Note: Arthur, founder of DeFiance Capital, currently believes that DeFi is undergoing a renaissance and recommends the DeFi protocols leading this renaissance.
On August 20, Arthur wrote that Aave is leading the DeFi renaissance, thus Aave is severely undervalued (at that time, AAVE was around $100, and now it is around $180);
On October 15, an article analyzed from a data perspective how DeFi is emerging from the trough towards a renaissance;
On November 8, Arthur again praised Aerodrome, the DEX leader on the Base chain, believing it to be the second DeFi protocol leading the DeFi renaissance.
Golden Finance 0xjs compiled Arthur's article 'Aerodrome: The Onchain Liquidity Engine' as follows:
Before discussing Aerodrome, let's first understand some background about decentralized exchanges (DEXs)
Breaking the DEX Stalemate: Why Traditional Models Fail
The development of DEXs has always been accompanied by a fundamental struggle: balancing the conflicting interests of multiple stakeholders while maintaining sustainable growth.
Traditional DEX models have faced two key challenges:
1. Stakeholder Balance:
DEXs must serve three different groups simultaneously: traders seeking efficient markets, liquidity providers seeking yields, and token holders demanding value accumulation.
Uniswap is a typical example of this challenge, as it directs 100% of fees directly to LPs, resulting in no direct protocol income for UNI holders. Meanwhile, Curve attempted a compromise by distributing CRV token emissions 50/50 between LPs and veCRV holders, but this model also faces sustainability issues as emissions decline.
What is the outcome? The ongoing tug-of-war between stakeholders' interests often leads to unsatisfactory results for all parties involved.
2. Token Release Dilemma:
The summer of DeFi in 2020/21 exposed the flaws of strict issuance plans, as countless Uniswap v2 forks engaged in an unsustainable competition for liquidity through token inflation.
Curve's innovative veCRV system introduced bribery as a mechanism to guide liquidity, but it produced unintended consequences: voters maximize personal benefits through bribery rather than supporting pools that generate sustainable protocol income.
Even Andre Cronje's Solidly, which attempted to address these issues, fell victim to its own design flaws—early issuance and the exploitation of token whitelists ultimately undermined its effectiveness.
Every iteration of DEX design attempts to address these fundamental challenges, but until now, none have been able to completely crack the code.
Aerodrome: The MetaDEX Revolution
Aerodrome combines the best features of previous DEXs - Curve/Convex-inspired tokenomics for improved governance and productive emissions, Uni v3 adapted concentrated automated market making (clAMM) for capital-efficient swaps, and enhancements to the Solidly codebase.
These features provide a solution to coordinate the incentives of various stakeholders and position it as the preferred venue for user transactions.
Holders of veAERO will receive all fees and bribes from the mining pools they vote to support as compensation. This motivates them to direct token issuance to the mining pools with the highest volume and fees, benefiting the protocol as well.
Liquidity providers will receive incentives equal to 100% of the AERO issuance and will optimize funding to the pools with the highest yields.
Traders benefit from ample liquidity on DEXs, resulting in better execution than on other venues.
Notably, since the launch of Aerodrome Slipstream (Uni v3 style clAMM) in April 2024, Aerodrome's DEX market share on Base has soared to 63%, effectively replacing Uniswap.
Source: DeFiLlama as of November 3, 2024
Aerodrome Slipstream has achieved absolute trading volume growth while also achieving higher capital efficiency overall compared to Uniswap V3 on Base.
Source: DeFiLlama as of November 3, 2024
Additionally, Aerodrome generates the highest fees among all decentralized applications (dApps) on Base.
Source: DeFiLlama as of November 3, 2024
The Rise of DEX Giants: The Rapid Growth of Aerodrome
Over the past year, Aerodrome's total locked value has surged 12 times to $1.3 billion, accounting for nearly 50% of Base's total locked value. Notably, during the market volatility from March to September, Aerodrome's total locked value continued to grow, demonstrating resilience.
Source: DeFiLlama as of November 8, 2024
Meanwhile, Aerodrome's monthly trading volume has surged 111 times, reaching $16.5 billion by the end of October. Additionally, Aerodrome's share of total DEX trading volume has risen to 8.5%. An even more impressive fact is that, despite a general decline in DEX trading volume over the past few months, Aerodrome has maintained volume growth.
Coinbase Effect
Base L2 plays a key role in Coinbase's strategy to promote cryptocurrency usability and reduce the complexity of on-chain transactions. They have pioneered several 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, with an on-chain effective usage amount of $2.7 billion.
Source: DeFiLlama as of November 3, 2024
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 past year, contributing to the rise in Aerodrome's usage.
Source: Artemis
Nearly 10% of veAERO is owned by protocols on Base that wish to improve the liquidity of their governance tokens by locking AERO and voting to direct issuance to their pools. With the growing number of users and economic activities on Base, we expect that protocols launched on Base will also do this in the future, leading to increased demand for AERO tokens.
As Coinbase decided to launch cbBTC to challenge WBTC, economic activity on Base has also increased. Since its launch on September 12, the TVL of cbBTC has grown to $839 million.
Aerodrome is the biggest beneficiary of this development, as they consistently capture about 80% of cbBTC's trading volume. This is not surprising to us, as the on-chain cbBTC is interchangeable with BTC on Coinbase CEX, which will drive CEX/DEX arbitrage flows. Since Aerodrome is the largest and most liquid venue for on-chain cbBTC, they should naturally facilitate most of the traffic.
