Introduction to Aerodrome

Launched on the BASE network on August 28, 2023, Aerodrome Finance is a next-generation automated market maker (AMM) aiming to be the central liquidity hub of the Base blockchain. It integrates robust liquidity incentive mechanisms, an innovative vote-locking governance model, and a user-friendly interface to offer an efficient, transparent, and easy-to-use decentralized trading platform.

Aerodrome Finance inherits advanced technical features from Velodrome V2 and builds upon them with further optimizations and innovations. Users can stake their tokens into NFTs, participate in voting to allocate token rewards, and enjoy the incentives and transaction fees generated by the protocol.

Designed to enhance user engagement and deliver higher economic returns, Aerodrome Finance promotes the ongoing growth and prosperity of the decentralized finance ecosystem.

Components of Aerodrome

Aerodrome is primarily composed of two parts: Swap and Liquidity.

Swap

Swap is Aerodrome’s main function as a DEX. It allows users to trade between different cryptocurrencies without relying on traditional centralized exchanges. Swap operations are executed via smart contracts, ensuring the security and transparency of transactions.

Aerodrome features a token list, where tokens on the list have their liquidity pools receiving emissions and incentives directly from the Aerodrome protocol’s smart contracts. The price of each token is obtained in real-time from Aerodrome’s on-chain oracle. Currently, Aerodrome supports 182 listed tokens with a total value locked (TVL) of $625 million.

Source：Aerodrome

Liquidity

In the Liquidity section of the Aerodrome platform, users can provide liquidity to the DEX and earn rewards and trading fees. Aerodrome includes both liquidity providers (LPs) and liquidity pools.

Liquidity providers (LPs) deposit tokens into liquidity pools to ensure smooth transactions and minimize slippage (the difference between the expected and actual transaction price). The higher the total value locked (TVL) in the liquidity pool, the lower the slippage and the better the trading experience. To encourage users to become LPs, the platform offers various rewards. LPs can earn platform tokens (AERO) and trading fees, while veAERO lockers can earn trading fees and have the right to vote on the most efficient liquidity pools.

Liquidity pools are where users deposit tokens to support trading on the platform. These pools contain various token pairs with different annual percentage rates (APR), trading fees, and volumes. Users can choose different liquidity pools based on their preferences and profit goals.

Aerodrome classifies liquidity pools as follows:

• Active Pools: Currently active liquidity pools.
• Stable Pools: Liquidity pools primarily consisting of stablecoins.
• Volatile Pools: Liquidity pools containing highly volatile token pairs.
• Concentrated Pools: High-concentration liquidity pools.
• Incentivized Pools: Liquidity pools with additional rewards.
• Low TVL Pools: Liquidity pools with low total value locked.

Users can view different liquidity pools on the platform, understand their respective APRs, trading fees, and token quantities, and make deposits to provide liquidity.

Source: Aerodrome

Mechanism Design of Aerodrome

As a DEX, Aerodrome aims to serve as the liquidity layer for the BASE network by integrating the benefits of Curve, Convex, and Uniswap V2 into a single AMM. Aerodrome Finance uses AERO as its governance token.

• AERO Token: The AERO token rewards liquidity providers.
• veAERO: veAERO is used for governance. Any AERO holder can vote-lock their tokens for up to four years in exchange for veAERO NFTs.

Participants in the AERO protocol can lock their $AERO to vote on the distribution of token emissions for the next period, becoming veAERO voters. Each week, veAERO holders vote to determine which pools receive AERO allocations. In return, veAERO voters earn rewards proportionate to their locked amounts. These rewards come from the previous period’s transaction fees and any additional voting incentives for the current period.

Moreover, protocols seeking liquidity incentives can bribe veAERO voters by depositing token rewards for pool voters and accumulating veAERO to directly vote.

Source: Aerodrome

Tokenomics

Aerodrome Finance uses two types of tokens to manage its utility and governance functions:

• $AERO: An ERC-20 utility token primarily distributed to liquidity providers (LPs) as rewards. LPs receive $AERO token emissions based on the accumulated voting proportion of their liquidity pools for each period.
• $veAERO: An ERC-721 governance token (in NFT form). Any $AERO holder can vote-lock (vote-escrow) their $AERO to receive $veAERO (also known as veNFT) in return. The vote-lock period can be up to four years. The amount of $veAERO received is proportional to the lock duration; for example, locking $AERO for four years yields 1 $veAERO per $AERO, while locking for one year yields 0.25 $veAERO per $AERO.

$veAERO is used for governance within the Aerodrome protocol. Holders can vote on the allocation of token emissions for the next cycle and receive a proportionate share of the previous cycle’s trading fees and current cycle’s additional voting incentives based on their locked amount. The longer the $veAERO lock duration, the higher the voting weight of the underlying locked balance.

