1/x Thread on game theory of new $CRV locking mechanism:

2/x Roughly speaking, this locking mechanism works by rewarding people based on having a higher % of the voting pool compared to their % of the liquidity pools, up to a maximum of 2.5x boost to rewards.

3/x It's worth noting right away, that this is merely transmuting rewards, not creating value. Some people (those who lock) will earn more, and others will earn less.

4/x To talk about what dynamics this is likely to create, let's first discuss one of my favorite game theory toy games: the dollar auction.

5/x In a dollar auction, an auctioneer puts up a $1 bill and will give it to the highest bidder. But there's a catch: the second highest bidder (or in some cases, all bidders) will also have to pay their bid to the auctioneer.

6/x Suppose I'm the first bidder. I may decide, "hey, $0.98 is less than $1, if I bid that, then I will make a 0.02 profit when I win!" But someone else (using the same logic) can decide to bid $0.99 in expectation of making $0.01.

7/x As the first bettor, I'm in a pickle. I can either give up and let me opponent win (in which case I now lose my $0.98 bid). Or I can try to outbid and bid $1 trying to not lose as much. Now my opponent is in the same position and bids $1.01 which leads me to try 1.02, etc.

8/x This escalation can continue for quite some time. The winner almost always pays more than $1, and sometimes $3 or more! And don't forget the losers who also have to pay in order to get nothing!

9/x This style of auction has also been used with success to rip off people on so-called "penny auction sites". See https://www.consumer.ftc.gov/articles/0037-online-penny-auctions

10/x So what does this all have to do with $CRV locking? Obviously CRV is not a scam in the same sense. But, if you accept that CRV is overvalued at 10b and that it is likely to converge to a more reasonable valuation over time, then there are a lot of similarities.

11/x Individuals are asked to bid (by buying and locking overpriced CRV) for the right to earn additional rewards. They probably won't be making a decision based on a rational valuation of CRV, but rather because the auctioneer is waving a dollar bill in their face.

12/x As others do the same thing, you will face a choice: bid more or lose most of the bonus rewards (and still be stuck with the cost of your initial bid). Moreover, as people do this, the CRV price is likely to increase, which makes the cost higher... but also the rewards!

13/x But in terms of fundamental value, the value of the rewards for governance and fee rights will be the same. You get the same % of the network. The people who participate most fervently in this game are the most likely to get rekt in the long term as more tokens unlock.

14/x What's the takeaway? 1) be careful with buying and locking tokens to increase your rewards in the short term, as the benefit you get from them may not last but you will have to reckon with the cost and possible degradation of your principal over the course of the lock.

15/x 2) if you want to exploit these dynamics, think about who wins in a dollar auction!