CoinMarketCap Alexandria takes a deep dive into decentralized exchange Velodrome, the top DeFi protocol on Optimism by total value locked.
In the final breaths of the 2021 bull market
legend and developer Andre Cronje
, launched his highly anticipated project, Solidly
, on the Fantom
blockchain. Solidly launched on Feb. 24, 2022, aiming to bring its own revolutionary concept
to DeFi by combining the vote-escrow model
popularized by Curve Finance
and the (3,3) game theory
model from OlympusDAO
Solidly had planned to distribute its own tokens via airdrop
to the top protocols by Total Value Locked
(TVL) in the Fantom ecosystem. As a result, protocols fought fiercely to attract liquidity to their protocols, with some new projects spawning with the specific intention of garnering the most control over Solidly. One of the largest of such projects was veDAO
Alas, the Solidly project was not meant to be, with Andre announcing his departure from crypto
just days after Solidly launched. The move quickly crippled the Fantom ecosystem as the bear market
Source: @AntonNellCrypto on Twitter
However, this was not the end for veDAO. Instead, they adapted and shifted their focus to Optimism
, one of the most promising Ethereum Layer 2
solutions. They sought to bring the best elements of Solidly to Optimism and improve on the shortcomings of the original model. Out of these efforts grew a strong and dominant project: Velodrome
. The decentralized exchange
(DEX) now sits at the top of Optimism, holding more than 32% of all TVL on the chain.
Velodrome is an automated market maker
(AMM) protocol aiming to provide deep liquidity
and low slippage
swaps. It was designed off Solidly’s design with a few key modifications to avoid the pitfalls that Solidly fell to. Velodrome also aims to be a public good for the Optimism ecosystem to support its growth.
The key problem with most AMMs was that emissions
were often tied to liquidity, rather than to trading volume, which generates fees for the protocol. To circumvent this, Velodrome allows holders of their native token, VELO, to lock them for a selected duration between 1 week to 4 years. The longer the lock, the more veVELO the user receives, which grants them more voting power.
Their position in locked VELO will be represented as an NFT
(also known as veNFT) which can then be traded on NFT marketplaces. Rebasing
is also used to ensure that VELO lockers were not significantly diluted, where veVELO is distributed to VELO lockers, proportionate to their locked amount.
Source: Quixotic, an Optimism-based NFT marketplace
Once the user locks their VELO, they are able to use their voting power to direct liquidity emissions to specific pools
. Liquidity emissions from Velodrome are distributed proportionally based on votes received by each pool. In return, these voters receive 100% of all fees and bribes received by the specific pools that they voted for.
Bribes come from external parties such as protocols looking to incentivize specific pools. For example, an emerging project might want to incentivize a liquidity pool of their native token to create sufficient liquidity for their token.
Bribes flow to voters which incentivizes them to vote for the pools with the highest combined value of bribes and fees. Consequently, this directs VELO emissions to these pools which benefits liquidity providers
, hence attracting more users to deposit liquidity into said pools.
Through such a mechanism, protocols paying out bribes can incentivize more than $1 of liquidity to be provided for every $1 in bribes spent.
Velodrome sought to surpass Solidly by fixing the issues in Solidly’s design. Many of these issues were in tokenomics
, which Velodrome was quick to address. The first of these was emissions.
Solidly distributed a significant portion of its tokens in its initial airdrop. This left little to incentivize future growth for the protocol, preventing the positive flywheel from creating long term ecosystem growth. Velodrome lowered initial emissions and released VELO tokens over a longer timeframe. Moreover, while rebasing was still a feature, it was reduced so that token lockers were still diluted but at a very slow rate compared to Solidly, which did not dilute lockers at all.
Source: Velodrome Docs
The second issue was in the distribution of tokens. 100% of SOLID tokens were distributed based solely on TVL. With Solidly’s rebasing feature, these protocols could easily consolidate control with their tokens, making it hard for new entrants to take any significant control. Velodrome, however, structured their airdrops to focus on protocols and users that would likely benefit the overall Velodrome ecosystem instead. Such users included Optimism power users as well as DeFi users from other chains holding specific locked tokens such as veCRV
True to their public goods angle, the Optimism team also received 5% of the total supply in veVELO to support and incentivize necessary pools. Velodrome further supported this by matching bribes on “public good pools” (such as sETH
), established projects and emergent projects in varying degrees.
In December 2022, Velodrome announced Velodrome V2.0, which is expected to launch in Q1 2023. Aside from a slew of improvements to better the user experience, Velodrome V2.0 also boasts 3 key additional features: concentrated liquidity
pools, adjustable trading fees, and VELO Fed.
Concentrated liquidity pools
, a concept popularized by Uniswap
with their V3 model, allows Velodrome to achieve much greater capital efficiency
, especially with identically-pegged
assets such as stablecoins
or liquid staking derivatives
Adjustable trading fees allow external protocols to set their own trading fees on their own pools, which can be used to incentivize voters to direct emissions to said pools as voters can earn more from the fees of these pools. Higher fees, more votes, simple.
Lastly, VELO Fed puts power in the hands of VELO lockers, empowering them to vote on the monetary policy
of Velodrome. In the initial launch of this feature, voters will be given 3 options: to increase, decrease or maintain current emissions with limits on the high and low ends. This gives greater utility to locking VELO tokens and enables more proactive governance
One year on from Fantom Solidly’s rapid rise and fall, Solidly forks have become some of the best performing forks by TVL.
Despite the bear market in 2022, Velodrome continued to build and ship features to users in the expanding Optimism ecosystem. In 2023, many eyes will be watching the Velodrome V2.0 deployment closely and the future developments to come from one of the most exciting teams in DeFi today.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators.
This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.
The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap.