Just one year after launching, Base is already one of the biggest DeFi chains in crypto. There are a number of top apps contributing to the burgeoning ecosystem, but Aerodrome is a top candidate for the network's buzziest DeFi opportunity.
Today, let's dig into what makes the protocol special 👇
What is Aerodrome?
Developed by the Velodrome team and launched in August 2023 on Base, Aerodrome is a decentralized exchange (DEX) and liquidity protocol built to serve as a major trading hub for the Base ecosystem.
Like Curve, Aerodrome is designed to offer low-slippage trades for both stablecoin and volatile pools. Low slippage + low Base transaction fees = great swap prices.
Aerodrome also makes use of a token gauge “liquidity engine” system, where the protocol’s governance participants earn trading fees for voting to steer $AERO token emissions to liquidity pools that generate the most trading activity.
Notably, today Aerodrome has the most liquidity of any Base project with $1.24 billion in total value locked (TVL), over 5x the amount deposited in Uniswap on the L2. However, thanks to its concentrated liquidity system, Uniswap is currently powering 57% of Base’s total swap volume compared to Aerodrome’s 37%.
To better keep up here, Aerodrome launched its own concentrated liquidity protocol, Aerodrome Slipstream, in April 2024. It’s made a difference too. For example, over the past 24 hours Slipstream facilitated $427.5 million worth of volume on Base compared to the $292 million powered by Uniswap V2 + V3 in the same span.
What are AERO and veAERO?
Aerodrome Finance employs a dual-token system to power its ecosystem and governance structure.
AERO is an ERC-20 utility token that serves as the lifeblood of Aerodrome. It's distributed to liquidity providers as rewards for their contributions to the platform's liquidity pools. Think of it as the fuel that keeps the Aerodrome engine running smoothly.
veAERO is where things get interesting. It's an ERC-721 non-fungible token (NFT) that represents locked AERO and grants governance rights. Here's how it works:
- AERO holders can "vote-escrow" their tokens, locking them for a period of up to 4 years.
- In return, they receive a veAERO NFT, which represents their locked position.
- The longer the lock period, the more voting power the veAERO NFT carries.
This system creates a unique relationship between time commitment and influence. For instance:
- 40 AERO locked for 4 years = 40 veAERO
- 40 AERO locked for 1 year = 10 veAERO
Once you have veAERO, you gain the ability to participate in Aerodrome’s gauge system. In other words, veAERO holders vote on how AERO emissions should be distributed among different liquidity pools.
The big idea? 100% of the trading fees generated by Aerodrome are distributed weekly to veAERO holders. Accordingly, voting for pools that attract more liquidity and trading volume can increase total protocol fees, benefiting all veAERO holders.
Here, note that the amount of fees you earn is proportional to your voting power (i.e. the amount of AERO you've locked and for how long), and earned fees can be re-locked as AERO to increase your veAERO position and voting power over time.
How to start earning with veAERO
If you’re interested in earning trading fees through the Aerodrome gauge system, then you’ll first need to acquire some AERO. The simplest way to do this is on the Aerodrome Swap page.
Alternatively, you can go to the Liquidity page, pick your pool of choice, and then provide liquidity and stake your LP tokens to start earning AERO emissions every epoch.
Whichever route you choose, when you have your AERO ready head to the Aerodrome Lock page, input the amount of AERO you want to lock, and choose your desired lock period between 7 days and 4 years. Carry out the allowance transaction and then the second finalizing transaction to finish up—then you’ll have veAERO.
At this point, you can navigate to the Vote page and vote to reward the liquidity pool you think will generate the most fees over the next epoch, thereby incentivizing more activity which can translate to higher earnings for all veAERO holders.
Zooming out, keep in mind that strategic voting in this gauge system can help Aerodrome become even more dominant on Base, which in turn can lead to higher rewards for governance participants over time—a classic DeFi win-win!