Velodrome Finance is a next-generation AMM combining the best of Curve, Convex and Uniswap, designed to serve as a liquidity center for Superchain. Velodrome's flywheel allows protocols to create deep liquidity in a capital-efficient manner by directing $VELO issuance into their pools.
Velodrome V2 is still 100% immutable and brings an important architectural foundation over the limited v1:
A liquidity pool factory registry allows to add new liquidity pool types (eg. concentrated, multi-tokens, custom pools).
Updatable gauges factory allows to support maintenance for these new pool type gauges and reward contracts.
Updatable rewards/incentives factory allows in case of a security incident, to provide quick and long-term maintenance
Velodrome AMM DEX
Tokenomics
Velodrome Finance uses two tokens to manage its utility and governance:
- VELO - ERC-20 protocol utility token. VELO is distributed to liquidity providers through emissions.
- veVELO - ERC-721 governance token in the form of an NFT (non-fungible token). Any holder of VELO can vote-escrow their tokens and receive veVELO (also known as Lock or veNFT) in exchange. Additional tokens can be added to the veVELO NFT at any time.
The lock period (also known as the no-vote period, hence the prefix ve) can be up to 4 years, following the linear relationship shown below:
- 100 $VELO blocked for 4 years will become 100 veVELO
- 100 $VELO blocked for 1 year will become 25 veVELO.
The longer the vesting period, the higher the voting power (vote weight).
Additionally, in Velodrome v2, a lock (veNFT) can be set to a permanent maximum lock time. Such permalocked locks (veNFT) are always considered by the protocol as locked for a maximum period of 4 years, and their voting power is not reduced.
Every epoch liquidity providers (LPs) receive VELO token emissions proportionally to the votes the pools accumulate. Only staked (in the protocol gauges) liquidity receive emissions.
Participants can lock their VELO to be able to vote on the next epoch distribution of emissions, becoming veVELO Voters.
veVELO Voters are rewarded (proportionally to locked amounts) for their votes with 100% of the protocol trading fees from the previous epoch and any additional voters incentives from the current epoch.
An epoch is a 7-day period. It starts every Thursday at 00:00 UTC and ends Wednesday at 23:59 UTC. Votes, emissions, fees, and incentives are calculated for each epoch.
Liquidity Pools
Velodrome Finance allows users to exchange tokens in a secure manner, with low fees and low slippage.
Slippage is the difference between the current market price of a token and the price at which the actual exchange/swap takes place. This difference can result in the exchange returning the desired tokens in smaller quantities (at a higher price) or in larger quantities (at a lower price).
To provide access to the best rates in the market, Velodrome identified two types of tokens:
- correlated - e.g., stable coins (USDC, DAI, etc.)
- uncorrelated - e.g. LINK and VELO.
Velodrome Finance offers two different types of liquidity pools depending on the needs of the token pair:
- Stable Pools. The formula used for pricing the tokens allows for low slippage even on large traded volumes
x³y + y³x ≥ k
- Volatile Pools uses a generic AMM formula.
x × y ≥ k
A protocol router evaluates both types of pools to determine the most efficient price quote and trade execution route. The router uses 30-minute TWAPs (time-weighted average prices) to protect against flash credit attacks. The router requires no maintenance (external maintenance).
The higher the liquidity of a given pool (higher locking cost), the less slippage it will offer.
Concentrated pools
Concentrated liquidity pools require liquidity to be deposited in a specific price range and use ticks (equally spaced price points) to define the boundaries of the range. The identifiers of these pools reflect their tick space. This is the minimum price change between liquidity ranges. These pools require maintenance or automated liquidity management (ALM).
Stable token pools use a price range boundary of 0.5% (tick space 50) for tokens such as USDC, DAI, LUSD.
Volatile token pools use a price range boundary of 2% (tick space 200) for tokens such as OP and WETH.
A price range boundary of 0.01% (tick interval 1) is available for highly correlated tokens such as stable coins and liquid rate tokens.
Concentrated liquidity pools explain what they are in their symbol:
CL1-wstETH/WETH. CL1 indicates that it's a concentrated pool with a 1 tick spacing, suggesting that the prices of the pool's tokens are closely correlated.
Velodrome Slipstream uses concentrated liquidity positions represented by NFTs in a similar way to Uniswap V3.
Fees
On Velodrome Finance, trading fees are stored in the tokens originally traded (if you trade USDC and VELO, the fees will be stored in the same tokens).
The default trading fees for both types of liquidity pools are 0.02% and can be customized for each pool up to 1%.
Liquidity Market
Velodrome distributes a programmed amount of VELOs to liquidity providers in all liquidity pools. The amount of VELOs entering each liquidity pool is changed by weekly voting. Voting participants are VELO holders - people who have purchased a VELO and locked it to receive veVELO NFT, which entitles them to allocate votes among the pools.
Voters have several potential reasons to vote for certain pools and increase the reward of the liquidity providers for those pools. They might:
- want to get more liquidity for specific tokens for the benefits mentioned above;
- themselves be liquidity providers on those pools and want to gain more for providing liquidity;
- want to get more direct rewards for their vote.
The third reason, direct rewards, is the most common. Velodrome rewards votes in two ways: fees and incentives.
Fees: Velodrome charges a trading fee; when someone trades tokens from a liquidity pool, a portion of the tokens they trade are distributed to those voting for that pool. More trading leads to more fee distributed to voters, so voters are incentivized to vote for pools they think will be in high demand.
Incentives: Anyone can incentivize voting for a particular pool by depositing tokens that will be distributed to voters for that pool.
veNFT
veNFTs come with unique dynamically generated on-chain artwork. Balance and unlock dates are provided through metadata that is indexed by the veNFT Marketplace.
- Permalocked veNFTs: V2 veNFTs can be set in a (maximum) 4-year lock state. In such a state, veNFTs’ veVELO balance constantly reflects the underlying VELO, no longer decaying.
- Managed veNFTs: Managed veNFTs operate like a vault and represent a foundation for reward-compounding products like Velodrome Relay. veNFTs can be deposited into a Managed veNFT which is run (not owned) by a partner, with rewards distributed to all depositors. Managed veNFTs aggregate NFT voting power whilst perpetually compounding and locking the underlying tokens.
- Improved veNFT Transfers: V2 veNFTs can be reset, transferred, and used vote on the same epoch, allowing for a more frictionless secondary sale experience.
