Aerodrome Finance (AERO) is a decentralized finance (DeFi) protocol that helps to automate market making and provide liquidity on the Base network. Launched on August 28, 2023, Aerodrome uses the technology of Velodrome, a leading decentralized exchange (DEX) on the Optimism network. Aerodrome aims to provide deep liquidity, low slippage, and competitive fees for traders, adding another dynamic layer to the Base DeFi platform.
In this article, we'll explore what Aerodrome Finance is and the protocol's role in the Base ecosystem.
TL;DR
Aerodrome rewards liquidity providers with its main token, AERO, to improve trading on its platform.
Locking AERO tokens grants veAERO NFTs, which allows holders to vote on protocol decisions and AERO emission allocations.
Aerodrome rewards liquidity providers with AERO tokens based on liquidity and veAERO votes.
AERO holders vote on key decisions, promoting community involvement and democratic governance.
Aerodrome enhances the Base ecosystem by promoting USDC adoption, supporting liquid staked tokens, and forming strategic partnerships.
What is Aerodrome Finance?
Aerodrome Finance is an automated market maker built on the Base network. Think of it as an advanced marketplace where you can trade cryptocurrencies in a decentralized manner. Unlike traditional centralized exchanges, Aerodrome operates autonomously, governed by its users through a community-driven model.
Aerodrome's integration of the best features from other prominent DEXs like Curve, Convex, and Uniswap V2 sets it apart. It provides a solution for liquidity provision and trading on the Base network, making it a one-stop shop for these activities.
Key features and tokens
AERO token: Aerodrome uses AERO as its primary utility and governance token. AERO is distributed as a reward to liquidity providers — individuals who supply the necessary funds to enable trading on the platform.
veAERO NFTs: When you lock your AERO tokens for a specific period, you receive veAERO NFTs. These NFTs give holders the right to be a part of project governance. Holders can vote on different protocol decisions, including how AERO emissions are shared between different liquidity pools. This system ensures that those who are committed to the platform have a say in its future direction.
Liquidity and rewards
Liquidity is the lifeblood of any exchange. Aerodrome rewards community members with AERO tokens to incentivize them to provide liquidity. These rewards are distributed based on the amount of liquidity provided and the votes of veAERO holders.
For example, if a pool receives more votes, it receives more AERO emissions, which should theoretically attract more liquidity providers to that pool. Imagine you have a lemonade stand and want to make sure you have enough lemons (liquidity) to meet demand. Aerodrome’s system gives you more lemons (AERO tokens) in return for helping out. It also lets you decide where future lemon supplies should go, so the best stands are always stocked.
Governance and community involvement
Aerodrome’s governance model is designed to be democratic. veAERO owners vote on important protocol decisions. This makes sure the platform evolves based on the input of its community members, encouraging a strong and more unified ecosystem with alignment between participants.
How does Aerodrome Finance reward liquidity providers?
Liquidity is important for any DEXs, and Aerodrome Finance has created a reward system to attract and retain liquidity providers. Let’s break down how this reward system works.
First, think of liquidity providers (LPs) as the people who keep the marketplace active. They deposit pairs of tokens into liquidity pools, enabling others to trade them smoothly. In return, Aerodrome rewards these LPs with AERO tokens.
AERO emissions
Aerodrome uses AERO tokens as an incentive for LPs. These emissions are distributed based on the liquidity provided in various pools. Essentially, the more liquidity you provide, the more AERO tokens you earn. This reward system is similar to earning interest in a savings account, but you receive AERO tokens instead of cash.
Impermanent loss and compensation
One risk LPs face is temporary loss, which happens when the value of the tokens they’ve deposited changes. To make up for this risk, Aerodrome’s AERO emissions provide an extra reward. This makes it more appealing for LPs to put their tokens to work, even though there might be changes in the market.
Weekly voting system
The Aerodrome community decides how AERO emissions are distributed. Each week, veAERO holders (those who have locked their AERO tokens and received veAERO NFTs in return) vote on which liquidity pools should receive more AERO emissions. This makes sure that the pools with the highest demand receive the most liquidity, aligning incentives with the market’s needs.
Fees and incentives
In addition to AERO emissions, liquidity providers can earn fees from the trades happening in their pools. When someone swaps tokens in a pool, a small fee is collected and distributed among the pool’s LPs. Anyone can also attract votes to a specific pool by depositing tokens. This should encourage veAERO holders to send more emissions to that pool.
This approach creates a dynamic environment where pools compete for liquidity based on potential rewards. For example, imagine you’re running a hot dog stand (a liquidity pool). You provide the ingredients (tokens) so people can make hot dogs (trades). Aerodrome pays you extra ingredients (AERO tokens) every week to encourage you to keep your stand open. And every time someone makes hot dogs, you get a small portion of their payment (trading fees).
If more people vote for your stand to receive extra ingredients, you’ll get even more supplies, making sure your stand remains well-stocked and popular. This reward system not only pays liquidity providers for their contributions but also makes sure the liquidity is directed where it’s most needed, sustaining a healthy and active trading environment on Aerodrome Finance.
What are the governance mechanisms in Aerodrome Finance?
Aerodrome Finance has a well-structured governance structure designed to give its community control over the platform’s decisions. Governance is primarily managed through vote-escrowed AERO (veAERO) tokens, which play a role in the decision-making process.
About vote-escrowing AERO tokens
To be part of the AERO team, AERO token holders can lock their tokens for up to four years, and get veAERO NFTs in return. The longer the tokens are locked, the more voting power the holder gains. For example, locking 100 AERO for four years provides more voting weight than locking the same amount for one year. This system rewards long-term commitment to the platform.
