Original title: Aerodrome - The DeFi Revenue Giant
Original author: Slapp jakke
Original source: onchaintimes
Compiled by: Mars Finance, Daisy
Aerodrome generates over $100 million in revenue per year, all of which is distributed to token holders.
introduce
Aerodrome has been the dark horse of “holder income” among all DeFi protocols in this cycle. In less than a year, it has paid out a massive $110 million in income to token holders, beating almost all other protocols on this metric. Below is a deep dive into how this was achieved, analyzing the performance of early ve(3,3) locks, and more.
Bullet
Part 1 - Aerodrome Under the Hood
Part 2 - The ve(3,3) Flywheel
Part 3 - Holders Revenue
Part 4 - Additional Info
Part 1 - Inside the Aerodrome
Aerodrome is a ve(3,3) METADex on Base. METADex is a protocol that combines the functionality of Uniswap v2 and v3, Curve Finance, and Convex/Votium into a simplified protocol, without a fee-charging middle layer. It acts as a central exchange and liquidity market on Base. Aerodrome is a fork of Velodrome and is operated by the same team. Velodrome was originally based on Solidly, but later with the launch of V2, both the frontend and backend were completely rewritten and several new features were added.
Automated Market Model
The Airport AMM consists of three different types of pools;
sAMM - Stable Exchange Based on Curve Stable Pool
vAMM - Variable swaps based on uni v2
Slipstream - Pooled liquidity similar to uni v3
Transaction fees are configurable on a per-pool basis and range from 0.01% to 2%.
Slipstream AMM
The Slipstream Pooled Liquidity AMM is based on Uniswap v3, but instead of individual users choosing fee settings, pools are created with configurable fee settings and 2x larger (some even larger) tick intervals. Rewards (AERO) always go to LPs, rather than being dependent on trading volume. These rewards reward LPs to stay active, even on days with low or volatile volume, and help maintain liquidity when it’s needed most.
Lock and vote
Lock your AERO into veAERO for up to 4 years to earn transaction fees, rewards (formerly known as bribes), and rebasing. Locks typically decay linearly, but can be locked forever without decay. veAERO is a transferable NFT, so users can sell it on the NFT marketplace. veAERO lockers can also vote for the meter to earn transaction fees and rewards each period. Voting will direct AERO emissions to the meter.
Rebasing and Issuance
Part of the AERO issuance will be provided to veAERO lockups as anti-dilution protection. These can be claimed and compounded into veAERO NFTs. In addition, AERO issuance will be distributed to LPs as liquidity mining rewards based on the voting in the previous period, and a small portion will be allocated to rebases.
Incentives
The protocol can also be called a bribe, which incentivizes voters to vote their meter to direct AERO emissions to LPs. Currently, the protocol receives about 2x the value of the emissions they deposited in incentives. If they deposit $10,000 worth of incentives, they will receive about $20,000 worth of token emissions.
Airport Rewards
Shareholders' income
Aerodrome distributes 100% of the protocol revenue to veAERO lockers based on voting pools. Revenue comes from:
100% Transaction Fee
100% reward (bribe)
Fees and bribe rewards
The Aerodrome operates on a weekly basis. Voting must be done by 23:00 UTC every Wednesday, and bribes can be collected every Thursday at 01:00 UTC. Meter emissions will be updated every Thursday at 00:00 UTC.
ve(3,3) model
The ve(3,3) model describes the relationship between different participants in the protocol.
- Users lock AERO to obtain veAERO, thereby obtaining voting rights
- Emissions are controlled by voters and flow to LPs
- Voters receive transaction fees + bribes for weighing votes
- Traders get low slippage
- Protocol to pay bribes and gain liquidity
airdrop
The entire supply of AERO was airdropped to veVELO holders. Holders received about 1/3 of the veAERO locked at launch and some liquid AERO as voting rewards. veAERO is now worth 3x the value of veVELO, and the weekly rewards received are about 7x.
Part 2 - ve(3,3) Flywheel
The goal of every ve(3,3) believer is to see the ve(3,3) flywheel fully operational, which creates a compounding effect where an increase in any of the following increases the flywheel’s effect.
1. Higher TVL
2. Lower slippage
3. Higher trading volume
4. Higher Fees
5. Higher Voting APR
6. Higher emissions
7. Higher APR
8. Repetition
In the beginning, ve(3,3) DEXs often relied heavily on bribes from partner protocols, during which protocols attempted to bootstrap liquidity for major volume-driving pairs such as WETH/USDC, wstETH/ETH, and USDT/USDC to increase fee revenue. Aerodrome's TVL increased significantly as prices rose in March, and it has been able to maintain most of its TVL despite the recent market downturn. About 20% of this TVL is in the CL pool (Slipstream), and the current TVL is about $520 million, down from about $700 million at ATH
Aerodrome TVL, Dune Dashboard
Concentrated liquidity TVL is especially important because it can bring a lot of trading volume and fees. As shown in the figure below, as more TVL is added, CL trading volume and fees are increasing rapidly (orange in the chart).
