the VE model, VE Locker votes on Pendle token emissions on different asset pools.

How to join Defi War

With the soil of war, how will the participants end? For the second-layer protocol, the mechanism should be designed in terms of benefit attribute and governance attribute

**Yield attribute: Based on yield boosting of VE tokens, VE Locker filters out governance attributes on the Layer 2 protocol, retains and enhances the yield attribute to the maximum while obtaining the exit liquidity of VE tokens. Governance Attributes: Layer 2 locks the longest VE token in the platform and automatically multiplecasts the lock to obtain the maximum voting rights.

In order to achieve higher returns, users deposit the governance tokens of the underlying platform into the second-layer platform. After helping users with yield boosting, Layer 2 protocols continue to accumulate voting rights for the underlying protocol. Create a more efficient incentive channel under economies of scale and capture bribery revenue. Users penetrate the governance of the underlying protocol through the governance of the Layer 2 protocol to complete the value capture of the token of the Layer 2 protocol.

An external input is required for the operation of a system, and in DeFi War, there are usually two types of this external input. Third-party agreements are the asset issuer and liquidity provider, i.e. LP. Asset issuers need the liquidity of the underlying protocol to support their issued assets, so they are willing to pay a price in exchange for liquidity, purchase tokens agreed in the system or provide bribes to enter the system as externalities to provide value support for the tokens of the underlying protocol and the second protocol. Liquidity providers need to vote incentives to their liquidity pools to obtain more returns.

In order to absorb governance tokens in the market, Layer 2 protocols compete to provide higher and more sustainable yields, a better experience (better liquidity and anchoring for their Warpped Ve tokens), and more efficient incentive channels to receive bribery proceeds.

After the Governance Wars, a More Robust Ecology

When the proportion of governance rights of the underlying protocol occupied by the second-layer protocol is basically fixed, we can consider that the battle for governance rights on the underlying protocol is basically over. The overall system presents the following pattern.

Specifically, in terms of indicators, the token inflation of the underlying protocol is controlled, the price support is strong, and the liquidity brought by incentives is more sustainable; The second-layer protocol creates a more efficient incentive channel to complete the value capture for its own tokens; Liquidity providers can emit higher incentives to themselves through bribery or direct voting; At the same time, in order to provide liquidity for their own assets to incentivize, third-party agreements have support for their own assets and provide externalities for the operation of the system. As a result, all participants in the entire ecosystem grow. Especially for low-level and second-layer protocols, TVL will gain intuitive growth.

Lybra War: Lybra’s way to break the game

Why Lybra? **

Lybra As the leading project of LSDfi stablecoins, users can use LST to mint interest-bearing stablecoins on Lybra eUSD to obtain higher returns than holding LST, as of October 12, Lybra’s TVL has reached $234.7m (Source:

However, at this time, Lybra itself also faced many problems, including the high inflation of LBR caused by the high APR in the early stage, the lack of growth caused by the competition for LST including Gravita, Raft, Agilely, etc. on the same track, and the community controversy over the handling of tokens that were not successfully migrated in time during the migration from V1 to V2. In order to create new growth points, the Lybra team also made a layout in advance in the V2 update, that is, by delegating the distribution right of each LST pool income to the DAO to improve esLBR empowerment, and creating a Convex-Like niche to yield boost esLBR to reduce LBR selling pressure. At the same time, a series of constraints are made to absorb LBR inflation. In late October, once the proposal for three LST collateral to go online was released, Lybra War began.

esLBR: Lybra War’s ammunition depot

In Lybra V2, the following mechanism is designed to absorb the inflation of LBR

**dLP mechanism: To obtain eLBR emissions from the eUSD pool, LP providers must lock in LBR/ETH dLP that exceeds 2.5% of the total value of their loans. When less than 2.5%, other users can purchase these unclaimed esLBR emissions with LBR and eUSD at a 40% discount. LBRs used to purchase esLBR will be destroyed. **Penal token burn mechanism: ** Extended the unlock time of esLBR from one month to three, if you want to exchange it back for LBR in advance, you will be confiscated by 25% to 90% as a penalty, and other users can also purchase this part of the forfeited asset at a 40% discount.

In terms of governance, esLBR determines the addition of LST collateral, the capacity of each LST corresponding to the vault and the eLBR emissions allocated to each vault.

