What Is Velodrome Finance? An Optimistic DEX

Hello, I am Subli! Velodrome is a new Decentralized Exchange protocol conceived on Fantom Blockchain but implemented on Optimism. Who is behind this project? How did the idea emerge? What makes Velodrome unique? What is its plan? All you need to know about this new DEX will be covered in this article. Or, if you’d rather watch a video explaining Velodrome, check out mine below!

Velodrome as explained by Subli

The Velodrome team refers to their product as their “baby,” and while making my two YouTube videos on the protocol, I realized they really do feel that way. Velodrome was developed and delivered without VC funding and has a TVL of 60M USD with a volume of 290M in just 45 days. Their baby is looking nice and healthy!

Velodrome Finance uses AMM technology, which my friend Charles explains well in this article.

Velodrome Finance is designed to solve one of the main problems for any DEX; incentivizing liquidity reduces the value of the DEX’s token. They address this problem by aligning protocol growth with fee generation, not just liquidity. In other words, take Curve Finance‘s sophisticated AMM and Solidly’s incentive structure, combine, shake well, and serve. Enjoy Velodrome!

The Origin:

Former members of the veDAO team developed Velodrome Finance. The veDAO team are participants in InformationToken, a DAO made up of 100 Members who provide funding, guidance, and research to blockchain developers. The veDAO team was formed to participate in the Solidly Protocol. To participate, the team needed to acquire a veNFT from Solidly. The veNFTs were airdropped to the top 20 projects on Fantom by TVL. The veDAO team managed to acquire 2.6 billion USD of TVL and easily qualified for the veNFT. 

Unfortunately, Solidly launched with several serious bugs and little follow-up service or support. Worsening the problem, only a month after launch, the project developer abandoned the project leaving only this message on the site: 

Andre Cronje s'en va: Est-ce la fin de Fantom ? – Tendances Crypto

The Promise:

veDAO’s goal is long-term revenue generation for its holders. In pursuit of this goal and because they saw the potential of Solidly, the team decided to take the project over. Unfortunately, Solidly would require a complete rebuild to make it sustainable. But, this was a challenge the team was eager to take on.

The development of Velodrome was completed just as Optimism was gearing up for its first airdrop, so the team made the logical decision to deploy on the quickly growing network.

Velodrome Finance promises the following:

  • Community ownership: 60% of the initial token distribution was airdropped to DeFi users & OP Holders.
  • Sustainability: Token tail emission has been set to a minimum of 4 years (and this duration may increase as it is subject to the locking ratio)
  • Fairness: As bad behavior will be sanctioned by the “Commissaire”.

Sustainability:

On a typical DEX, Liquidity Providers reap the lion’s share of rewards. However, that drives mercenary behavior as Liquidity Providers are not invested in the long-term growth of the protocol. They withdraw their funds and migrate as soon as another DEX proposes better rewards.

Curve Finance’s solution is to reward 50% of the total protocol fees to $CRV Lockers. Velodrome takes this a step further. 

Velodrome Finance aligns protocol and user interests, by strongly encouraging users to lock their $VELO tokens. Users who lock their tokens claim 100% of the fees of the Liquidity Pool they vote for. This pushes users to vote for the most traded pool and increases liquidity mining in this pool. The TVL of the protocol increases, slippage decreases, and swap rates improve. FLYWHEEL effect engaged!

Liquidity Providers are only rewarded for liquidity mining with $VELO emissions.

Velodrome-vs-Curve

The Offer :

Velodrome Finance offers few ways to earn, so let’s go through each of them:

  1. Traders: Velodrome uses two types of Swap Curve Formula an sAMM and a vAMM. The sAMM is for correlated assets, i.e. stable assets. The vAMM is for volatile assets. The sAMM offers better swap rates and is similar to what Curve Finance offers on certain pools. In addition, the whitelisting of trading pairs is permissionless, so adding tokens is very easy.

Note: In the style of Curve, an emergency DAO called the “Commissaire” was created by the team to prevent malicious behavior for whitelisting tokens and gauges and has the power to vote them down. The Commissaire is comprised of seven people drawn from both the team and prominent members of the Optimism community.

  1. Liquidity Providers: By depositing liquidity into the sAMM or the vAMM pools, liquidity providers earn $VELO tokens in proportion to their deposit share in the LP and the number of gauge votes the LP received.
  1. Lockers: The $VELO token can be locked for up to 4 years and provides voting power in the gauge votes that allocate the weekly emissions of $VELO to the Liquidity Pools. Lockers are entitled to 100% of the trading fees and 100% of the bribes for the voted pool. In addition, Velodrome Finance received 3,000,000 $OP tokens as a grant from the Optimism Foundation. These tokens will be distributed alongside other rewards to incentivize liquidity on the protocol. While $OP emissions are running, additional bribes/vote power will also be distributed. 

Finally, Velodrome took note of Olympus DAO’s rebase mechanism and implemented a similar feature to reduce the dilution of $VELO lockers. In short, $VELO lockers receive weekly rewards to their position. The amount of rebase depends on the ratio between Total $VELO emission and Locked $Velo, and can vary from 0% to 50% of the $VELO weekly emission.

Formula: (veVELO.totalSupply / VELO.totalsupply)³ × 0.5 × $Velo Emission (Weekly)

Because a locker’s position is a veNFT, it can be exchanged on an NFT Market Place. The Velodrome Finance veNFT can be traded on Quixotic, the most prominent NFT Market place on Optimism.

What’s next?

RELAY. As the maxim states: “Alone, I go faster; together, we go further” the team announced this new feature that will be built on top of Velodrome Finance and will work like the Curve/Convex dynamic. Relay will introduce the following new solutions:

  • Voting power delegation – veNFT holders can delegate their voting power.
  • Yield Optimizer – A simple auto-compounder for user LP positions as well as a Bribe Optimizer + auto-compounder, which automatically converts rewards into $VELO.

Conclusion:

Velodrome is significantly innovating the AMM ecosystem on a thriving new blockchain. The team has proved to be very capable at synthesizing the successful features of established protocols with the relatively new features of Solidly. With the success of Optimism, Velodrome is in a strong position to capture significant market share. Optimism’s TVL increased by +50% from June to July, with 57 new DEFI protocols being built. Currently, the Optimism Foundation’s grant program is still going through its first phase, so Velodrome is quite early!

You will find an extensive list of protocols currently applying for Optimism grants in their Governance Forum. Please take a look for a better understanding of their potential competitors and collaborators!

If you are interested in specific yield farming videos, check out my video below! Thanks for reading!

Subli’s Yield Farming Strategy for Velodrome

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