Velodrome: Reinventing the DEX Landscape
Velodrome is an Automated Market Maker (AMM) protocol built on Optimism to provide low slippage swaps and deep liquidity.
Overview
What is Velodrome?
Coming from the creative minds behind veDAO, Velodrome is a Decentralized Exchange (DEX) and liquidity protocol built on Optimism, currently making its mark as a promising option for traders and liquidity providers alike. Learning from the pitfalls of Solidly, Velodrome has carefully integrated important modifications to address the issues that previously limited its success.
The most notable features coming out of Velodrome are its significantly lower fees compared to centralized exchanges, as well as their deep liquidity. This cost advantage is made possible by utilizing Optimism, which offers substantially reduced gas costs when compared to Ethereum. Additionally, their high liquidity model comes from their incentives for LPs, including yield farming rewards and bribes.
How Does Velodrome Work?
With traditional AMMs, it’s common to see emissions being more focused on liquidity rather than on generating fees through trading volume. Velodrome tackles this problem by distributing 100% of the fees generated by a pool only to the veVELO voters that select it, incentivizing them to choose the pools with the highest trading activity.
To become a veVELO voter, VELO token holders can vest their tokens, selecting a lockup period that works best for them, with options ranging from a short one week to a lengthy four years. While committing to a four-year lockup may sound like a long time, it has its perks, such as: the longer the lockup, the more veVELO (an ERC-721 governance token in the form of an NFT) users can earn as rewards. The current structure works in a linear fashion, for example:
- 100 $VELO locked for 4 years will become 100 $veVELO
- 100 $VELO locked for 1 year will become 25 $veVELO
You might wonder, why lock up your VELO tokens? Well, when you lock your tokens, you gain voting power to help decide how liquidity emissions are distributed among specific pools. Velodrome then allocates these emissions proportionally, based on the votes each pool receives. As a reward, you’ll earn all the fees and bribes tied to the pools you’ve chosen to support.
Bribes are effectively voting incentives that protocols deposit to bootstrap and maintain liquidity for their pools by attracting votes and VELO emissions. The combination of bribes and fees steer voting results and in turn, attracts more liquidity providers (LPs) to the top-performing pools.
Furthermore, to reduce the dilution effect from VELO emissions, Velodrome implemented a rebasing system that increases the veVELO balance for lockers each epoch, keeping things balanced and fair for everyone involved. An additional advantage of using an ERC-721 token for this is that it can be traded on NFT marketplaces, giving users much more flexibility.
Now looking forward, when Velodrome unveiled their V2 model, they focused not only on enhancing the overall user experience but also on implementing some standout features. As a DeFi enthusiast, you may appreciate the following upgrades:
Adjustable Trading Fees — As the name suggests, adjustable trading fees enable protocols to set their own fees for their specific pools. This is particularly useful as it can be used to entice voters to allocate emissions to those pools, providing them the opportunity to earn more from the fees generated. It’s a win-win for both protocols and voters.
Concentrated Liquidity — Taking a page out of Uniswap V3’s model, Velodrome will develop a similar concentrated liquidity model to increase capital efficiency for its users — This upgrade will come shortly after the launch of V2.
VELO FED — The VELO FED is a new first-of-its-kind model that enables veVELO voters to set the monetary policy for VELO supply, putting the power into the hands of VELO lockers.
Tokenomics
Velodrome opted for a more careful approach to the distribution of its VELO tokens compared to Solidly. Rather than handing out a large chunk of tokens in an initial airdrop, it spread the release of tokens over a longer time period, creating a sustainable framework for future growth.
Velodrome also added a twist. Instead of focusing solely on TVL, they targeted their airdrops toward those likely to provide the most value to the ecosystem. However, rebasing was maintained as a feature, but with a more defined method of operating. As a result, token lockers experienced a very slow rate of dilution.
What’s perhaps even more interesting is that the Optimism team was allocated 5% of the total veVELO supply to support and incentivize necessary pools. A move by Velodrome to show their commitment to supporting public goods. This was then further validated by Velodrome matching bribes on public goods pools.
A full breakdown of their tokenomics can be found in their documentation.
Summary
Velodrome is an impressive DEX and liquidity protocol built on Optimism, offering great opportunities for traders and liquidity providers. It stands out due to its lower fees and deep liquidity, which are highly attractive in the DeFi space.
What makes Velodrome unique is its approach to emissions and token lockups. VELO token holders can choose their lockup period, earning more veVELO as a reward for longer commitments. By locking up tokens, users gain voting power, influencing how liquidity emissions are distributed among pools. This not only benefits the voters, but also attracts more users to deposit liquidity into top-performing pools.
Velodrome’s V2 model will introduce several standout features, such as adjustable trading fees, concentrated liquidity, and VELO FED, which put more power in the hands of VELO lockers. Their tokenomic structure also adopted a more sustainable approach to token distribution, ensuring long-term growth. Keep an eye on them, Velodrome is definitely one to watch.
