Velodrome, as a native DEX on the Layer 2 Optimism of Ethereum, had a TVL of $137.53 million as of January 31, an increase of 83.54% in the past month. Both in terms of the number of TVL and the growth rate, it has surpassed leading multi-chain DeFi projects such as Aave, Curve, and Uniswap on Optimism. In the case that the top project has a moat, it is becoming more and more difficult for native projects to develop, so what makes Velodrome gain such an advantage?
Velodrome’s ve(3,3) mechanism
Velodrome was adapted by the veDAO team from Solidly launched by the Andre Cronje team, and some modifications were made on this basis. The token design also refers to Solidly’s (3,3) mechanism.
There are two types of tokens in Velodrome: VELO is an ERC-20 token used to reward liquidity providers; after locking VELO, you will get veVELO (also known as veNFT), which is an NFT governance token. The ve prefix comes from the vote-escrowed in Curve veCRV, that is, voting escrow. Designing veVELO in the form of NFT also solves the problem that pledged tokens could not be traded, but veVELO NFT has no liquidity in the secondary market.
The ve mechanism was first adopted by Curve to strengthen the incentives for long-term token holders; (3,3) the game theory was designed by Olympus DAO. When everyone pledges tokens instead of selling them, everyone’s income is higher.
Among the main participants of Velodrome, the transaction fee for traders in Velodrome is only 0.02% to 0.05%. Even without the liquidity accumulation of Uniswap V3, they may have a better experience because of the lower fee.
For liquidity providers, there is no transaction fee income in common AMMs, and they completely rely on Velodrome’s mining reward VELO.
Holders of veVELO can obtain four rights and interests: governance rights, which determine the weight that VELO assigns to each liquidity pool; all transaction fees; all bribe rewards; and reduce the dilution of voting rights through rebase.
Then, the more bribes and transaction fees in Velodrome, the higher the income of veVELO holders, the price of VELO may rise, and the increased income of liquidity providers will attract more liquidity, and better liquidity will be further improved Transaction fee income forms a flywheel effect.
The initial supply of VELO tokens is 400 million, of which 60% is allocated to the community, including WEVE holders, Optimism users and other DeFi users on the chain. The remaining 40% is allocated to partner projects, the Velodrome team (some tokens are used to lock up and vote for VELO trading pairs), the Optimism team, and the initial liquidity pool.
The tokens allocated to liquidity providers are reduced every week, with 15 million VELO (3.75% of the initial supply) in the first week, and the total supply is expected to reach 1.8 billion VELO in 200 weeks.
VELO pledge and veVELO holding status
From the above, we can know that both VELO and CRV are long-term inflationary assets. Curve is crucial to stablecoins, liquid pledged tokens, anchored coins and revenue aggregator projects, so each project competes to accumulate CRV to form a “Curve War.” If the participants’ demand for VELO is insufficient, Velodrome will inevitably go into a death spiral, but judging from the current situation, Velodrome is still the project with the highest TVL on Optimsim, and there is a tendency to form a “Velodrome Race.”
According to the statistics of Dune Analytics @0xkhmer, from Epoch1 to the current Epoch35 (one Epoch per week, each Epoch starts at 8:00 a.m. Beijing time every Thursday), although the supply of VELO is constantly increasing, almost all of the newly added VELO is used for lock-up, and the number of VELO in circulation has hardly changed. At Epoch1, the locked VELO was 163 million, and the circulating VELO was 141 million; while at the current Epoch35 stage, the locked VELO is 645 million, and the circulating VELO is 157 million.
Apart from the Velodrome team, the one holding the most veVELO is Beefy, which is a multi-chain revenue optimizer. Beefy started accumulating veVELO around Epoch20. Its beVELO vault helps users automatically obtain VELO rewards and reinvest and charges a certain fee from it. After staking VELO, users can obtain tradable beVELO tokens, which can be traded in the secondary market. Beefy also usually reserves a part of VELO for users to withdraw. The beVELO staking APY is usually higher than 100%.
In addition to Beefy, 200 Keys, Synthetix, Frax, Inverse Finance, Revenant Labs, etc. have more veVELO holdings in the last two Epochs. But so far, no project has obtained a relatively large proportion of veVELO voting rights.
veVELO’s income structure
Among the three incomes of veVELO holders, the highest source of income is bribery, and transaction fees and rebase income are relatively small. Why are more and more projects willing to adopt the form of bribes instead of initially adopting governance tokens issued by themselves as mining rewards? Because the form of bribery is more effective, according to Velodrome’s calculations, every $1 in bribes will generate approximately $1.5-2 in VELO rewards for the corresponding trading pair.
At the ended Epoch34, the Rebase APR was 18.06%, the average bribe APR was 65.47%, the average transaction fee APR was 3.76%, and the total APR was 87.29%.
As shown in the figure below, during the period from Epoch10 to Epoch33, the average APR was higher than 100%. Epoch34 because the VELO price has risen too fast relative to the bribe funds, so the APR has dropped. Since the transaction fees and bribes collected come from the trading pairs that vote, different veVELO holders will receive different bribes and transaction fees due to different votes, while the rebase rewards are the same.
It can be seen that Velodrome’s bribery funds set a historical record in Epoch34. The bribery amount of that week was $449,104, and the total historical bribery amount was about $5.1 million.
Synthetix is one of the important sources of bribes for Velodrome. Multiple trading pairs, including SNX/USDC, USDC/sUSD, WETH/sETH need to attract liquidity on Velodrome. The bribery funds given by Synthetix are OPs officially rewarded by Optimism.
In addition, WETH/LUSD from Liquity, WETH/BIFI from Beefy, alETH/WETH from Alchemix, DOLA/USDC from Inverse Finance, etc., all use OP as bribery funds, almost no projects use stablecoins for bribery, and OP prices have risen more recently, which explains why bribery funds have hit new highs in the near future. However, the OP tokens that Optimism gives to ecological projects are limited, which also paves the way for whether Velodrome’s mechanism can continue.
It is worth noting that recently Lido, the top liquid staking track, has also started to bribe in Velodrome. The weekly bribe fund of wstETH/WETH is 7000 LDO, and the weekly bribe fund of wstETH/OP is 1000 LDO. This generates a new source of income for veVELO holders.
Velodrome adopts Solidly’s (3,3) mechanism. Although the supply of VELO continues to increase, in the past half a year, almost all of the newly added VELO has been used for lock-up, and the number of VELO in circulation is basically the same as that in Epoch1, which shows the effectiveness of this mechanism, Beefy, and other projects are actively accumulating more veVELO.
The main income of veVELO holders comes from bribery, which makes project parties more efficient in attracting liquidity. Recently, bribery funds have hit a record high, but part of the reason is due to the rise in the price of bribery tokens. Synthetix, Liquity, Beefy, Alchemix, Inverse Finance, etc., all use OP tokens officially given by Optimism for bribery, which also makes the prices of Velodrome and OP tokens, the number of OP tokens given to ecological projects by Optimism and other factors highly bound.
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