Original title: Aerodrome: The Onchain Liquidity Engine Original authors: Bryan Tan & Arthur Cheong Original translation: zhouzhou, BlockBeats
Editor's note: This article primarily discusses Aerodrome's role as a liquidity engine on the Base chain and its growth potential. By addressing issues such as token issuance and stakeholder incentives, Aerodrome has successfully attracted substantial trading volume and built a solid liquidity foundation. The article also notes that Coinbase's support and the expansion of the Base chain will drive further growth for Aerodrome, with expectations of reaching a TVL of $4 billion and monthly trading volume of $50 billion. Overall, we are optimistic about Aerodrome becoming a key infrastructure in the DeFi ecosystem.
The following is the original content (the original content has been restructured for readability):
Before introducing Aerodrome, let's first understand the background of DEXs.
Breaking the DEX deadlock: Why traditional models struggle to work
During the development of DEXs, a core dilemma arises: how to achieve a balance among multiple stakeholders while maintaining sustainable growth. Traditional DEX models have always been plagued by two main challenges:
1. The balance issue of stakeholders:
DEXs need to simultaneously serve three different groups: traders seeking efficient markets, LPs pursuing yields, and token holders demanding value appreciation. Uniswap is a typical case of this balancing issue, as it allocates 100% of the fees to LPs, resulting in UNI holders not benefiting directly from the protocol's revenue. Meanwhile, Curve attempted a compromise by splitting the CRV issuance between LPs and veCRV holders, but this model also faces sustainability issues due to reduced issuance.
What is the result? The constant tug-of-war between various interests often leads to unsatisfactory outcomes for all parties.
2. The token emission dilemma:
The DeFi boom of 2020/21 exposed the pitfalls of fixed issuance plans. Many forks of Uniswap v2 competed for liquidity by attracting users through inflation, leading to unsustainable competition. Curve's innovative veCRV system introduced bribery mechanisms to guide liquidity but also brought unintended consequences: voters began to hunt for personal gain through bribery instead of supporting liquidity pools that could bring sustainable income to the protocol.
Even Andre Cronje's Solidly attempted to solve these issues, its design flaws severely undermined its effectiveness: large initial distributions and abuse of token whitelisting ultimately affected Solidly's effectiveness.
Every generation of DEX design has attempted to solve these fundamental issues but has failed to fully crack the code—until now.
Aerodrome: The Revolution of MetaDEX
Aerodrome combines the best features of previous DEXs: it adopts a token economic model inspired by Curve and Convex to optimize governance and token distribution, and implements a Uniswap v3 style concentrated automated market maker for efficient capital exchange, while improving upon the codebase of Solidly.
These features provide a solution for aligning the incentive mechanisms of various stakeholders, making Aerodrome the preferred trading venue for users.
· veAERO holders: can receive 100% of the fees and bribery rewards from the liquidity pools they vote for. This mechanism incentivizes them to direct token issuance to high-volume, high-fee liquidity pools, benefiting the protocol as a whole.
· Liquidity providers: receive 100% of AERO issuance rewards, incentivizing them to allocate capital to the highest-yielding liquidity pools.
· Traders: enjoy deep liquidity on DEX, providing better execution compared to other venues.
Notably, since the launch of Aerodrome Slipstream (a Uni v3 style clAMM) in April 2024, Aerodrome's DEX market share on the Base chain has surged to 63%, successfully replacing Uniswap.
Image source: DeFiLlama as of 3rd Nov 2024
Aerodrome Slipstream has achieved growth in total trading volume while exhibiting higher overall capital efficiency than Uniswap V3 on the Base chain. This dominance is even more pronounced considering the presence of fraudulent token pools on Uniswap.
Image source: DeFiLlama as of 3rd Nov 2024
Moreover, Aerodrome generates the highest fee income among all dApps on the Base chain.
Image source: DeFiLlama as of 3rd Nov 2024
The rise of decentralized exchange giants: the rapid rise of Aerodrome
In the past year, Aerodrome's total locked value has skyrocketed 12 times, reaching $1.3 billion, accounting for about 50% of the total TVL on the Base chain. Notably, despite significant market volatility, Aerodrome's TVL has continued to grow from March to September, demonstrating strong resilience.
Image source: DeFiLlama as of 3rd Nov 2024
Meanwhile, Aerodrome's monthly trading volume surged 111 times, with October trading volume reaching $16.5 billion. Additionally, Aerodrome's share of total DEX trading volume has risen to 8.5%. More impressively, despite a decline in overall DEX trading volume in the past few months, Aerodrome has continued to maintain growth in trading volume.
The Coinbase effect
Base L2 plays a crucial role in Coinbase's strategy, aimed at driving the utility of cryptocurrencies and simplifying the complexities of on-chain transactions. Coinbase has spearheaded multiple ecosystem initiatives, such as integrating Base into the Coinbase smart wallet, hosting hackathons, and partnering with institutions like Stripe to support fiat-crypto conversions on Base. Due to these initiatives, Base has now become the largest rollup, with a locked value of $2.7 billion, and these funds are being effectively utilized on-chain.
Image source: DeFiLlama as of 3rd Nov 2024
As the largest dApp on the Base chain, Aerodrome is benefiting from the rapid expansion of Base. The daily active users and daily trading volume of Base have steadily risen this year, further driving the usage of Aerodrome.
Image source: Artemis
Protocols on the Base chain hold nearly 10% of the veAERO, enhancing the liquidity of their governance tokens by locking AERO and voting to direct token issuance to their own liquidity pools. With the expansion of users and economic activity on Base, it is expected that protocols launched on Base in the future will adopt similar strategies, driving the market demand for AERO tokens.
The economic activity on the Base chain has also increased 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.
