What is x(3,3)?

To understand how x(3,3) works, we need to first understand ve(3,3):

Origins of ve(3,3)

Andre Cronje revolutionized exchanges by creating a system where all participants are incentivized to act in the best interest of each other and the exchange. While not perfect, it was a huge step forward as a means to align incentives with participants. To understand ve(3,3), we need to break down two key concepts:

Rebase

A core element of the ve(3,3) model was the rebasing of locked positions to prevent a user from being diluted by emissions, OHM (3,3). This anti-dilution mechanic for veTOKEN holders allowed them to maintain the same ownership without having to buy and lock more tokens.

Here is a crude visual representation of it in action:

xSHADOW addresses dilution with a unique “PVP Rebase”, which acts both as dilution protection and additional yield. Instead of adjusting locked position sizes to counteract the effects of new emissions, x(3,3) does two things:

1. xSHADOW stakers are able to capture emissions created by the protocol with emission exits.
2. xSHADOW allows holders to exit early, sacrificing their voting power. The forfeited underlying tokens are streamed to existing stakers proportional to their positions.

Vote Escrow (ve)

The second concept you should understand is vote escrow (ve) - a fundamental change to governance and on-chain voting systems that introduced time-weighted voting.

Instead of voting with token amount a, tokens are lockable in a VotingEscrow, now shown as veA, for a selectable locktime

Your vote is not only calculating total tokens held, but also the lock duration. Curve first introduced this in a 2020 whitepaper.

A visual representation can be seen below:

This system intentionally creates a risk vs. reward scenario. where more governance power is given to active participants continually extending their locks. x(3,3) has a similar decision matrix, but users do not have to lock tokens to participate.

ve(3,3) ➡ x(3,3)

ve(3,3) has a flaw: the absence of an exit mechanism. Without such a measure, the system accumulates dead voting power, as users hold veTOKENs indefinitely without active participation, still influencing the protocol without contributing to its success. Users can exit xSHADOW at any time.

Now that you understand ve(3,3), the question persists:

How does x(3,3) improve this?

xSHADOW is where x(3,3) shines by taking a user-first approach to incentive access—removing four-year locks and incorporating exit mechanisms. Rather than relying on traditional token unlocks or insider rewards, x(3,3) creates an system where tokens flow to active participants and ownership naturally concentrates among users who value it most.

User Exits

Shadow implements a unique player vs. player (PvP) rebase mechanism where exit penalties are streamed to xSHADOW stakers. When users exit their xSHADOW position early, 100% of the forfeited tokens are streamed to existing xSHADOW stakers proportional to their positions. This creates a powerful incentive structure where:

1. Rewards scale with the protocol (user activity)
   • Strong incentives to stay instead of locks
2. Removes the need for locks or wrappers
   • xSHADOW solves the need for token lock-ups
   • $x33 (Liquid staked xSHADOW) solves the need for liquid wrappers

Emission Exits

x(3,3) takes a proactive approach to ecosystem health by distributing all emissions through xSHADOW. Emissions can be claimed as either liquid SHADOW or xSHADOW, giving you the choice between immediate liquidity or improved yield:

Claim as SHADOW (Liquid)

• Instantly exits xSHADOW rewards to SHADOW (Default APR)
• xSHADOW stakers are able to capture emissions created by the protocol

Claim as xSHADOW (Illiquid)

• Claims emissions as xSHADOW (2X APR)
• Ownership flows to those that value it most (commit long-term)

Conclusion

This dual incentive structure ensures that participation becomes increasingly valuable over time. As more users interact with the protocol, both the frequency of exits and the volume of emissions grow proportionally, scaling Shadow without requiring artificial lock-ups or arbitrary restrictions.

Previous DEX Limitations

The history of decentralized finance has been marked by repeated attempts to solve the "DEX Trilemma" - the challenge of aligning incentives between traders, liquidity providers, and token holders. While Andre Cronje's ve(3,3) model theoretically solved this by balancing incentives between all participants—long lock-ups created a high friction system that forced users to lock tokens to participate equitably in the incentive model.

