Author: Jack Inabinet, Senior Analyst at Bankless; Translation: Xiaozou from Golden Finance
The Aerodrome is undoubtedly special.
Aerodrome has been one of the most popular applications on Base L2 since day one. The protocol currently hosts $1.3 billion in TVL (50% of all Base smart contract deposits), and its AERO token is the best performing DeFi asset this fall, up 125% since the beginning of September.
Before it began to surge in early September, Aerodrome’s TVL had been stable at around $500 million, becoming a major obstacle to AERO’s upward price movement. The token was trading 80% below its all-time high, but then rebounded during the bull run in September.
Today, let’s discuss the mechanics of Aerodrome to better understand the risks and opportunities associated with this type of peak exchange.
1. Aerodrome mechanism
Like many other decentralized exchanges (DEXs), Aerodrome utilizes an automated market maker (AMM) to provide instant low-slippage trading and one-click liquidity provisioning opportunities across hundreds of cryptocurrencies.
As a "MetaDEX", Aerodrome stands out for its token economics, combining the uniqueness of Curve and Convex liquidity mechanisms with the passive market-making technology pioneered by Uniswap. In practice, this produces an AMM exchange based on Base's veTokenomics model, which empowers token holders to direct token allocation to liquidity pools through voting.
Unlike Curve, which only rewards its veCRV holders with 50% of transaction fees, Aerodrome returns 100% of application transaction fees to veAERO participants, who gain greater voting power and higher rewards by locking more tokens. While Aerodrome liquidity providers do not receive any proceeds from token transactions, they are compensated with inflationary AERO distributions that can be held, sold, or hosted for voting.
Through Aerodrome’s incentive market, users can lock crypto tokens as rewards to veAERO voters, who allocate tokens directly to designated pools, resulting in a well-functioning Aerodrome liquidity bribery market and providing an additional source of income for veAERO participants.
Epoch 60 (or the week ending October 23, 2024) was the sixth-highest week on record for total rewards at Aerodrome and the second-highest week by volume, with veAERO lockers earning a net $5.85 million in fees and rewards on $3.63 billion in volume.
2. Investment considerations
Aerodrome token economics encourages long-term oriented holders to lock up their tokens in hopes of offsetting AERO’s high inflation rate, which at the time of writing is as high as 37% annualized.
Currently, 50% of AERO’s supply is locked up with an average lock-up period of 3.86 years, and due to the limited availability of tokens for sale, resulting in a mismatch between supply and demand, the token can more easily rise with less buying pressure.
The rise in Aerodrome’s market value is very reasonable. The increase in distribution value increases the total yield of liquidity providers, attracts new deposits, improves the bullish fundamentals of the protocol, and increases investors’ willingness to pay for AERO!
Unfortunately, while the veTokenomics mechanism can successfully boost token prices and deposits, it also inspires inherent reflexivity. Despite stable TVL in April, AERO still fell sharply by 80%, which clearly shows that it is difficult for the market to absorb high-inflation tokens when investor demand shrinks.
