Velodrome Slipstream
Velodrome is the undisputed liquidity hub of Optimism Mainnet, boasting 2x the TVL and 5x the tokens of every other major DEX combined. By combining the best of UniV2, Curve, and Convex into a single streamlined design, Velodrome makes it easy for projects to build deep liquidity on their tokens and has established itself as one of DeFi’s leading DEXs.
Soon Velodrome will not just be the liquidity hub of Optimism, but also its volume hub. Introducing our new AMM, Velodrome Slipstream.
The Velodrome model of combining token emissions with standard vAMM or sAMM pools remain the optimal choice for most project’s liquidity needs. While UniV3 style concentrated pools have their benefits, in low volume conditions liquidity supported on fees alone (even with active management) provide inconsistent trade execution and suboptimal outcomes. There are however high volume pairs (i.e. OP, WETH, wstETH, etc) that are well served by UniV3 style concentrated liquidity pools.
This represents a major opportunity for Velodrome. On Optimism, pairs such as WETH/USDC typically do millions in daily volume, most of which is currently being captured by Uniswap liquidity providers. Even modest improvements in the liquidity concentration and capital efficiency of Velodrome pools could capture 4–5x the volume and fees, winning swap execution at any price on critical high volume ecosystem pairs.
Just as combining UniV2 style pairs with an optimized emissions based incentive model has catapulted Velodrome far ahead of traditional UniV2 forks like Sushi Swap, we believe Velodrome Slipstream’s novel approach to incentivized clAMM pools will make Velodrome one of the best places in in DeFi provide liquidity on pairs such as WETH/USDC and OP/USDC. Establishing Velodrome as both the central liquidity and volume hub of Optimism Mainnet and the coming Optimistic Superchain.
Velodrome Slipstream: Objectives
The primary objective of Slipstream is to add support for concentrated liquidity pools as an additional option on top of our existing sAMM and vAMM models in a way that uniquely leverages the Velodrome flywheel.
We’ll do this by:
- Encouraging persistent LPing on Velodrome in all market conditions
- Incentivizing LPers to stake for VELO emissions, directing fees to veVELO voters
- Maximize emissions efficiency to driving optimal concentrations and rewards for liquidity providers
- Maintain full protocol decentralization and transparency (no off-chain gauge computations)
The primary benefit of our Slipstream clAMM is to improve the capital efficiency of stable pools and less volatile assets. Most volatile pools won’t benefit from concentrated liquidity and will likely not transition to it.
Velodrome Slipstream is a novel and fully audited clAMM implementation based on UniV3’s trusted contracts and will fall under our BUSL.
Velodrome Slipstream: Design
Gauge Rewards
Gauge rewards are distributed over time and only in the active tick. The active tick is the liquidity around current price that traders trade against.
- Distributing over time is similar to V2 and encourages persistent liquidity that doesn’t move day to day in response to market conditions
- Incentivizing only the active tick means that we maximize capital efficiency by only rewarding useful liquidity
- Gauges accept positions created by the
NFTPositionManager - Residual emissions (e.g. if there is no liquidity in the active tick for a non-zero amount of seconds in a given epoch) will be rolled over to the following epoch
- The gauge will have helper functions that will allow users to manipulate their liquidity position while it is in the gauge should the user want to increase or decrease liquidity in response to market conditions
Fees + Emissions
The pool factory will allow a fee module to be set. The factory can update the fee algorithm being used by the protocol at any time.
- The factory will ship with the custom fee module that exists with V2
- The maximum fee on this fee module will be set to 3%
During volatile market conditions, emissions may not adequately compensate LPs for the risk they are taking in CL pools.
To keep liquidity on Velodrome, unstaked liquidity will be able to earn trading fees rather than emissions. However, to encourage restaking of LP’s back into the Velodrome flywheel, the pool factory will allow a unstaked liquidity fee rake / tax (i.e. the fee that is levied on LPers that choose not to stake in the gauge) module to be set. The fees earned by this module will be given to the veVELO voters of that pool.
- The factory will ship with the custom fee module similar to the one described above for pool fees
- The default value of the rake will be 10%, with the valid values ranging from 0 to 20%
This fee is designed to incentivize users to stake so that they can participate fully in the flywheel. By not staking, they will still contribute to the flywheel via the small fee that they pay. A small rake should allow Velodrome pools to maintain their TVL advantage meaning LPs will not benefit from moving to a different DEX.
The goal is that Velodrome is able to provide adequate liquidity for baseline market conditions, but also adapt dynamically to volatile ones.
Tick Spacings
Larger tick spacings will make the pools more retail friendly and reduce the frequency of which ALMs will need to rebalance liquidity. The pools will still be more capital efficient than v2, but potentially slightly less efficient than a UniV3 pool of the same tick size and fee. However, because emissions will be able to attract more liquidity, Velodrome will still offer better trade execution at lower levels of concentration.
In addition, since Velodrome will be using custom fee algorithms, it can still maintain another advantage here (e.g. stable pool depegs and the fees go up, our clAMM pools become more attractive to LP in vs alternatives).
Suggested tick spacings are:
- Stable pairs use 0.05% fee tier, with tick spacing of 10
- Established pairs (e.g. OP/ETH), .3% fee tier, with tick spacing of 60
- Volatile pairs, using 1% fee tier, with tick spacing of 200
Miscellaneous
- The oracle will be updated to add a new observation once every 15 seconds as opposed to once every block a unique optimization enabled by the OPStack
- We will provide support for swaps between V2 and V3 pools by adapting Uniswap’s Universal Router for our contracts
- The routing will provide support for actions across a whole host of different NFT platforms
- We may also choose to implement additional support for contracts within the Velodrome ecosystem to make it easier for users to bulk collect emissions / rewards and swap them
- Velodrome Slipstream will ship with the ability for automated liquidity management to be offered on top of it. The goal of this is to help non-professional users benefit from concentrated liquidity pools without having to put a lot of effort in re-balancing their positions
Conclusion
Velodrome Slipstream will be heading to audit soon and represents a major leap forward for Velodrome style DEXs. By combining the best features of Curve, Convex, UniV2, and UniV3 into a single streamlined DEX design it further entrenches its position as one of the leading exchanges in DeFi.
Hope you are ready for the next leg of the race. 🚴♀️💨✨
