After the Velodrome V2 upgrade: a new high in revenue but less than the value of additional tokens

Author: Jiang Haibo, PANews

Velodrome, modeled on Solidly’s ve(3,3), has been a liquidity center on Optimism since its launch in June 2022. Velodrome V2 was officially launched in June this year, adding functions such as custom liquidity pool fees, centralized liquidity pools (this feature has not yet been launched), and automated voting management. In addition, some ecological projects built on Optimism and Base have also been launched one after another.

Custom liquidity pool fee to promote transaction fee increase

Velodrome enables token swaps by attracting liquidity. Liquidity providers pledge liquidity to obtain VELO token rewards; VELO token pledgers (veLO holders) decide the distribution of VELO tokens in the liquidity pool based on transaction fees, bribery funds or voting for their own interests. Emissions; traders trade on Velodrome with extremely low transaction fees to increase transaction volume and income of VELO stakers.

In terms of architecture, Velodrome V2 has made major adjustments compared to V1, allowing the addition of new liquidity pools, such as centralized liquidity pools, multi-token pools, and custom pools. The reward contract of the liquidity pool is also set to be renewable for long-term maintenance and timely adjustment in the event of a security incident. The launch of V2 is mainly to achieve the following main functions:

• Support centralized liquidity;
• Support dynamic fees;
• Dynamic emission of VELO;
• Multi-token pool;
• New dApps;
• New VELO tokens.

As a DEX, the transaction fee of Velodrome V1 is only 0.02% to 0.05%. However, there are a large number of volatile assets such as OP, SNX, and VELO on Optimism. The transaction fee ratio of such assets in other DEXs is usually 0.3%, low transaction fee means a subsidy for traders. Ideally, low transaction fees may also lead to higher transaction volumes, increasing the income of VELO stakers, but this will require transaction volumes to increase several times. For example, for the VELO-USDC trading pair, will the transaction volume be 6 times that of 0.3% under the 0.05% handling fee? I am afraid it will be difficult to achieve.

Aside from unrealized functions such as centralized liquidity pools and multi-token pools, the relatively large update of Velodrome V2 is to allow custom handling fees. For the VELO-USDC trading pair mentioned above, the transaction fee was 0.05% in V1, but it is currently 1% in V2, which contributes more fee income to VELO stakers. This part of the income is also the real income of VELO. Only the VELO/USDC trading pair has brought a weekly income of more than 50,000 US dollars in the past few weeks.

According to the dashboard compiled by @0xKhmer, in the last 5 Epochs, Velodrome’s transaction fee income has exceeded the historical highest value before V2 went online. The most recent Epoch 63 (August 10-August 16) transaction fee income was 210,745 USD, of which USD 208,077 came from V2 and USD 2,668 came from V1.

Focus on ecological projects on OP and Base

Aerodrome

Aerodrome calls itself the Base liquidity layer jointly developed by Velodrome and the Base team and partners. In Layer 2, which has recently launched the main network, Base has received more support and attracted funds than Linea, which has the same strong background. Base not only has the background of Coinbase, but also has the support of many projects on Optimism. For example, Synthetix V3 has also been approved to be deployed on Base.

The current ecological development of Base is similar to that of Arbitrum in the early days. Various DEXs have been launched in turn to attract funds, such as the current leading BaseSwap and Alien Base. However, due to competition incentives on the DEX track, most projects lack a moat, and some DEXs have security incidents, such as LeetSwap and RocketSwap.

Aerodrome, which was developed by Velodrome, is relatively safer, and has reached partnerships with about 20 projects before going online. 40% of the initial circulation of AERO will also be distributed to VELO stakers in the form of veAERO.

Extra Finance

Extra Finance is a leveraged liquidity mining project built on Optimism, which can provide up to 7 times leverage. Since the liquidity on Optimism is mainly on Velodrome, almost all of Extra’s leveraged mining strategies are built on Velodrome.

Users with low risk appetite can lend stablecoins, ETH, OP, VELO and other assets on Extra to obtain interest and EXTRA token rewards; users who need to increase leverage can also pay interest to borrow assets for leverage mining.

Bike

Bike, a meme token on Optimism, launched in July this year. 10 million BIKE tokens were initially minted, 50% of which were airdropped to VELO stakers, and the remaining 50% were used for weekly bribes to attract more liquidity.

The contradiction between the new high income and the fact that the income is still less than the value of token issuance

Due to the fee increase brought by Velodrome V2 and the bribery funds still at a high level, in the last two weeks (Epoch 62 and Epoch 63) Velodrome’s bribe + fee income was US$1.076 million and US$996,000 respectively, both of which exceeded the history before the V2 upgrade highest value. Bribe funds and fees are also among the real benefits distributed to VELO stakers.

This also makes Velodrome’s revenue in the past 7 days ranked fifth in DeFiLlama’s statistics (after excluding the public chain), as shown in the figure below.

But amid the increase in revenue, the price of VELO tokens keeps falling. One of the reasons is that the Velodrome V2 upgrade also increased the emission of VELO tokens. As shown in the figure below, Epoch 62 and Epoch 63 issued 14.337 million and 14.181 million VELO respectively, worth 1.566 million and 1.25 million US dollars respectively. The minted tokens are worth more than the profits captured.

This may also be the predicament that projects such as Curve that rely on token economics to attract liquidity are prone to fall into. Although projects can attract high liquidity and may also have good income, this is based on the issuance of more tokens based on. When the market conditions are not good, the selling pressure brought by the newly issued tokens causes downward pressure on prices.

In addition, some people have questioned that there are a group of worthless projects on Optimism that are bribing Velodrome. Since a large number of tokens of these projects are controlled by the team, the team can attract people to buy their tokens through the high APR of bribes, and can also obtain VELO income by providing liquidity. If this is true, it should be considered an attack on Velodrome.

Summary

After the upgrade of Velodrome V2, the transaction fee is allowed to be customized, which also increases the transaction fee in disguise. For example, the VELO/USDC transaction pair used to have a transaction fee ratio of 0.05%, and now it is 1%. Currently, this transaction pair can contribute more than 5% per week. million dollars in fees. Some ecological projects launched one after another may enhance the expectations of Velodrome, especially Aerodrome on Base. The improvement of the above fundamentals deserves attention.

However, the V2 upgrade also speeds up the issuance of VELO. At present, it decays at a rate of 1% per week. The value of VELO issued every week still exceeds the fee + bribe income.