Authors: Bryan Tan & Arthur Cheong
Compiled by: Felix, PANews
Before discussing Aerodrome, let's understand some background about DEX.
Breaking the DEX Stalemate: Why Traditional Models Fall Short
The development of DEX has been accompanied by a fundamental struggle: balancing the interests of multiple stakeholders while maintaining sustainable growth. Two key challenges have plagued traditional DEX models:
1. Balancing the interests of various parties:
DEXs must serve three distinct groups simultaneously: traders seeking efficient markets, liquidity providers (LPs) pursuing yields, and token holders demanding appreciation.
Uniswap, as a typical representative, directly passes 100% of fees to LPs, leaving UNI holders with no direct protocol income. Meanwhile, Curve adopts a neutral approach, splitting CRV evenly between LPs and veCRV holders. However, with the decline in release volume, this model faces sustainability issues.
The result is a continuous tug-of-war among parties, leading to unsatisfactory returns for everyone involved.
2. Issuance Dilemma:
The DeFi summer of 2020/21 starkly exposed the flaws of strict issuance plans, with countless Uniswap v2 fork tokens attracting liquidity through token inflation, resulting in fierce competition.
Curve's innovative veCRV system introduced bribery as a mechanism to guide liquidity, but it led to unexpected consequences: voters maximize personal interests through bribery instead of supporting funds that generate sustainable protocol income.
Even though Solidly, created by Andre Cronje, attempted to address these issues, it suffered from design flaws—early issuance and token whitelisting ultimately undermined its effectiveness.
Every iteration of DEX design has attempted to address these fundamental challenges, but to date, none have fully resolved them.
Aerodrome: The MetaDEX Revolution
Aerodrome combines the best features of previous DEXs—tokenomics inspired by Curve/Convex for improved governance and releases, a centralized automated market maker (clAMM) inspired by Uni v3 for capital-efficient exchanges, and improvements to the Solidly codebase.
These features provide a solution to coordinate incentives among parties and position themselves as the preferred venue for user trading.
veAERO holders can receive 100% of the fees and bribes from the pools they vote on as compensation. This incentivizes them to direct towards the pools with the highest emissions and fees, which also benefits the protocol.
LPs will receive 100% of the AERO emission incentives and will fund the pools with the highest returns.
Traders benefit from the high liquidity of DEX, allowing for better execution compared to other exchanges.
Notably, since the launch of Aerodrome Slipstream (a Uni v3 style clAMM) in April this year, Aerodrome's market share in the DEX market on Base has soared to 63%, effectively replacing Uniswap.
Source: DeFiLlama, as of November 3
Compared to Uniswap V3 on Base, Aerodrome Slipstream has achieved absolute growth in volume while also achieving higher capital efficiency overall. This dominance becomes even more apparent considering the numerous scam tokens present on Uniswap.
Source: DeFiLlama, as of November 3
Additionally, Aerodrome is the highest fee-generating application among all dApps on Base.
Source: DeFiLlama, as of November 3
The rapid rise of Aerodrome
In the past year, Aerodrome's TVL skyrocketed by 12 times, reaching $1.3 billion, accounting for nearly 50% of Base's TVL. Notably, from March to September, Aerodrome's TVL continued to grow amidst a turbulent market, demonstrating a certain resilience.
Source: DeFiLlama, as of November 8
Meanwhile, Aerodrome's monthly trading volume surged by 111 times, reaching $16.5 billion by the end of October. Furthermore, Aerodrome's share of total DEX trading volume has risen to 8.5%. In recent months, despite the overall decline in DEX trading volume, Aerodrome's trading volume has continued to grow.
The Coinbase Effect
Base plays a key role in Coinbase's strategy to promote crypto utility and reduce the complexity of on-chain transactions. They have pioneered multiple ecosystem initiatives, such as integrating Base into the Coinbase smart wallet, hosting hackathons, and partnering with institutions like Stripe to facilitate fiat-to-crypto conversions on Base. As a result, Base is currently the largest rollup by TVL, approximately $2.7 billion.
Source: DeFiLlama, as of November 3
As the largest dApp on Base, Aerodrome is benefiting from Base's rapid expansion. Base's DAU and daily trading volume have steadily increased over the year, contributing to Aerodrome's usage.
Source: Artemis
Protocols on Base hold nearly 10% of veAERO, hoping to improve the liquidity of their governance tokens by locking AERO and voting to direct issued tokens to their own pools. With the growth of users and economic activities on Base, it is expected that future protocols launched on Base will do the same, stimulating the demand for $AERO tokens.
Economic activity on Base has been increasing due to Coinbase's decision to launch cbBTC to challenge WBTC. Since its launch on September 12, cbBTC's TVL has grown to $839 million.