Airport Capacity and Swap Fees, Dune Dashboard
Volume has been growing rapidly and has effectively absorbed the majority of Uniswap’s volume, currently dominating with 79% of volume when comparing the two on Base.
Aerodrome vs Uniswap daily volume (in basis percentage)
For several days in the past month, the trading volume of the Aerodrome WETH/USDC pool on Base has consistently exceeded that of the Uniswap WETH/USDC pool on the Ethereum mainnet.
Dexscreener Sort by quantity. August 5, 2024
All fees generated from the Slipstream AMM pool will be used as voting rewards for the next round, and the capital efficiency of fees/bribes is currently about 2x. This is the biggest impact on the ve(3,3) flywheel so far. For example, in the 47th cycle, the rewards for WETH/USDC were $419,000, which will bring the pool about $820,000 in rewards in the next cycle. This will bring higher APR, more TVL, lower slippage, more trading volume, more fees... The flywheel will continue to turn.
And ve(3,3) bulls are imagining what fees will be like at the peak of the bull run, when volume will be 10-20x higher than today, and Base will become the norm chain. Just like the high volume experience seen during the August 5, 2024 crash
Aerodrome Slipstream Daily Volumes and Daily Fees 05.Aug 2024
Section 3 - Holder Income
After Maker, Lido, Ethena, and Aave recently generated impressive revenues, there is a renewed interest in revenue-generating DeFi protocols. These are OG protocols from the Ethereum mainnet, funded by venture capital, and many of them already have blue-chip status in DeFi. Among these venture-funded giants, we can find Aerodrome, one of the only newcomers in this cycle (besides Ethena) and one of the highest revenue earners. Considering that Aerodrome did not raise any funds and is completely bootstrapped by the community, its revenue is very impressive.
Most protocols have different revenue sharing mechanisms. Another major difference between Aerodrome and other protocols that earn huge revenue is that Aerodrome distributes 100% of its revenue to its token holders (lockers). This is something that most protocols simply don’t do. For example, Uniswap is still discussing passing on 10% of fees to token holders, while other protocols share much less revenue. Aerodrome has maintained huge revenue over the past 6 months and now sits between Lido Finance, Ethena, and Solana if all crypto projects tracked by TokenTerminal are counted.
TokenTerminal income 180 days, all market sectors
Looking more closely at revenues in the DEX space tracked by TokenTerminal, we see that Aerodrome outperforms all other DEXs by at least 2x. Aerodrome distributes 100% of revenue to its token holders, while Uniswap Labs distributes 0% of revenue to token holders and PancakeSwap distributes 70% of revenue to token holders.
TokenTerminal income 180 days, exchange (DEX)
Last year, Aerodrome earned and distributed $110 million to its holders.
Airport concierge revenue
Lock-in and incentives
Locking tokens is a topic of disagreement among many DeFi users. One side refuses to lock any tokens to keep their investments liquid, while the other side does not mind locking tokens to earn income or gain voting rights in protocol governance.
However, it is more common for protocols to lock up tokens to gain governance rights than users. They have real use cases that depend on their voting power, such as driving TVL to their tokens, bootstrapping the maximum liquidity they can at the lowest possible cost. To incentivize protocols (or users) to lock up their tokens, there are multiple positive incentives for users or protocols who want to lock up AERO tokens.
Flight School
Flight School is Aerodrome's lock-up incentive program. During the launch period, Flight School received 10% of the veAERO NFT supply, and it used its revenue to buy back and lock AERO from the market. These veAERO NFTs were then distributed to the largest lockers in the previous era.
The flight school has bought back 31 million AERO and locked it up as veAERO and distributed it to lockers.
Cumulative distribution of veAERO
OP Superfest Bonus
In the Optimism Superfest funding round, Aerodrome will be distributing 280k OP as lock-up rewards (70k for personal lockers, 210k for the protocol). The program has been in place for about 5 weeks and has already had a significant impact on the number of new lockers, from 15k lockers to 20k lockers.
Locking AERO Holders
Relay - Autocompounding Vaults
Users can deposit their veAERO NFTs into an automated Compound relayer, which will optimize their votes for maximum rewards, and then use those rewards to purchase and lock in veAERO Compound positions.
Aerodrome Relay
Many protocols are using Aerodrome to incentivize their tokens and setting up their own relay vaults to mint tokens and vote for their own pools. For example, Lido Finance has a relayer that specifically votes for the wstETH/ETH pool. Most major lockers are providing constant buyback pressure as vaults vote for their own pools and use all fees and incentives collected to buy back AERO and lock it up to increase voting power.
Agreement to hold veAERO
The protocol’s veAERO NFTs continually gain more voting power, leading to more rewards, increasing their paired TVL, and more… Many call this the ve(3,3) protocol flywheel.