Uniswap focused on a simple two-party system: traders and liquidity providers (LPs). ve(3,3) improved this by properly aligning incentives with token holders as well, but access to those incentives was unfair and heavily skewed towards protocols.

Credit to the Aerodrome team for the original graphic and concept.

The result? A more fluid and accessible system that still provides strong incentives, while removing much of the friction that still plagues ve-token models (token lock-ups).

Directing Emissions

As discussed in our DEX Trilemma, prior to ve(3,3) users had no choice but to suffer from misaligned incentives from centralized parties. This led to inefficient capital allocation and reduced long-term sustainability for exchanges. x(3,3) solved this by putting emission control directly in the hands of xSHADOW stakers who are incentivized to optimize for value.

Directing emissions is an extremely powerful use case for xSHADOW stakers as it gives the holders primary power over what the platform incentivizes. If a token continually underperforms via fees, xSHADOW holders are going to be less incentivized to vote for it, reducing incentives to it.

Less rewards from the pool = less emissions = less liquidity.

Each week, in what we call Epoch, xSHADOW stakers make a choice on what liquidity pools to direct rewards to. Based on that vote which concludes every Thursday 00:00 UTC, xSHADOW emissions are then directed to the chosen liquidity. You can read more about voting and how emission distribution is calculated here.

Voters earn claimable trading fees throughout the week, based on the liquidity they voted for before the epoch flip. If you vote for a liquidity pool in Epoch X you will then earn swap fees for the entirety of Epoch Y based on your vote compared to total pooled votes.

Vote Incentives

On Shadow we utilize two different types of vote incentives: liquidity pool incentives & voter incentives. A vote incentive can be in the form of ANY whitelisted token. As a protocol, incentivizing your liquidity will attract voters and result in higher directed emissions. As an xSHADOW staker, you earn a portion of the incentives.

A voter incentive is designated at anytime during the current Epoch and paid out in lump sum to xSHADOW voters. It is displayed after the incentive is made and will influence votes until Epoch rollover.

A liquidity incentive is another method protocols can use to attract liquidity provision. This incentive is distributed directly to liquidity providers and is a great way to bootstrap new liquidity on the platform.

Fees

Shadow's x(3,3) model takes a straightforward approach to fee distribution:

• 100% xSHADOW holders - All protocol fees flow to governance participants, incentivizing long-term alignment!

This creates a flywheel where:

1. High-performing pairs generate more fees
2. xSHADOW stakers are more incentivized to vote
3. Increased emissions attract deeper liquidity
4. Deeper liquidity drives more volume and fees

Dynamic Fees

Shadow's algorithm automatically adjusts fees based on market conditions and trading volume. Thanks to FeeM, fee adjustments can happen as frequently as every 30 seconds.

While dynamic fee mechanisms are not entirely novel—Shadow's dynamic fee algorithm monitors both DEX and CEX volume inflow. This leads to better performance, especially during volatile periods.

Below is a visual of Shadow's dynamic fees versus Uni-V3:

Fee-Split

Fees-splits can be configured per gauge, below are the default fee-splits for all liquidity types:

FeeShare™

Memecoins often avoid ve(3,3) exchanges due to sell pressure from fee distributions. Shadow's FeeShare™ system addresses this by returning a portion of trading fees to memecoins.

Only tokens from whitelisted memecoin launchers will have a percentage of the total trading fees distributed back to users, according to each launcher's directive. The remaining fees are then distributed through the normal fee-split.

FeeM

Shadow Exchange leverages FeeM's gas refunds to enhance protocol efficiency in two key ways:

By receiving 90% gas refunds through FeeM, we can continuously run these operations without concern for transaction costs. This results in:

• Better price execution across all liquidity
• Reduced adverse selection costs for LPs

The captured value is returned to the ecosystem through vote incentives, ensuring value stays within Shadow.