One of the key contributors to the DeFi movement was the rise of decentralized exchanges which allows users to exchange or swap tokens with other assets without a centralized intermediary and more. Join us in this coinreport as we take you through Aerodrome Finance, an AMM DEX built on a new Base.
Aerodrome Finance is an AMM built on the MetaDEX design to serve as the primary trading and liquidity hub of the Base ecosystem. It inherits the latest features of Velodrome V2 to offer protocols and users on Base a complete venue for liquidity attraction, yield farming, and low-slippage swaps.
In addition, it has onboarded over 100 protocols and boosted the adoption of native USDC on Base blockchain like never before.
And since going live on 28th of August, 2023, Aerodrome now supports over $800 million in TVL, which puts it over 2X the combined TVL of all other Base DEXes (including Uniswap and Sushiswap).
This review of Aerodrome (AERO) was created for informational purposes. This article is not intended for promotion.
Decentralized exchanges are a marketplace where cryptocurrency traders transact on a peer-to-peer basis. Unlike centralized solutions, DEXs do not verify users, store their funds, or control transactions.
Order book based DEXs represent the traditional DEXs which somehow acted similar to centralized exchanges. They use an order book held by the exchange to allow traders to place their best bid or ask price for an asset, which may or may not be filled based on the available market liquidity.
As many would argue, the holding of the order book makes them partially centralized and to add to this problem, they are typically slow and offer limited liquidity. This explains why they quickly faded and AMMs rose to power.
In AMMs, assets are priced using a simple mathematical formula and are organized in pairs, for example ETH/USDT, in pre-funded pools of assets known as liquidity pools. These pools are funded by other users known as liquidity providers (LPs) who have to deposit an equivalent value of each asset in the trading pair. In return they earn interest through transaction fees that the DEX charges for executing trades on that pool.
This means for an AMM DEX to thrive, it needs a lot of users to lock up their assets in the form of liquidity, because the model has a downside when there is not enough liquidity-slippage.
“100% of value should flow permissionlessly to participants. Contributors to these projects should be rewarded through utility, not sales. And incentives should be aligned towards longevity, not exits.“
However, the distribution of value between stakeholders has been a problem even in the leading DEXs like Uniswap and Curve, but not anymore…
MetaDEX is a new DEX structure that combines the best of both worlds of liquidity and user experience from DEXs like Curve, Convex, and Uniswap into one powerful design to balance the needs of all stakeholders.
Liquidity providers get token emissions proportional to their productivity, token holders get 100% of the value created as incentives to optimize it, while traders get the best execution.
Different approach to DEX value distribution (‘DEX Trilemma’ as termed by MetaDEXs)
Aerodrome and Velodrome are the two leading examples of this design. And to help you understand this design better, we will take you through Aerodrome Finance.
At the heart of this design is its native token $AERO, an ERC-20 token designed to primarily distribute value across the entire Aerodrome ecosystem.
Every week (referred to as ‘epoch’ which starts every Thursday at 00:00 UTC and ends Wednesday at 23:59 UTC) the protocol distributes a preprogrammed amount of AERO emissions to liquidity pools.
After receiving AERO, LPs have several options to use them. They can simply hold the token in their wallets, redeposit it as liquidity for AERO pools, swap it for other tokens, or lock it to earn a ticket to participate in the protocol’s governance.
Locking AERO is done through a process known as vote-escrowing which involves locking them for a specified period (also known as vote-escrowed period), ranging up to four years and can be done by any AERO holder.
In exchange, lockers receive veAERO an ERC-721 non-fungible token (NFT), also known as a Lock or veNFT which represents the voting power. The duration of the lock-up determines the amount of veAERO that you receive and the voting power they possess.
The calculation for the amount of veAERO is:
veAERO = AERO ∗ time remaining in lock
4 years
For instance, if one locks 100 AERO for one year they get 25 veAERO.
So if locking AERO is the gate pass to Aerodrome’s governance, what is in it for the ‘contributors’?
veAERO voters act as the primary stewards of Aerodrome’s operation and have the responsibility to to vote on the next epoch distribution of AERO emissions.This can be done toward any pool they choose and in return, they receive 100% of fees from swaps and any additional voter incentives (proportional to locked amounts).
Because they only benefit from the pools they vote for, they are motivated to make strategic decisions.
The flow of value across users in Aerodrome
If a DEX is to attract more users, it must offer them the best user experience and thus protect them against slippage. This is what Aerodrome does through Slipstream concentrated liquidity pools. Where LPs define price ranges for which they are willing to provide liquidity. The end result of this is deeper liquidity around the active price and reduced slippage.
https://x.com/AerodromeFi/status/1824446071596281868
As we have seen, Aerodrome operates with a dual-token system that balances utility and governance. Therefore, it is important that we also look at how they were distributed.
AERO had an initial token supply of 500 million, of which 450M (90%) were locked as veAERO for four years, while 50M tokens were reserved for voter incentives and initial liquidity.
In 2024, Aerodrome played a pivotal role in Base’s meteoric rise. User deposits in Base applications surged from around $300M to nearly $4B over the year.
As the #1 DEX on Base, Aerodrome generated more revenue than all other DEXs combined. It hosted the highest onchain trading volumes for ETH, BTC, and FX pairs. By year end, it became the second largest DEX in all of DeFi based on data from Token Terminal.
Aerodrome’s total value locked (TVL) skyrocketed from $96M in January to $1.5B in December. Weekly trading volume jumped from $22.4M to a staggering $6.35B over the same period.
So, Aerodrome is aligning the interests of protocols, traders, liquidity providers, and token holders, so it can and has created a sustainable ecosystem.
Disclaimer: Trading and investing in cryptocurrencies (also called digital or virtual currencies, altcoins) involves a substantial risk of loss and is not suitable for every investor. You are solely responsible for the risk and financial resources you use to trade crypto. The content on this website is primarily for informational purposes and does not constitute financial advice.
