Aerodrome Takes Flight
Navigating the Complexity of This High-Flying DEX
Introduction:
Aerodrome has been on a remarkable ascent lately, with its trading volume and Total Value Locked (TVL) surging past the $1 billion mark, claiming the 5th spot in overall TVL rankings. What many believed was only possible for centralized exchanges (CEX) is now becoming a reality for decentralized exchanges (DEX) with lower fees and incredible incentives. Aerodrome's explosive growth makes it a project worth understanding, especially for those interested in the evolving DeFi landscape.
What Is Aerodrome?
Aerodrome is a fork of Velodrome, originally created on the Optimism network as an implementation of Andre Cronje’s vision of the ideal DEX, combining the best aspects of Uniswap, Curve, and Olympus. In its simplest form, Aerodrome is an automated market maker (AMM), where tokens can be swapped using liquidity pools—a concept popularized by Uniswap.
However, Aerodrome goes beyond just token swapping. It introduces its voting tokens (veAERO), aligning incentives for AERO token holders and liquidity providers in a novel way. It operates under a "3,3 system," referring to a cooperative strategy where AERO tokens are locked into veAERO, a time-locked NFT, rewarding participants with voting power and emissions.
But what exactly does all this mean? How does this protocol work, and what does on-chain data reveal about its inner workings?
Why This Article?
Aerodrome's inner mechanics are not just complex—they're daunting to navigate. Available dashboards are often difficult to interpret or locked behind closed access. This lack of transparency can be challenging, but that's where Agnostic and on-chain data comes into play. With this article, we're embarking on our first flight into the protocol's depths, aiming to unpack its complexity and visualize what's truly going on under the hood.
This is just the beginning, and we plan to delve further into Aerodrome in the future. We invite you to join us on this exploration and provide feedback. Our hope is that by shedding light on this protocol, we can foster a greater understanding and interest in Aerodrome's innovative approach.
Okay, Let's Look at the Pools
Aerodrome currently has around 2,500 ‘basic’ liquidity pools and 32 ‘slipstream’ pools according to on-chain data from their PoolFactories, rivaling Uniswap on Base. This has steadily increased overtime with roughly 200 getting added per month.
Pools are created using pairs of tokens, and in slipstream pools, you even get individual NFTs that set parameters like the liquidity window. The TVL (Total Value Locked) of these pools is the sum of the value of tokens they contain. Below, we observe the WETH TVL across the top pools, showing an increasing trend as Aerodrome’s TVL grows.
Pool Fees and Rewards
Pools generate fees that are passed to liquidity providers, with the highest TVL pools often earning the most fees. The USDC/AERO pool, for example, collects nearly 40% of the platform's fees, amassing roughly 190 WETH in the past 30 days.
However, fees aren't the only form of rewards on Aerodrome. The platform incentivizes users through AERO and veAERO tokens.
AERO Emissions
Most of these pools have gauges linked to them, and veAERO holders vote on which gauges should receive AERO emissions. In turn, veAERO voters earn emission from the protocol, further enhancing their rewards. Although emissions have been declining, they remain substantial, given the changes in token prices.
The Role of veAERO Tokens
veAERO is held as an NFT with a specific lock-up period; the longer you lock the token, the more voting power and rewards you receive. Here's a glimpse of the top veAERO holders, some with specific lock parameters set for their NFTs:
*We’ll take a closer look at the NFT lock periods in a future article*
As a veAERO holder, your job is to vote on pools each epoch. Below is how the latest epoch votes were cast:
And this directly impacts the distribution of AERO which aligns closely with the votes:
Fees and Bribes for Gauge/Pool Voters
The final piece of the Aerodrome puzzle involves bribes and fees distributed to gauge/pool voters. Protocols often incentivize pools with their tokens, AERO, or other fungible assets like WETH to secure votes, which leads to more liquidity and better trading conditions. Here’s how fees and bribes have been claimed in recent months:
Conclusion
As Aerodrome continues to soar, its innovative approach and incentive structures are cementing its place as a significant player in the decentralized exchange space. By blending complex mechanisms with cooperative strategies, it sets a new standard for what DEXs can achieve.
Our journey today has been just a first attempt at unpacking this intricate protocol. With the help of on-chain data, we've gained a glimpse into the moving parts of Aerodrome—its pools, emissions, and rewards systems. However, there is still much more to uncover. We’ll cover the NFT locks and tokens going into the protocol a bit more in future articles.
Also, please - this is a call for feedback and a solicitation for further exploration. Understanding Aerodrome’s complexity isn’t easy, but with continued analysis and community interest, we can chart a clearer path. We hope this sparks more curiosity and deeper dives into the mechanisms that make Aerodrome tick. The flight has only just begun!