Role and benefits of veAERO holders
VeAERO holders have the power to vote on proposals that impact the platform. This includes decisions on emission allocations, fee adjustments, and introducing new features. By holding veAERO, participants contribute to governance and earn rewards. VeAERO holders receive 100% of the trading fees generated by the platform, which is distributed in proportion to their voting power. This creates a direct incentive for active participation in governance.
Aero Fed system
The Aero Fed system is another innovative aspect of Aerodrome’s governance. When the platform’s emissions programmatically drop to a certain level, veAERO voters can influence the monetary policy. They can vote to either increase, decrease, or maintain current emission rates. This system makes sure the community has a say in the economic aspects of the protocol, promoting sustainable growth.
Overall, the system allows those who make a bigger commitment to have a greater say in governance, and earn more rewards in return. This makes sure that the most dedicated members can have the biggest impact.
How does Aerodrome Finance support Base?
Aerodrome Finance provides liquidity and incentives to drive growth and stability within the Base ecosystem. Here’s a closer look at how Aerodrome supports initiatives on the Base Network.
Promoting USDC adoption
Aerodrome Finance has been influential in accelerating the adoption of native USDC within the Base ecosystem. Through strategic partnerships and incentives, Aerodrome has shifted AERO rewards to native USDC liquidity pools.
This transition has significantly boosted USDC’s liquidity, increasing its utility and trading volume on the platform. As a result, the total value locked of native USDC on Aerodrome grew to $150 million in 2024, marking a substantial increase in its adoption.
Supporting liquid staked tokens
Liquid staked tokens, such as cbETH, wstETH, and rETH, benefit from Aerodrome’s liquidity provisions. Aerodrome has supported the tokens' growth by providing an effective way to trade and giving them incentives to make money. This has helped to make DeFi more active and flexible. The support extends to strategic tokens, enhancing their presence and utility within the Base network.
Strategic partnerships
Aerodrome collaborates with various protocols to bolster the Base ecosystem. These partnerships enable the integration of innovative features and enhance the overall functionality of the platform. Integrations with major DEX aggregators like Odos and KyberSwap have increased trading volume and liquidity through Aerodrome pools.
Improving ecosystem resiliency
Aerodrome’s rewards help to make the Base network more resilient by keeping money available even when activity is lower. This helps the network to remain strong and able to support many different economic activities, encouraging a healthy and sustainable ecosystem.
What's next for Aerodome Finance?
Aerodrome's collaboration with DEX aggregators Odos and KyberSwap opens the door to other similar partnerships. Aerodrome makes sure that its liquidity pools are easier to find with DEX aggregators, which gives the community wider trading options and more liquidity.
Meanwhile, Aerodrome is set to benefit from the expanding Optimism Superchain. Aerodrome is a key part of this system, and will use the improvements made by the Optimism Superchain to make transactions cheaper and more efficient. These improvements are expected to attract more community members and liquidity to the platform, further solidifying Aerodrome’s position in the DeFi space.
Today, Base plays an important role in Aerodrome’s strategy to scale Ethereum. And, all eyes were on Base during mid-2024 due to its On-chain Summer II initiative being in full swing for developers and builders. Through the initiative, Base and its partners are offering 600 ETH¹ ($2 million) in prizes, grants, and gas credits. Aerodrome could also benefit from the advancements born from On-chain Summer II, as developers build new features that strengthen the Base ecosystem.
The final word
Aerodrome Finance (AERO), built on the Base network, is designed to automate market making and provide liquidity. Launched in August 2023, the platform leverages Velodrome’s technology from the Optimism network, offering deep liquidity, low slippage, and competitive fees.
Aerodrome combines the best of Curve, Convex, and Uniswap V2, serving as a central hub for trading on the Base network. Key tokens include AERO for utility and governance, and veAERO NFTs for protocol decisions and emissions. Meanwhile, liquidity providers are rewarded with AERO tokens, while community-driven governance is encouraged as a key component of the platform.
Many in the crypto community will be keeping a close eye on projects such as Aerodrome Finance as new projects and use cases emerge across DeFi. Interested in learning more about this TradFi disruptor? Read our guide on what DeFi 2.0 is, and explore the top Bitcoin DeFi projects to watch in 2024.
FAQs
Aerodrome Finance rewards liquidity providers (LPs) with AERO tokens. LPs add pairs of tokens to liquidity pools for smoother trading. The more liquidity LPs provide, the more AERO tokens they earn. LPs also gain trading fees from pool swaps. Aerodrome offers extra rewards to reduce the risk of loss, making it attractive for LPs to contribute despite market changes.
AERO tokens are important in Aerodrome’s governance. AERO token holders can lock their tokens for up to four years and receive veAERO NFTs in return. The longer the lock period, the more voting power they get. VeAERO holders vote on proposals affecting emissions, fees, and features. They also earn 100% of trading fees, which are distributed based on their voting power to promote participation in the governance process.
Aerodrome Finance promotes the adoption of the USDC stablecoin, provides liquidity for liquid staked tokens including Coinbase's cbETH, and and forms partnerships to strengthen the network. Aerodrome has previously moved AERO rewards to native USDC pools, increasing liquidity and trading volume. The project also supports cbETH, wstETH, and rETH with good trading conditions and incentives. Meanwhile, partnerships with DEX aggregators Odos and KyberSwap help to improve the Base network’s functionality.
Aerodrome Finance plans to expand its integrations with other DEX aggregators, improving trading options and liquidity. The platform will leverage the Optimism Superchain to enhance transaction efficiency and cost-effectiveness.
Aerodrome also wants to benefit from the growing Base network, especially through events like On-chain Summer II. The event provides major prizes, grants, and gas credits to encourage participants to create and build on the network. These developments can help to attract more community members and liquidity for all parties involved.
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