Case Study - Locker Revenue
However, locking isn’t just for protocols. For regular users, timing locks correctly can be very profitable. AERO has been distributed to VELO locks, and below is an analysis of the ROI of early Velodrome locks. The ROI of locking VELO early is incredible, if a user locked in epoch 7-10 (about 2 years ago), they would have received ~10x return from voting rewards (fees and incentives). And this does not involve selling veVELO or veAERO, as the current value locked is ~40x.
The ROI for this analysis targets the early locker 0xa60a...3259.
Note that some locks are added later using farm VELO (counted as no cost in this analysis), and that these numbers are manually collected from debank.
Initial investment (purchase): approximately $8,100
Total investment (purchase + breeding): Approximately US$21,700
Wallets veVELO and veAERO lock size 0xa60a...3259
After the launch of Aerodrome, total revenue from pure incentives (fees and bribes) grew exponentially.
Total reward (fees and bribes): $877,000
ROI (rewards/purchases): 10.8x
(Calculated as of July 18, 2024)
Rewards earned from veVELO and veAERO locks, calculated 18.07.2024
VELO Lockers received the veAERO airdrop and are now earning almost 7x the weekly return of veVELO and are worth about 3x the value of veVELO locks.
Total value locked: $3.057 million
Total ROI ((Rewards + Locked Value) / Purchase): 48.3x
At its peak in March, the locked value was close to 100x. Note that the locked value has declined recently.
veVELO and veAERO locked values, calculated on July 18, 2024
Users who joined when Velo v2 was released (about 1 year ago) would have received ~1.5x their income (fees + bribes) return on investment, and ~8x the total value of their locked positions (based on the analysis of the wallets above). This analysis does not include all previously allocated lock-up and voting incentives:
OP Lock Rewards
AERO Liquidity at Launch AERO Voting Incentives
Ecosystem Airdrop
Compound until the perfect point (Velo v2 release? Or AERO price increase in March?)
Aerodrome is undoubtedly one of the DeFi kingmakers of this cycle.
SECTION 4 - ADDITIONAL INFORMATION
Coinbase Connect
It’s no secret that a close partnership with Coinbase has helped Aerodrome, but what does the future hold?
Basic incentive layer
Base said they were not planning to issue a token and they needed other ways to incentivize the development of the ecosystem. Aerodrome solidified its position as the engine that helps the entire ecosystem grow.
CB Venture Capital
CB Ventures had to buy its stake in Aerodrome on the open market and is still buying AERO off the market.
Coinbase Smart Wallet
Coinbase just launched Smart Wallet, a wallet that uses account abstraction to allow users to use Base without knowing it. This means Aerodrome can be integrated directly into the Coinbase app through the Coinbase frontend using the Base DeFi rails.
We’ve seen a lot of people on CT talking about “normalcy is coming,” and it turns out they’ve started using Coinbase Smart Wallet.
Weekly active Smart Accounts on Base
criticize
As new agreements become successful, there will always be critics of how the agreement works. Here are some thoughts on the most common criticisms of the Velodrome and Aerodrome.
release
“But they issue millions of tokens every era, and the net benefit is negative.”
It’s true that a large number of tokens are issued in each epoch, but Aerodrome’s rewards are increasing while issuance is decreasing. All crypto projects need incentives to get off the ground, which is usually achieved through token issuance. As long as the incentives are driving growth, one can say they are working as intended. The difference between ending up being the dominant DEX on a chain and becoming a farm and dump token that ends up going straight to the DeFi graveyard is having users and protocols see the value in holding (and locking up) that token.
Comparing a protocol that achieves all of its inflation through permissionless token issuance to a low float high FDV token may change your perspective on issuance. As @wagmiAlexander said… “Unlocking is just permissioned issuance, inflation is designed to benefit a few”.
Grants
“The success of the Velodrome is entirely due to funding from the OP.”
As we all know, grants helped Velodrome a lot during its launch, but Aerodrome has now proven that it can achieve this goal even without grants. Velodrome has used grants in a way that is 5 times the value of the grants (this chart is from a year ago) and only distributed them to users who commit to the Optimism ecosystem over the long term. The use of grants means that no hired farmers can extract value from the ecosystem without a long-term commitment.
Fork
“This is just a fork of Solidity, which in turn forked Curve, Uniswap, and Convex”
Velodrome V2 completely rewrites the frontend and backend of Solidly and fixes issues in the original Solidly code that caused it to crash. Defi is all about iterating on previous protocols and changing and combining them in a perfectly coordinated way.
Summarize
Historically, locking up VELO and AERO early has been very profitable. The masterpiece in Andre Cronje's vision for ve(3,3) is to split the fees from the LPs and have 100% of the revenue go to the holders. When people talk about DeFi as an opportunity to "own part of a bank and all its revenue", they are talking about this!