An Aerodrome DeepDive, The Liquidity Layer of Base

Introduction

Aerodrome (website) is trying to become the liquidity layer of Base, the same as Velodrome on Optimism. Aerodrome is serving Base as its central Automated Market Maker (AMM). This initiative is a collaboration between the Base team and Velodrome. By adopting Velodrome's successful playbook, Aerodrome aims to bring features like the Night Ride UI, concentrated liquidity, and a dynamic AERO FED to Base.

Aerodrome isn't just about liquidity; it's also about community and public goods. A portion of Aerodrome's initial votepower is reserved for Ecosystem Goods, which will fund assets crucial to the ecosystem's success. This aligns with Base's commitment to application development and user experience, ensuring that both projects will grow and thrive together.

So, why did we write this article? It's simple: Base is a top 3 player in the Layer 2 space, and Aerodrome is designed to fuel that growth. As the liquidity layer of Base, Aerodrome will support new projects, generate liquidity, and serve as a business development layer for the Base ecosystem. It's a win-win for both parties, aligning perfectly with Base's focus on scalability, interoperability, and user experience.

The Liquidity Layer on Base

Aerodrome is a next-gen Automated Market Maker designed to be the heartbeat of liquidity for Base. Built on the robust Velodrome v2 tech stack, Aerodrome brings a host of innovative features to the table. Think concentrated liquidity, automated voting, and even a unique veNFT Marketplace.

When it comes to tokens, Aerodrome uses two: $AERO for utility and $veAERO for governance. The latter is an NFT, and it's not just for show. By locking up their $AERO tokens, users can become veAERO voters. This gives them a say in how token emissions are distributed and lets them earn rewards, making it a win-win.

So, who stands to benefit from Aerodrome? First up, we have liquidity providers, or LPs for short. They're incentivized to pour liquidity into the system because they get $AERO tokens in return. Then there are the traders, who get to enjoy low slippage and minimal fees. And let's not forget other protocols that can quickly build up their liquidity by locking veAERO and offering incentives.

Now, what sets Aerodrome apart? Three things. One, its vote-lock governance model gives veAERO voters a lot of clout, including sway over the protocol's monetary policy. Two, it has a dynamic emission schedule for $AERO tokens, balancing rapid growth with long-term sustainability. And three, it earmarks a quarter of its initial votepower for public goods, funding assets that are crucial for the ecosystem.

In terms of impact, Aerodrome is set to shake up the DeFi sector, Aerodrome is more capital-efficient, community-driven, and flexible than traditional AMMs. And because it's the liquidity layer for Base, which is the fastest-growing Layer 2 network this year, Aerodrome can become a big deal in the future.

Collaborating with Base

Together with the Base Team, Aerodrome is innovating a unique “public goods engine.” Interestingly, this engine is an integral part of Aerodrome. Here’s the breakdown: they’re setting aside a quarter of Aerodrome’s initial voting strength for Ecosystem Goods. This strategy ensures liquidity for crucial assets. Furthermore, the fees generated from these pairs will be channelled into the public goods funding (PGF) and voting. Consequently, the $AERO token becomes the heart and soul of the ecosystem.

Protocols aiming to integrate with Base will find Aerodrome to be an essential ally. Not only does it facilitate liquidity, but it also serves as an entry point for these protocols. These protocols can use veAERO, guiding AERO emissions to their respective zones. On the flip side, VeAERO holders are in for a treat. They stand to gain the entirety of trading fees and benefits from their selected pools. This setup guarantees handsome rewards for the most active participants.

Unlocking the Liquidity Layer With Aerodrome

When it comes to its tokens, Aerodrome has two tokens, with $AERO for utility and $veAERO for governance. By locking up $AERO tokens, users can become veAERO voters, influencing how tokens are distributed and earning rewards along the way. This dual-token approach is the backbone of Aerodrome, benefiting everyone involved.

So who gains the most from Aerodrome? Liquidity providers get incentivized through $AERO tokens, while traders enjoy low fees and slippage. Other protocols can also easily integrate with Base by using veAERO to direct $AERO emissions to their liquidity pools. This ensures that active participants get substantial rewards.

The flywheel effect in Aerodrome is a fascinating phenomenon that's driving its success. Much like a mechanical flywheel that gains momentum as it spins, Aerodrome's fundamentals and its $AERO token create a self-reinforcing cycle of growth. When the price of $AERO rises, liquidity providers make more money and are incentivized to add more liquidity. This increased liquidity boosts trading volume, which in turn raises protocol revenue. More people then lock their $AERO tokens to earn income, attracting even more protocols to join in. This creates a virtuous cycle, continually driving up the value of $AERO and the protocol itself.

On its launch day, August 31st, Aerodrome's team fueled this flywheel by allocating nearly 7% of $AERO emissions to the $AERO-USDC pool. With few $AERO tokens in circulation at the time, the first trade set the token's price. The small pool and high rewards led to an APR as high as 10,000% for liquidity providers, creating a scarcity of $AERO tokens. This scarcity drove up the token's price, and in just one day, Aerodrome attracted $200 million in total value locked, establishing its dominance on the Base chain.

But what happens when the upward spiral stops? The circulating supply of $AERO increases over time due to linear emissions. Eventually, market participants might find that liquidity mining rewards aren't as profitable. They may start selling their $AERO holdings, breaking the upward spiral and stabilizing the yield. If selling pressure outweighs buying pressure, the price of $AERO could decline, leading to a potential downward spiral.

So, while Aerodrome's flywheel effect has been a key driver of its rapid growth, it's crucial to understand the mechanics that could either sustain or break this momentum. As of now, Aerodrome has managed to maintain its upward trajectory, but like any financial market, it's subject to the laws of supply and demand. Keeping an eye on these dynamics will be essential for understanding Aerodrome's future in the ever-evolving DeFi landscape.

Aerodrome’s rise

Aerodrome has over $165 million in Total Value Locked (TVL)and it's clear that the platform has gained significant traction. In the last 24 hours alone, it has seen a trading volume of $2.91 million. But it's not just about locking value and facilitating trades; Aerodrome is also generating substantial fees. The platform's annualized fees amount to $2.65 million, with an annualized revenue of $5.42 million.

It's not just a marketplace for trading and liquidity; it's an ecosystem that rewards active participation. With its dual-token system, vote-lock governance, and dynamic emission schedule, Aerodrome offers a growth path that's attracting liquidity providers, traders, and other protocols alike.

Final Thoughts

Aerodrome's integration with Base is a strategic move that is trying to redefine how we think about liquidity, governance, and community engagement in DeFi. With its TVL and revenue generation, Aerodrome is proving that it's not just another AMM; it's an ecosystem that rewards active participation.

The platform's dual-token system, governance model, and focus on public goods make it somewhat special in a crowded DeFi space. It's not just about making trades or locking up assets; it's about building a community that has a say in its own future. And with Base's rapid growth, Aerodrome is perfectly positioned to become a cornerstone on Base.