Background

In 2020, Curve changed DeFi by introducing a vote-escrow model that let locked tokenholders direct emissions through gauges. Every protocol needs liquidity to survive, and the gauge is the valve that determines who gets to drink. For the first time, real-time governance determined where rewards landed, where liquidity formed, and which markets got to deepen. This led to the so-called Curve Wars.

Protocols like Yearn and Stake DAO moved quickly to accumulate veCRV and direct emissions toward their own preferred pools. But Convex rapidly consolidated voting power by allowing users to deposit CRV for liquid cvxCRV and by pairing boosted Curve rewards with CVX emissions. This effectively brought the Curve Wars to an end.

Andre Cronje is often cited as having sparked the Curve Wars after witnessing a concentration of voting power on Curve.

His Solidly protocol on Fantom introduced ve(3,3), a model that combined Curve’s vote-escrow mechanics with OlympusDAO’s cooperative game theory. The design was right. The execution was not. Solidly launched broken. Velodrome picked up the pieces on Optimism, fixed the contract bugs and economic edge cases, and proved the model could work. Aerodrome then brought Velodrome’s refined codebase to Base and executed at scale.

ve(3,3) fixed DeFi’s value accrual problem. In Curve’s model, holders locked tokens and hoped the system would eventually reward them. In Aerodrome’s model, locking AERO gives veAERO, which can be used to vote and earn on gauges every week. Protocols that want liquidity for their token pairs post incentives to attract votes. Voters weigh those incentives against the organic fee yield of each gauge and allocate accordingly.

Swaps evolved into a market where protocols could bid for liquidity through gauges. Lending never did.

Lending Did Not Get Its Gauge

Lending evolved differently. Compound launched on Ethereum mainnet in September 2018 as the first protocol to offer permissionless lending pools with algorithmically set interest rates based on supply and demand. The launch of COMP token in June 2020 sparked DeFi Summer, proving that token incentives could bootstrap lending supply. However, the token itself had no mechanism to direct the flow of supply.

Aave scaled that model with pooled liquidity, flash loans, and more sophisticated risk configuration, but the basic process remained the same: propose, vote, pass or fail. If it passed, existing depositors absorbed the risk. If it failed, the asset had no market. Protocols like Ondo built entire lending platforms just to sidestep this bottleneck for their own tokenized treasury assets.  Cream and Fuse ran permissive listings against Aave and Compound. Abracadabra let users borrow against interest-bearing assets MakerDAO would not touch. Euler and Morpho pushed further by making market creation permissionless and isolated.

Permissionless market creation solved the question of who can create a lending market. It did not solve who directs capital into one. Despite all the advancements in DeFi lending, supply still arrived passively. The natural assumption is that rates do the routing. If a lending market is undersupplied, the rate rises, and deposits follow the yield. That assumption has been tested on Aave and Compound and has been debunked. Across multiple DeFi systems and stablecoins, algorithmic interest rates showed almost no statistically significant relationship with actual deposit flows.

Depositors continued placing stablecoins into DeFi lending pools even when the risk-free rate exceeded the rates those pools offered. The economic model of rate-driven depositing could not explain the behavior. DeFi lending systems have not been able to rely solely on liquidity provided by depositors.

Liquidity has no invisible hand. When rates are not enough, markets need a tool that lets demand pull supply into the right place. In swap markets, that tool is the gauge. Protocols that need deeper liquidity in a specific pair bid for it. Frax held 19% of CVX and used it to direct CRV emissions toward Frax pools. Protocols weighed the cost of incentives against the value of the liquidity they received and allocated accordingly. The gauge turns passive supply into directed capital.

Defi lending never had this primative. No protocol could bid for deeper lending supply in a specific collateral market the way Frax bid for deeper FRAX/USDC swap liquidity on Curve. The gauge existed for swaps. It had never existed for lending.

Why Lending Is Harder

Porting ve(3,3) directly from swaps to lending does not work. The two markets fail in different ways.