Initial Token Distribution

For $AERO tokens:

• Voter Incentives: 40M $AERO (8% of total supply)
• Initial Liquidity Pools: 10M $AERO (2% of total supply)

For $veAERO tokens:

• Airdrop to $veAERO Lockers: 200M $veAERO (40% of total supply)
• Ecosystem Pools: 105M $veAERO (21% of total supply)
• Aerodrome Team (locked for 4 years): 70M $veAERO (14% of total supply)
• Protocol Incentive Fund: 50M $veAERO (10% of total supply)

This distribution ensures incentives for early participants, liquidity providers, and the development team while supporting ecosystem growth and funding public goods.

Source: Aerodrome

The initial supply of $AERO is 500 million, with 450 million distributed in the form of vote-locked tokens ($veAERO). The weekly unlock rate is 10 million $AERO (2% of the initial supply). The emission plan comprises three stages:

1. First 14 Weeks: The unlock rate increases by 3% weekly to rapidly boost protocol activity and partner onboarding.
2. Post 14 Weeks: Emissions decay at 1% per period, ensuring reduced inflation as the protocol matures.
3. Aero Fed: Once the emission rate programmably drops below 9 million per period, around the 67th week, veAERO voters will control Aerodrome’s monetary policy via the Aero Fed system. Voters will choose weekly from the following options:
   1. Increase unlock rate by 0.01% (annualized 0.52%)
   2. Decrease unlock rate by 0.01% (annualized 0.52%)
   3. Maintain the current unlock rate percentage
4. A simple majority will decide the winning vote. If an increase or decrease is chosen, the emission rate will change in the following period. The maximum emission rate is 1% per week (annualized 52%), and the minimum is 0.01% per week (annualized 0.52%).

Liquidity Market

The liquidity market is a crucial component of cryptocurrency trading, especially in automated market maker (AMM) decentralized exchanges (DEXs). The core of a liquidity market is to provide sufficient liquidity, allowing traders to buy and sell tokens easily without significantly impacting market prices. Increased liquidity can lower trading costs, improve trading efficiency, and stabilize the market.

Liquidity Providers (LPs)

Liquidity providers enhance market liquidity by depositing equal values of two tokens (usually stablecoins or Ethereum) into liquidity pools. They bear the risk of “impermanent loss,” which occurs when market prices fluctuate significantly, potentially causing them to recover less value than if they had simply held the tokens. To compensate for this risk, LPs need to earn sufficient rewards to ensure their participation is profitable.

• Reward Mechanism: LPs are typically compensated through trading fees and token rewards. For example, in Aerodrome Finance, LPs earn rewards through the emissions of AERO tokens, proportional to the liquidity they provide.
• Governance and Voting: In Aerodrome, holders can vote on token distribution and liquidity pool rewards. These voters typically have locked AERO tokens to obtain veAERO NFTs. Voters may support specific liquidity pools for various reasons, such as increasing liquidity for a particular token, boosting their liquidity provider rewards, or earning direct voting incentives.
• Trading Fees and Incentives: As a DEX, Aerodrome charges traders trading fees. When traders swap tokens in liquidity pools, a portion of the trading fees is distributed to the pool’s voters. Additionally, anyone can incentivize voting for specific pools by providing tokens to the voters, increasing the pool’s AERO emissions and, consequently, its liquidity.

Ways to Participate in Aerodrome

Joining the Aerodrome platform can be simplified into the following three steps:

Token Integration

1. Acquire Token Information: Obtain token information, including the contract address and symbol.
2. Add Token Information: Submit a pull request to add the token information to the Tokenlist repository or seek help on the Aerodrome Discord.
3. Complete Integration: On the platform, click the “Add token” button and follow the instructions to complete the integration.

Source: Aerodrome

Create a Pair

1. Deposit Tokens: Create a liquidity pool by depositing tokens into Aerodrome.
2. Stake Tokens: Choose to stake the deposited tokens on Aerodrome. After voting concludes, you will start earning rewards.
3. Complete Deposit: Click the “Deposit” button and follow the instructions to complete the deposit.

Source: Aerodrome

Add Incentives & Vote

1. Provide Incentives: By offering incentives, you can attract more liquidity providers.
2. Vote: Voting is crucial in determining the emission rates for the next cycle’s liquidity pools. The more emissions a liquidity pool receives, the higher the rewards for those providing liquidity.

Source: Aerodrome

1. Add Incentives: Liquidity pools can receive incentives and votes each week. Click the “Add Incentives” button and follow the instructions to add incentives, attracting more voters.

Conclusion

Since its launch on the BASE network on August 28, 2023, Aerodrome Finance has successfully established itself as the central liquidity hub of the Base blockchain with its innovative automated market maker (AMM) model. Combining advanced liquidity incentive mechanisms, a vote-locking governance model, and a user-friendly interface provides users with an efficient, transparent, and easy-to-use decentralized trading platform.

Looking ahead, Aerodrome Finance is poised to expand its influence in the decentralized finance (DeFi) sector, leveraging the extensive user base and growth potential of the Base chain. As the cryptocurrency market evolves and matures, Aerodrome Finance will continuously optimize and upgrade its AMM technology to meet market changes and user needs, enhancing transaction efficiency and security while further developing use cases for the AERO token to empower the community.

With ongoing technological advancements and shifting market dynamics, Aerodrome Finance is set to become a significant player in the DeFi space, offering users richer and more efficient financial services.