Velodrome: The Infinite Race

The Velodrome flywheel is spinning at full speed. The protocol has attracted over $150M in TVL, the highest of any project on Optimism and the most of any DEX on any Ethereum Layer 2. This growth is backed by strong fundamentals: emissions and incentives are declining while bribes, fees, and veVELO lock rates are all increasing in lockstep.

During epoch 35, veVELO voters received over $555,000 in rewards, equivalent to an annual run rate of $28.9M, distributed as a portfolio of 53 unique tokens from projects using Velodrome to incentivize liquidity.

Established protocols such as Inverse Finance, Synthetix, and Lido have accelerated the pace of both their bribes and veVELO accumulation after seeing the impact these tools have in driving rapid growth on while reducing their overall liquidity incentive costs.

It is more clear than ever that the “Velodrome Model”, pioneered by our team and iterated on by teams such as Equalizer and Thena, has become the definitive version of the fast growing “Solidly style” AMM design.

But Velodrome is not stopping here. Velodrome 2.0 (shipping in Q1) will represent the next major leap forward not just for “Solidly style” AMMs but for the broader DEX landscape. It represents over six months of work rebuilding/optimizing the underlying contracts, adding new features and functionality, and completely overhauling the protocol UI /UX.

In addition to the improvements announced previously, Velodrome is will implement a new addition to its economic engine: The VELO FED.

The VELO FED will replace the existing tail-emissions and allow veVELO holders to set the VELO emission rate within a key set of parameters.

Combined with adjustable trading fee rates for token pairs and concentrated liquidity pools, we believe it represents the future of decentralized decentralized exchange design.

VELO FED

A first in DeFi, the VELO FED will give veVELO voters the power to set monetary policy for VELO supply. VELO emissions are a critical component of the Velodrome flywheel. They power liquidity and attract rewards for veVELO voters, while veVELO holders “pay” for liquidity with dilution. As such, veVELO voters have a strong incentive to maintain a healthy balance of sustainable emissions.

In Velodrome’s current growth stage, emissions flow rapidly, following a predictable distribution curve with a 1% reduction per epoch. When weekly emissions drop below 5M (~0.3% of total supply), the VELO FED will automatically replace the existing schedule, following a simple set of rules:

veVELO holders will vote each epoch on 1 of 3 options

• increase emissions by 0.01% of total supply (0.52% annualized)
• decrease emissions by 0.01% of total supply (0.52% annualized)
• maintain emissions fixed

The winning vote will be determined by simple majority.

If a increase or decrease is selected, the emission rate will change one full epoch after the vote

A max emission rate will be set at 1% of total supply per week (52% annualized) and a min rate at 0.01% per week (0.52% annualized).

VELO FED will allow the protocol to adjust to exogenous factors such as economic conditions or ecosystem growth, while ensuring only long-term stakeholders can have a meaningful influence on monetary policy.

For example, veVELO voters could decide to increase emissions in a period of fast growth on Optimism to attract more protocols; or to reduce emissions when Velodrome is outpacing ecosystem growth, allowing the protocol to retain TVL with lower dilution.

Adjustable Trading Fees

As Velodrome liquidity grows, so does its ability to capture a higher fee for veVELO voters while still delivering the best execution for top pairs.

Protocols bribing on Velodrome 2.0 will be able to choose the fee level for their liquidity pools, which will also make it easier for pairs to “self-bribe”, generating more fees to attract more voters and emissions.

Concentrated Liquidity

Velodrome’s volatile and stable pricing formulas allow LPs to take a passive position, collect VELO rewards, and support low slippage swaps. The simplicity of these pools offer a low barrier of entry for most educated users to participate as LPs.

However, concentrated liquidity pools have proven their worth in capturing more volume with the same TVL by offering low slippage for large trades. For highly correlated pairs and assets with established market makers, the added value of concentrated liquidity outweigh the increased complexity for LPs.

Velodrome 2.0 will set the foundations for AMM upgrades that will include a novel implementation of concentrated liquidity pools. To incentivize liquidity providers, VELO emissions to these pairs will be split based on a combination of LP size, liquidity range, volume, and time. Combined with adjustable fees, concentrated liquidity pools will enhance fee rewards veVELO voters and reduce liquidity incentive costs for protocols.

The Infinite Race

As the next wave of decentralied finance protocols leverage Ethereum Layer 2 networks to offer low cost, fast frequency transactions, they’ll seek base-layer protocols that can effectively support their applications.

By reducing their need to offer liquidity incentives in their native tokens, Velodrome adds a layer of endurance to the Optimism ecosystem. Lower liquidity incentive costs mean longer runway, lower token inflation, and better price stability for protocols using Velodrome, giving them an advantage over projects in other ecosystems.

To me, it doesn’t matter whether it’s raining or the sun is shining or whatever: as long as I’m riding a bike I know I’m the luckiest guy in the world — Mark Cavendish, cycling legend

In other words, protocols on Optimism can effectively outsource a portion of their token dilution and volatility risks to Velodrome. With Velodrome 2.0, we aim to extend this advantage to make Velodrome the most advanced liquidity solution and obvious choice for L2 projects.

We hope you will join us on the next leg of this race!

🚴‍♀️💨✨