• On a swap gauge, the worst case for a voter backing the wrong pool is a lower share of fees. The pool earns less volume than expected, incentives were spent poorly, and everyone moves on to the next epoch.
• On a lending gauge, the worst case is a solvency event. Collateral crashes, liquidations fail to clear, and depositors lose money.

This is where the two bottlenecks converge. DeFi lending never solved who directs supply into a market. It also never solved how to price the risk of listing a new collateral asset without forcing existing depositors to absorb that decision.

Pricing Risk Through Emissions

A lending gauge must determine who directs supply into a market, and who bears the risk of being wrong about it.

This is a value-capture problem. Aave and Compound built lending markets that work, but they never solved who earns for the long-term performance of those markets or who is on the hook when a listing goes wrong. There needs to be a way for markets to prove creditworthiness before depositors absorb the risk.

That starts with the way revenue is split. Most of the interest paid by borrowers flows back to depositors, and the protocol takes a slim spread. The depositor collects yield and exits when better yield appears elsewhere. No participant earns for the long-term performance of the markets they helped create.

Next is how assets get listed. Typically, new markets are added through governance proposals. However, the people voting on a listing are not necessarily the people who deposit into it. If a listing goes through, depositors absorb the risk of a decision they did not make, while voters face little more than reputational risk.

Both gaps share a root. The system cannot tell who is serious. A vote on Aave costs nothing, and a deposit can leave the next block. Nothing in the design forces a participant to put long-term skin behind a claim about creditworthiness.

Ve-economics offers a way to route supply and price risk in the same motion. Emissions are how a protocol pays for supply, and are also how protocols compete for the right to be supplied. The vote that directs emissions is the same vote that decides which markets deserve liquidity. The people casting that vote have locked capital behind the decision. Emissions are the only place in DeFi where incentives, judgment, and skin in the game already converge in a single weekly decision.

We can adapt this to create a new DeFi lending primitive. On Mezo, a market that wants supply can post incentives to attract veBTC votes. veBTC holders weigh the yield of that market against the risk they believe it carries. If the yield compensates the risk, they vote and route MEZO emissions toward it. If it does not, the incentives sit.

A project that thinks the market has mispriced its risk can pay emissions to argue otherwise. The bid for emissions becomes a market signal. It tells veBTC holders how much the project is willing to pay for capital, and it tells the market how much compensation voters require to support that risk.

In swaps, gauge votes signal where liquidity should deepen. In lending, they could signal which collateral markets are credible enough to support. As a result, emissions are less of a subsidy and more of a risk-pricing signal. In every epoch, voters weigh the returns a market can generate against the risk they believe it carries.

That changes the asset-listing problem. Instead of lobbying governance and waiting, a project can try to earn supply by convincing long-duration holders that the market is worth backing.

Lending Gauges Turn Emissions into Underwriting

Lending gauges cannot copy swap gauges. They have to route supply and price the risk of the markets receiving it in the same vote, by the same people.

Emissions make that possible. A vote for emissions is a claim that a market is creditworthy. A bid for emissions is the market saying it agrees. Creditworthiness in DeFi has always been assessed by people who do not have to live with their assessments. Mezo asks whether the people setting the price should be the people holding the bag.

The mechanism that turns those votes into a verdict on creditworthiness is the subject of a future post. Stay tuned.

If you are new to Mezo and want to get a head start, check out the Getting Started blog.

→ Lock BTC at mezo.org/earn/lock.
→ Vote at mezo.org/earn/vote.
→ The Mezo Earn whitepaper covers the full mechanism design.
→ The Mezo docs walk through each step.

The materials are provided for informational and illustrative purposes only, and may not be complete. The materials contain forward-looking statements regarding future events, milestones, development, and utility. Such statements are based on current expectations and assumptions and are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied. The materials do not constitute, and should not be construed as, financial, investment, or legal advice. Digital assets are highly volatile assets with no guaranteed value, utility, or performance. Participation involves significant risk, including but not limited to price volatility, technological vulnerabilities, and liquidity risk, which may result in partial or total loss of funds. Participants must conduct their own due diligence on all relevant matters and seek advice from legal, tax, or financial advisors regarding the risks and consequences of participation. All actions taken are done so at your own risk.

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