The past year has seen the total value locked (TVL) of the DeFi ecosystem boom tremendously, thanks, in large part, to the immense innovation permeating this sector. Amid this growth, Velodrome, a next-generation automated market maker (AMM), has made a name for itself, securing over $190 million in TVL and $ 8.4 billion in cumulative trading volume.

Moreover, since the project’s inception, Velodrome has amassed a massive number of followers, currently boasting 97k monthly active users, as well as an annualized trading-fee pool of $48+ million.

In this article, we will examine the intricacies of what makes Velodrome an attractive option for investors, examining its foundational elements, functionalities, and core benefits. So, without further delay, let's get into the meat and bones of things.

What is Velodrome and How Does it Work?

Velodrome is a next-generation automated market maker (AMM) designed to serve as the central liquidity hub on the Optimism blockchain. It combines the best features of popular AMMs like Curve, Convex, and Uniswap into a single platform. At its core, Velodrome enables low-slippage token trading by incentivizing liquidity provision through token emissions.However, before proceeding any further, it would be best to briefly describe what an AMM in.

That said, the Velodrome protocol has two key tokens - VELO, an ERC-20 utility token, and veVELO, an ERC-721 non-fungible token (NFT) used for governance voting. Liquidity providers deposit trading pairs into Velodrome liquidity pools and have the option to earn a share of VELO emissions proportional to the amount of liquidity they provide. VELO token holders can then lock their VELO into veVELO NFTs, with longer lock times granting higher voting power. These veVELO voters determine how VELO emissions are distributed across the different liquidity pools.

In addition to earning a share of emissions, veVELO voters also capture 100% of the trading fees generated by the pools they vote for as well as any additional incentives offered by protocols. This creates an incentive flywheel wherein the more votes a pool receives from veVELO holders, the more VELO emissions it attracts — which in turn incentivizes more liquidity provision. Protocols can jumpstart this flywheel by offering initial incentives to veVELO voters to direct emissions to their pools.

What Makes Velodrome Unique?

Velodrome stands out from other AMMs for its ability to combine several innovative features into a unified protocol.

• Anti-Dilution Rebases: A key innovative feature of the platform is that veVELO holders receive anti-dilution rebases proportional to the VELO emissions distributed to liquidity pools each epoch. This reduces the voting power dilution of veVELO holders as new VELO is minted for emissions.

• Concentrated Liquidity: While most AMMs like Uniswap utilize the x*y=k price curve for liquidity provision, Velodrome supports concentrated liquidity models pioneered by protocols like Curve and Convex. This allows liquidity to be concentrated around the current market price, reducing asset inefficiency from impermanent loss.

• Emissions Voting with veNFTs: Velodrome utilizes a novel governance model where VELO holders can lock tokens into veVELO NFTs, granting voting power over VELO emissions distribution.

• Multi-Token Liquidity Pools: Going beyond simple trading pairs, Velodrome enables the creation of liquidity pools containing multiple tokens, allowing efficient swapping between complex token sets (such as stablecoins).

• Customizable Pool Logic: The protocol has a modular design allowing the deployment of pools with custom bonding curves, fees, and other parameters tailored to specific needs.

• Liquidity Mining Incentives: In addition to VELO emissions, Velodrome allows protocols to offer additional incentives for veVELO lockers to direct emissions to their pools as a capital-efficient way to bootstrap liquidity.

Partners and Audits

Velodrome places a strong emphasis on security and working with reputable partners to ensure the safety of user funds. In this regard, the protocol has undergone multiple comprehensive smart contract audits by leading blockchain security firms.

For instance, in early 2023, blockchain security firm Spearbit audited Velodrome's smart contracts. Subsequently, Spearbit completed an audit of Velodrome's concentrated liquidity Slipstream contracts. To further strengthen security, Velodrome launched a $200,000 bug bounty program on June 29th, 2023, in collaboration with Immunefi and the Optimism Foundation. This initiative was designed to incentivize researchers to identify and report any vulnerabilities in the protocol's codebase.

Velodrome has also actively forged partnerships to drive growth and adoption within the Optimism ecosystem. A notable partnership was announced with Resonate in September 2022, where Velodrome committed 1,000,000 VELO tokens to bootstrap liquidity in the VELO/USDC pool. This enabled Velodrome to incentivize liquidity providers to lock their positions for extended periods.

More recently, in September 2023, Velodrome received a grant of 1.25 million OP tokens from Optimism. This grant aims to expand on Optimism’s vision by increasing governance participation using novel govNFT technology and enabling ecosystem growth through initiatives like the Tour de OP voting incentive program.

In terms of the people working behind the scenes, Alex Cutler is a co-founder. Prior to getting involved with the DeFi economy, Alex worked in politics, technology, and consulting. Tao Watts is another co-founder. He has been involved with this space for several years.

Conclusion

With the crypto ecosystem continuing to expand and grow at a monumental rate, platforms like Velodrome seem ready to help revamp the global economy. Most recently, Rivo — a DeFi Yield Marketplace with Smart Contract Wallet functionality  — integrated three of Velodrome vaults. These include:

• Velodrome KWENTA-ETH: This vault provides ETH liquidity for KWENTA on Velodrome, earning 58.0% APY from VELO incentives.

• Velodrome SNX-USDCe: Provides USDC.e liquidity for SNX and earns 34.8% APY from VELO incentives.

• Velodrome wstETH-LDO: This vault offers wstETH liquidity for LDO, allowing users to earn 22.51% APY from VELO incentives and ETH liquid staking yield.

Thus, looking ahead, it will be interesting to see how this space continues to evolve and grow!