A Comprehensive Understanding of Optimism's DEX Leader Velodrome: Can a Trading Fee Rate of Only 0.02% Sustain Customer Acquisition?
Does Velodrome intend to replace Uniswap, occupying one-third of Optimism's TVL?Author: Arkady Childe
In the long history of DEX, the time before 2020 seems like a calm prelude. However, starting from June 2020, this field has undergone tremendous changes, with trading activity surging and daily trading volume skyrocketing to $2 billion.
Early DEXs primarily relied on order book models, but this approach did not trigger a significant increase in liquidity. Subsequently, the birth of the Automated Market Maker (AMM) mechanism injected new vitality into DEXs, attracting a large number of trades and users. Currently, most popular on-chain DEXs have chosen AMM as their core mechanism.
However, while AMMs have brought opportunities, they also come with issues such as impermanent loss and low capital efficiency. To encourage liquidity providers to participate, many protocols have launched liquidity mining, attracting them with generous token rewards.
Against this backdrop, Velodrome has quickly emerged as a trading leader on Optimism. Its Total Value Locked (TVL) has reached an astonishing $310 million, accounting for nearly one-third of the overall Optimism ecosystem. Notably, Velodrome's position on Optimism has surpassed other well-known DeFi projects such as Uniswap and Curve.
Next, we will delve into various aspects of Velodrome's products, economic model, and more.
Overview of Velodrome's Advantages: Low Fees, Dual Tokens, DAO Governance
Velodrome, as an AMM-style native DEX on Optimism, is launched by the team behind veDAO and is inspired by Solidly, introduced by Andre Cronje. Its token design combines the veToken model with Solidly's (3,3) mechanism, showcasing unique technical features.
First, Velodrome's trading fee is 0.02%, which is more moderate compared to Curve's 0.04% and Solidly's 0.01%. Additionally, veVELO is not only in the form of NFTs but also has voting governance functionality. Holders of veVELO can earn all fees and bribes from the liquidity pools they vote for, as well as receive anti-dilution Rebase weekly. To ensure fairness, Velodrome has eliminated LP acceleration rules, creating an equal mining environment for veVELO voters and Velodrome LP providers. Furthermore, to mitigate future risks, Velodrome has preemptively whitelisted certain tokens.
In terms of token management, Velodrome utilizes the native token VELO and veVELO for utility and governance. VELO is primarily used to reward liquidity providers, while VELO token holders can choose to lock their tokens to receive veVELO. This locking relationship is linear; for example, locking 100 VELO for 4 years yields 100 veVELO, while locking for 1 year yields 25 veVELO. veVELO holders can also vote on which liquidity pools can receive VELO rewards and, in return, earn transaction fees and bribes from the trading pairs of the pools they participate in voting.
Finally, Velodrome has learned from Solidly's lessons and has preemptively whitelisted certain tokens, including those from partner protocols. Individuals holding a certain proportion of veVELO can initiate votes to add tokens for others to vote on. However, it is worth noting that the initial committee, composed of 7 members from the Velodrome team and some well-known figures from the Optimism community, has the authority to disable malicious gauges or veto whitelist requests, ensuring the stability and security of the system.
VELO Token Distribution Mechanism: Aiming to Establish a Fair and Active DeFi Ecosystem
After gaining insight into Velodrome's core construction, we turn our attention to its economic model, particularly the distribution strategy and incentives for VELO.
VELO, as the core token of Velodrome, has an initial issuance of 400 million tokens. In this bold distribution strategy, Velodrome decided to reward 60% of the tokens to community members on the first day of the project's launch. Additionally, partners and DAOs received 24%, while the founding team of Velodrome and the Optimism team received 10% and 5%, respectively. To further encourage liquidity, 1% of the tokens have been reserved for the genesis liquidity pool.
Notably, Velodrome has announced the launch of a new DEX fork on Coinbase's Layer 2 network, Base, named Aerodrome. This new platform plans to attract users through an airdrop of its native Aero token, particularly targeting those who have already locked VELO to receive veVELO. When Aerodrome officially launches, veVELO holders will have the opportunity to share 40% of the initial Aero token supply. By airdropping the native Aero token, Velodrome encourages existing VELO and veVELO holders to participate in the new DEX. This strategy ensures that Velodrome's loyal users quickly transition to the new platform while attracting new users.
Velodrome's data performance chart
In terms of reward distribution, Velodrome pays special attention to those members who contributed in the early stages of the project. For instance, loyal supporters of veDAO, namely holders of WeVE tokens, will share 27% of the initial supply. Active users of Optimism will also have the opportunity to share 18% of the airdrop. Interestingly, seasoned users of cross-chain DeFi, such as those who have long locked veCRV on Curve, will also benefit from this airdrop. Meanwhile, to further solidify partnerships, 18% of the tokens will be reserved for protocols that closely collaborate with Velodrome, while another 6% will be allocated as rewards for partners.
When it comes to rewards, Velodrome adopts a gradually decreasing strategy. Each week, liquidity providers will share rewards starting from 15 million VELO, which will decrease by 1% weekly. To balance this reduction, veVELO holders will regularly receive additional rebase veVELO rewards.
In summary, Velodrome offers its users four major rewards:
Liquidity incentives: Rewards for users who provide liquidity to the platform.
Trading fee earnings: Sharing trading fees based on users' voting rights.
External contribution rewards: Encouraging external users to provide additional rewards for liquidity pools.
Dilution protection: Rewards provided to veVELO holders to ensure their rights are not diluted.
Through this economic model, Velodrome aims to establish a vibrant and fair DeFi ecosystem, ensuring that all participants can benefit.
Velodrome's Efforts in DeFi Are Commendable, but Future Attention Is Needed
Looking back at Velodrome's overall construction, we can clearly see its unique attempts in the DeFi space. Its token model and economic system bring new perspectives and thoughts to the entire field. However, like all emerging technologies and models, Velodrome will inevitably face a series of challenges and opportunities. Market reactions, user attitudes, and acceptance levels will be key factors in determining Velodrome's true value. Nevertheless, regardless of the final outcome, Velodrome's exploration and efforts provide valuable references and experiences for the development of the DeFi field.
