Author: Jack Inabinet, Senior Analyst at Bankless; Translation: Jinse Finance xiaozou
Aerodrome is undoubtedly special.
Since its launch on day one, Aerodrome has been one of the most popular applications on Base L2. The protocol currently hosts a TVL of $1.3 billion (accounting for 50% of all Base smart contract deposits), and its AERO token has been the best-performing DeFi asset this autumn, rising 125% since early September.
Before the surge that began in early September, Aerodrome's TVL had remained stable at around $500 million, becoming the main barrier to AERO's price ascent. The token's trading price is 80% lower than its historical peak, but then rebounded during the bull market sprint in September.
Today, we will discuss Aerodrome's mechanism to better understand the risks and opportunities associated with such peak exchanges.
1. Aerodrome's Mechanism
Like many other decentralized exchanges (DEX), Aerodrome utilizes automated market makers (AMM) to offer instant low-slippage trading of hundreds of cryptocurrencies and one-click liquidity supply profit opportunities.
As a 'MetaDEX', Aerodrome stands out for its tokenomics, combining the uniqueness of Curve and Convex liquidity mechanisms with the pioneering passive market-making technology from Uniswap. In practice, this has resulted in an AMM exchange based on Base's veTokenomics model, which empowers token holders to direct token distributions towards liquidity pools through voting.
Unlike Curve, which rewards its veCRV holders with only 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 earn any profits from token trading, they can receive inflationary AERO distributions as compensation that can be held, sold, or voted on.
Through Aerodrome's incentive market, users can lock cryptocurrency tokens as rewards for veAERO voters, who directly allocate tokens to designated pools, creating a well-functioning Aerodrome liquidity bribery market and providing extra income for veAERO participants.
Epoch 60 (or the week ending October 23, 2024) is the sixth-highest week for total rewards on record for Aerodrome, and the second-highest week by trading volume, with $3.63 billion in trading volume and net income of $5.85 million for veAERO lockers.
2. Investment Considerations
Aerodrome's tokenomics encourages long-term-oriented holders to lock their tokens in hopes of offsetting AERO's high inflation rate, which is as high as 37% annualized at the time of writing.
Currently, 50% of the AERO supply is locked, with an average lock-up period of 3.86 years. Due to the limited availability of tokens for sale, there is a mismatch in supply and demand, allowing the token to rise more easily with smaller buying pressure.
The rise in Aerodrome's market cap is very reasonable, as the increase in distributed value enhances the total yields for liquidity providers, attracting new deposits, improving the protocol's bull market fundamentals, while increasing investors' willingness to pay for AERO!
Unfortunately, while the veTokenomics mechanism can successfully boost token prices and deposits, it also triggers inherent reflexivity. Despite stable TVL in April, AERO still plummeted by 80%, clearly indicating that when investor demand shrinks, the market struggles to absorb high-inflation tokens.