In this development, Aerodrome is the biggest beneficiary, as it consistently holds about 80% of the trading volume in the cbBTC trading pair. This is not surprising, as cbBTC is interchangeable on-chain with BTC on Coinbase CEX, driving arbitrage liquidity between CEX and DEX. As the largest and most liquid trading venue for cbBTC, Aerodrome naturally becomes the carrier platform for most arbitrage liquidity.
Image source: @seoulon Dune Analytics
Furthermore, we believe Coinbase has ample reason to support the growth of Aerodrome. Coinbase Ventures has amassed a significant holding of AERO (approximately $20 million), which we believe is the largest single investment by Coinbase Ventures to date. They acquired these AERO tokens through the public market and locked a portion of them to obtain veAERO.
Coinbase Ventures is an active participant in Aerodrome governance, voting to direct AERO token issuance to the cbBTC liquidity pool, further consolidating Aerodrome's market dominance. This also reaffirms the close ties between Aerodrome, Base, and Coinbase, making the protocol a cornerstone financial infrastructure of Base L2.
DeFi revival on Base
As outlined in our DeFi revival theory, we believe DeFi is entering a new wave of liquidity, driven by new innovations. Considering Base's strong competitive advantages as a leading L2 and its direct connection to Coinbase's distribution channels, we believe Base will be an ideal candidate for DeFi's thriving development.
Looking ahead, Base will become the main on-chain trading venue for retail trading, arbitrage trading volume, and stablecoin forex flows. As the lifeblood of Base's liquidity, Aerodrome will reap significant benefits from this future realization.
Given that the cbETH and cbBTC trading pairs are already live, we would not be surprised if Coinbase expands the coverage of its wrapped assets to Base. Having high-volume trading pairs like cbSOL, cbDOGE, and cbPEPE will incentivize more DEX/CEX arbitrage liquidity to migrate to Base and Coinbase. Moreover, this will significantly enhance the user experience for Base users, as they can trade native tokens from other chains on Base without the cumbersome bridging process, making the trading experience on Aerodrome similar to that of a CEX.
We have already seen the initial shape of this scenario, thanks to the wrapped assets supported by the Universal Asset protocol. Traders on Aerodrome can now trade popular assets like SOL and DOGE without leaving the Base chain.
Stablecoin trading volume is also a promising growth area that could significantly boost economic activity on Base. Following the acquisition of equity in Circle in 2023, Coinbase also has vested interests and capabilities to promote the broader use of Circle stablecoins on Base.
In addition to USDC and EURC, we believe other major high-volume global currencies, such as the Japanese yen and British pound, may also launch on Base in the future. Aerodrome has already begun to enter this vast market, supporting liquidity pools for USDC and EURC, which currently have a daily trading volume of $70 trillion.
Another favorable development frontier for Aerodrome is the rise of AI agents as active participants in DeFi protocols. We have already seen preliminary manifestations of this trend, especially in the past week, where the AI agent Terminal of Truth autonomously interacted with crypto Twitter and publicly supported the Memecoin GOAT on Solana, which currently has a market cap of $600 million and has listed perpetual contracts on Binance.
The Base chain is also home to Luna, another popular AI influencer created by the Virtuals Protocol, who autonomously tweets and conducts on-chain trades. She has the ability to execute token swaps and has already distributed LUNA token rewards to her followers. Interest in LUNA and other AI agent tokens created by Virtuals has driven the trading volume of Aerodrome, making the Virtuals/cbBTC liquidity pool one of the largest pools on Aerodrome in terms of TVL and trading volume.
Coinbase seems to be vigorously promoting consumer-facing AI applications, focusing on agent-based AI. They recently launched Based Agents, a framework for developers that allows them to create autonomous on-chain agents capable of conducting financial transactions.
This opens the door to unique use cases that were previously unattainable, such as making complex DeFi operations as simple as a conversation. Imagine just typing 'swap some ETH for the best yield opportunity,' and the AI agent operates through various DeFi dApps to complete the task.
Transforming token issuance into a growth engine
One of the main concerns investors have about AERO is its perceived high token issuance rate, which is expected to reach about 40% by the 67th issuance (early December 2024). We believe this situation is much better compared to those projects supported by venture capital, where most of the tokens allocated to teams and investors eventually get sold off. In fact, some venture-backed tokens have more drastic unlocking arrangements, where the circulating supply may increase more than threefold within a year.
For Aerodrome, token issuance is primarily productive and contributes significantly to building a solid liquidity foundation. This initiates a virtuous cycle where Aerodrome attracts trading volume, generating fees for veAERO, ultimately making AERO issuance valuable, thus consolidating Aerodrome's liquidity advantage. For example, 13% of the voting income is automatically compounded into AERO weekly through Relay and Flight School, maximizing the lock-up as veAERO.
Additionally, the team's AERO allocation will be locked as veAERO for 4 years, creating an incentive mechanism that allows them to receive substantial rewards only if they drive the protocol's interests in the long term. We believe that the productive use of token issuance and the consistent incentive mechanism of the team alleviate concerns about inflation.
Summary thoughts
We are optimistic about Aerodrome's prospects as the liquidity engine on the Base chain. The protocol has already demonstrated its rapid growth capability and shows no signs of slowing down. We believe this trend will continue, as Aerodrome has successfully addressed key incentive issues by uniting major stakeholders (traders, liquidity providers, token holders). Aerodrome will continue to benefit from collaboration with Coinbase and Base, as well as the ongoing growth of DeFi on the Base chain.
We believe Aerodrome has yet to realize its full potential, expecting its TVL to triple from current levels within a year, reaching $4 billion, while monthly trading volume will reach $50 billion. This growth will benefit from the easing of liquidity conditions in traditional financial markets and the continued development of Base. Aerodrome represents one of the fastest-growing DeFi protocols, and we anticipate more growth in the future.
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