On income rights, esLBR holders receive income through the circulation of eUSD and the minting of peUSD, including

• eUSD 1.5% service fee per year in circulation, converted into USDC/peUSD for distribution to esLBR holders

• **eUSD/USDC > 1.005, **Sell eUSD is issued in USDC
• **eUSD/USDC < 1.005，**Convert eUSD→ peUSD

• 1.5% of total peUSD borrowed APY for non-rebase LST minted peUSD

As with Curve, esLBR can get different boost multiples depending on the lock time. For the calculation of Boost, the esLBR lockable threshold is proposed as an intermediate indicator, and the ratio of personal debt to total debt is mapped to the number of total esLBR, and then the number of personal hedged esLBR is divided by the above indicator and multiplied by the time factor to obtain the Boost multiple.

**Lybra War Sandbox Deduction: How Big Will the War Fruit Be **

Since in Lybra v2, users must stake at least 2.5% of LBR/ETH dLP holding eUSD value to accept esLBR emissions, so the Layer 2 protocol needs to accumulate esLBR through yield boosting of esLBR and dLP, but in order to obtain esLBR emissions, you must have dLP, so the accumulation of dLP and the dynamic matching of dLP and eUSD is the core of Lybra War. **

Lybra War’s allocation rights are based on the esLBR emissions between LSD pools, and the potential demand side is mainly LST asset issuers and large eUSD miners. For large LST issuers, the capacity of a single pool of Lybra is relatively small, and the demand for bribery is not strong, so it will be more that small LST issuers accumulate esLBR and pay more attention to esLBR voting rights to increase their own use cases. And unlike Curve, Curve allocates liquidity, which is upstream compared to asset issuers, and Lybra is downstream of asset issuers. As a result, Lybra War will be more akin to Pendle War.

As of October 12, Lybra’s TVL is $234.7m, and according to Pendle War’s experience, the volume of Layer 2 protocols is generally between 10% and 30% of the underlying protocol. Based on this logic, the Lybra ecosystem will also have 2-3 Layer 2 agreements valued between $20m-$70m**. And in these layer 2 protocols, the ultimate winner will account for the largest proportion of esLBR, and there will be the most incentive-efficient path in this protocol under the blessing of scale effects, thereby receiving incentives from more LST issuers. In addition, the governance token of this protocol can be mapped to more Lybra governance rights, so that the token price will also have strong support. The winner’s position in Lybra War can be compared to Convex in Curve War.

**Threshold for becoming a great power: Lybra War Participant Requirements **

Based on the general model of DeFi War and Lybra’s restrictions on esLBR, the following constraints can be proposed for Layer 2 protocols:

1. Filter out the governance attributes of esLBR, retain and enhance the income attribute, and provide exit liquidity
2. For Lybra to combat the increase in acquisition emissions of LBR inflation, it is necessary to hold LBR/ETH dLP requirements, match dLP with eUSD, and receive emissions more efficiently.

Match Finance: Lybra War’s debut “new force”

Based on the current public information, only Match Finance has entered Lybra War, and there is no competitive situation. In Match Finance’s protocol design, there are two main problems solved

1. Users cannot get esLBR incentives without dLP when minting eUSD;
2. yield boosting of esLBR and exit liquidity issues;

For the first question, Match opens dLP and LST deposits, after users deposit, the protocol will dynamically match dLP and LST dynamic minting eUSD to earn the maximum esLBR emissions, coinage, redemption, risk management operations are unified by the protocol to improve efficiency and save gas, unified minting management also greatly reduces the risk of liquidation, encountering extreme scenarios Match will first liquidate internally instead of Lybra, thereby greatly reducing user liquidation losses. Users can choose to deposit either LST or dLP to earn income, with 20% of the LST depositor’s earnings divided among the dLP provider, and if both are deposited, the returns are calculated separately.

For the second question, similar to Convex, Match offers its own wrapped esLBR, mesLBR. Match will convert all 1:1 esLBR received by eUSD minted to mesLBR, providing exit liquidity for users who want to obtain esLBR staking earnings. Similarly, Match permanently locks the esLBR held by the protocol to maximize the boost payoff, so it can be directly compared to cvxCRV. And in the future, after the start of Lybra War, Match will use the voting rights accumulated by the protocol to obtain bribes and additional incentives.

Outlook – Finding Certainty in Uncertainty

With Lybra’s current sluggish growth, they decided to decentralize incentive allocation to the LST pool and create new opportunities through Lybra War’s model. Lybra War will undoubtedly happen, just on a different scale, as Lybra is actually downstream of the LST issuer, so the strength of late-stage bribery remains an uncertain factor. On the other hand, there is only one player in Match at this stage, and the entire Lybra War is in its very early stages, and the fog of war in Lybra War is still there.

But if you are a radical “war maniac”, maybe the prologue to this battle will also have a place for you.