Aerodrome is the biggest beneficiary of this initiative, occupying about 80% of the trading volume for cbBTC trading pairs. This is not surprising, as on-chain cbBTC is redeemable for BTC on Coinbase CEX, driving CEX / DEX arbitrage activities. As Aerodrome is the largest and most liquid venue for cbBTC on-chain, it naturally facilitates most of the flow.
Source: Dune Analytics
Additionally, Coinbase has ample reason to support the development of Aerodrome. Coinbase Ventures has accumulated a significant AERO position (approximately $20 million). Like other market participants, they acquired it through the open market, locking a large portion as veAERO. Coinbase Ventures is an active participant in Aerodrome governance, voting to release AERO into the cbBTC pool, further strengthening Aerodrome's market dominance.
The DeFi Renaissance on Base
Currently, we are witnessing a new wave of liquidity entering DeFi, driven by new innovations. Given Base's positioning as a leading L2 platform and the direct access to Coinbase's distribution channels, Aerodrome will be a blue-chip project thriving in DeFi. It can be envisioned that Base will become the primary on-chain venue for retail trading, arbitrage, and stablecoin forex flows. As Aerodrome is the hub of liquidity on Base, it will benefit from this in the future.
With cbETH and cbBTC trading pairs already launched, it is expected that Coinbase will expand the range of its wrapped assets and introduce them to Base. Having high-volume currency pairs like cbSOL, cbDOGE, and cbPEPE will incentivize more DEX / CEX arbitrage flow to migrate to Base / Coinbase. Moreover, this will greatly enhance Base's user experience, as trading native tokens from other chains on Base without bridging will make trading on Aerodrome resemble a CEX experience.
Data as of November 3
Currently, the prospects for wrapped assets protected by universal asset protocols are already apparent. Aerodrome traders can now trade popular assets like SOL and DOGE without leaving the chain.
The trading volume of stablecoins is also a promising growth area that could drive economic activity on Base. After acquiring Circle in 2023, Coinbase is positioned to drive greater adoption of stablecoins on Base. In addition to USDC and EURC, other high-volume global currencies like the yen and pound may also go live in the future. Aerodrome has already begun to enter this vast market, which contributes $70 trillion in daily trading volume, with liquidity pools supporting USDC and EURC.
Source: A16z
Another favorable situation is that AI agents are becoming active participants in DeFi protocols. Over the past week, a robot trained on internet knowledge, Terminal Truth, has autonomously interacted with Crypto Twitter and publicly supported the meme coin $GOAT on Solana. The AI agent Luna, created by Virtuals Protocol, is based on the Base chain. Luna has complete autonomy over its tweets and on-chain transactions, capable of token swaps, and has already issued $LUNA token rewards to its followers.
Interest in the $LUNA and other AI agent tokens created by Virtuals has boosted Aerodrome's trading volume, making Aerodrome's Virtuals / cbBTC pool one of the largest in TVL and trading volume.
Additionally, Coinbase seems to be pushing more broadly for consumer AI applications focused on AI agents. They recently launched Based Agents, a platform for developers to create autonomous on-chain agents capable of conducting financial transactions, unlocking unique use cases that were previously impossible. For example, performing complex DeFi operations can become as simple as a conversation.
Transforming issuance into a growth engine
A significant part of the hesitation from investors regarding AERO stems from the perception that AERO’s token unlock volume will be substantial, reaching about 40% after Epoch 67 (early December 2024). In reality, this inflation scenario is much better than that of venture-backed projects. In venture-backed projects, large distributions to teams and investors are ultimately sold off.
For Aerodrome, the issuance mechanism has largely been effective and has contributed significantly to establishing a solid liquidity foundation. This has initiated a virtuous cycle where Aerodrome attracts trading volume, which in turn generates fees for veAERO, ultimately making the issuance of AERO valuable, thereby consolidating Aerodrome's liquidity advantage.
Additionally, the team's AERO distribution cap is set for 4 years of veAERO. This creates an incentive mechanism where the only way they receive substantial compensation is by acting in the long-term interest of the protocol. These incentives effectively alleviate concerns about inflation.
Conclusion
Aerodrome has demonstrated its rapid growth potential as the liquidity engine on Base and shows no signs of slowing down. Given that Aerodrome has successfully addressed key incentive issues by uniting its main stakeholders (traders, LPs, token holders), this growth trend is expected to continue. Aerodrome will continue to benefit from its partnership with Coinbase / Base, as well as the ongoing growth of DeFi on the blockchain.
However, Aerodrome has yet to fully realize its potential, and TVL is expected to double from its current level to $4 billion within a year, while monthly trading volume is projected to reach $50 billion. This will be driven by a loosening of TradFi liquidity conditions and continued growth of Base. Aerodrome is one of the fastest-growing DeFi protocols, with significant growth expected in the future.
Related Read: How the most powerful native DEX on Base, Aerodrome, has succeeded?