Source: @seoul on Dune
Furthermore, we believe Coinbase has good reason to support the development of Aerodrome. Coinbase Ventures has accumulated a large AERO position (approximately $20 million), which we believe is Coinbase Ventures' largest single investment to date. They acquired AERO on the open market like all other market participants, and locked a significant portion of it as veAERO. Coinbase Ventures is an active participant in Aerodrome governance, voting to allocate AERO issuance to the cbBTC pool, further strengthening Aerodrome's market dominance. This again illustrates how Aerodrome's close ties with Base and Coinbase will solidify the protocol as the cornerstone financial infrastructure of Base L2.
DeFi Renaissance on Base
As our DeFi renaissance paper suggests, we are at the forefront of a new wave of liquidity in DeFi driven by new innovations. Given Base's strong competitive position as a leading L2 and its direct access to Coinbase's distribution channels, we believe it will become a major candidate for thriving DeFi. We envision Base becoming the primary on-chain venue for retail trading, arbitrage, and stablecoin forex liquidity. Since Aerodrome is the lifeblood of liquidity on Base, we believe it will benefit immensely from this future realization.
Given that cbETH and cbBTC are already live, we would not be surprised if Coinbase expands its wrapped asset coverage and introduces it to Base. The presence of high-volume assets like cbSOL, cbDOGE, and cbPEPE will likely incentivize more DEX/CEX arbitrage flows to migrate to Base/Coinbase. Additionally, this will greatly enhance the user experience for Base users, as they can trade native tokens from other chains without the hassle of bridging, making trading on Aerodrome a CEX-like experience.
As of November 3, 2024
We have already seen the potential of wrapped assets protected by general asset protocols. Aerodrome traders can now trade popular assets like SOL and DOGE without leaving the chain.
Stablecoin trading volume is also a promising growth area that can enhance economic activity on Base. After acquiring a stake in Circle in 2023, Coinbase also has vested interests and capabilities to drive the widespread adoption of Circle stablecoins on Base. In addition to USDC and EURC, we believe there is potential for other major global currencies with high trading volumes, such as the Japanese Yen and British Pound, to be launched in the future. Aerodrome has already begun to enter this massive market, which has a daily trading volume of $7 trillion and liquidity pools supporting USDC and EURC.
Source: a16z
Another favorable development for Aerodrome is the active participation of AI agents in DeFi protocols. Over the past week, we have seen this in action as the AI agent Terminal of Truth semi-autonomously interacted with Crypto Twitter and publicly supported the memecoin GOAT on Solana, which currently has a valuation of $600 million and its futures token listed on Binance. Base is also home to another popular AI KOL, Luna, created by Virtuals Protocol, which can autonomously tweet and conduct on-chain transactions. She has the ability to swap tokens and has distributed LUNA token rewards to her followers. Interest in LUNA and other AI Agent tokens created by Virtuals has increased trading volume on Aerodrome, making the Virtuals/cbBTC pool on Aerodrome one of the largest in terms of TVL and trading volume.
Subsequently, Coinbase seems to be more broadly promoting consumer AI applications focused on agents. They recently launched Based Agents, a framework for developers to launch autonomous on-chain agents capable of financial transactions. This unlocks unique use cases that were previously unachievable. For example, performing complex DeFi operations could become as simple as a conversation. Imagine typing "swap some ETH for the best yield opportunities" and letting the AI agent work its magic through various DeFi dApps.
Transforming token releases into a growth engine
A significant portion of investors' hesitation towards AERO is due to their belief that the token release amount is substantial, reaching about 40% after Epoch 67 (early December 2024). We believe this inflation is a better scenario, as compared to VC-backed projects that ultimately sell a large amount of tokens allocated to teams and investors. In fact, some VC-backed tokens have stricter unlock schedules, where circulating supply exceeds three times within a year.
For Aerodrome, its issuance has largely been productive and has made a significant contribution to building a solid liquidity foundation. This has initiated a positive flywheel, where Aerodrome attracts trading volume, which in turn generates fees for veAERO, and ultimately makes AERO's issuance valuable, solidifying Aerodrome's liquidity advantage. For instance, 13% of voter income is automatically compounded into AERO and is maximally locked into veAERO weekly through Relay and Flight School.
Moreover, the team's AERO allocation is locked as veAERO for four years. This creates an incentive structure where the only way they can reap substantial rewards is by acting in the long-term interests of the protocol. We believe that effective utilization of token releases and the team's aligned incentives can alleviate concerns about inflation.
Conclusion
We are optimistic about Aerodrome becoming the liquidity engine on the Base chain. The protocol has already demonstrated its ability to grow rapidly, with no signs of slowing down. We believe that, since Aerodrome has successfully addressed key incentive issues by uniting its main stakeholders (traders, LPs, token holders), this trend will continue. Aerodrome will continue to benefit from collaboration with Coinbase/Base, as well as the ongoing growth of on-chain DeFi.
We believe Aerodrome has not yet realized its full potential, and we expect its TVL to double from current levels to $4 billion within a year, while monthly trading volume will reach $50 billion. This will be driven by the easing of TradFi liquidity conditions and the continued growth of Base. Aerodrome is one of the fastest-growing DeFi protocols, and we anticipate significant growth in the future.
