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dear bankless nation,
A new DeFi project is in the spotlight.
It is Velodrome – an optimistic liquidity protocol that pushes the boundaries of capital efficiency.
The protocol has blown up lately as it starts to compete with Uniswap in terms of volume on the network.
Log fees have also been skyrocketing lately.
The project was designed as a combination of the leading stable liquidity protocol Curve, Andre Cronje’s infamous Soldily and Votium (a protocol for earning bribes on Curve/Convex).
All three of these projects have developed innovative new mechanisms for the liquidity and token economy. Now Velodrome is resorting to it.
Put this together and there’s a compelling case for the project worth looking into.
And given its recent success, the protocol offers some very attractive returns for Layer 2 pioneers.
William Peaster teaches you everything you need to know about velodromes and how to use them to get insanely high yields.
– Bankless team
PS Check out the new one Web3 fact under “Action Steps” to help you build your crypto investing thesis! 🔎
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Bankless Writer: William M PeasterUnbanked contributor & metaversal writer
Velodrome is a decentralized exchange and liquidity marketplace on Optimism that has grown rapidly over the past two months. This bankless tactic introduces you to the basics of the protocol and shows you how to make money in the project’s stable pools.
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Goal: Learn how to use the Velodrome
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Be able: Intermediate
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effort: 1 hour of research and effort
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ROI: Up to +30% APR at current stable pool rates
Velodrome is a DEX and liquidity marketplace on Optimism Layer Two (L2) scaling solution.
DeFi outlet has staking bits previously noted how Velodrome is like a mixture of “Curve, Solidly and Votium with ve(3,3) tokenomics” and this is the perfect framework to understand the project.
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Curve because Velodrome is similarly designed to offer trades with low fees and low slippage and similarly uses a CRV-like one vote deposited Measurement system to facilitate its token issuance.
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Firmly because Velodrome has adopted Solidly’s innovative use of gauge voting to incentivize trading fees (in contrast, how Curve’s CRV issuance encourages passive liquidity) and Solidly’s vote-escrowed NFT or veNFT model.
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A desire because Velodrome has a built-in bribery system where people or projects can deposit tokens to incentivize votes for their liquidity pools of their choosing.
Overall, Velodrome resembles a “Solidly 2.0” on Optimism, a public goods-focused L2 that directly inherits Ethereum’s security guarantees, rather than on Fantom, the EVM-compatible alt-L1 that was home to the original Solidly project.
In January 2022, DeFi pioneer Andre Cronje introduced the ve(3,3) token model. He then accelerated the development of Solidly, an automated market maker (AMM) protocol on Fantom, which would be the first to implement this ve(3,3) approach.
However, after launching in February 2022, Solid immediately encountered various issues, and then a crucial death spiral ensued after Cronje departed from DeFi altogether in March 2022. The project is now worth less than $5 million (TVL) in total, making it the 29th largest log on Fantom at the time of writing this post DeFi calls.
If the dream of Solidly was Still alive, a group called veDAO educated. Incubated by a decentralized venture studio information token (IT) veDAO burst onto the scene to become influential contributors to Solidly.
As Solidly started to fall apart, elements of veDAO and IT came together to build Solidly 2.0 on optimism. Those efforts resulted in the Velodrome Protocol we have today.
Launched on June 1st, 2022, Velodrome has accumulated a TVL of +$123M in less than two months, becoming one of Optimism’s most popular dapps in that span of time.
The 3 biggest dapps of optimism right now – image via DeFi calls
At the heart of Velodrome is the protocol’s ERC20 utility token, VELO, and its ERC721 governance token, veVELO – also known as veNFT.
Like CRV, VELO is continuously issued and used to reward Velodrome’s liquidity providers. Holders can escrow, i.e. lock, their VELO to receive veVELO and participate in the governance of the project, which includes voting on which liquidity pools should receive VELO rewards.
As with CRV, you can block your VELO for up to four years, and the longer you block it, the more voting rights you get.
So let’s break this down again:
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Velodrome liquidity providers earn VELO emissions
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veVELO holders vote on which liquidity pools receive those VELO Bounties, and the pools earn in proportion to the voting power they receive per epoch, i.e. each week
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veVELO holders then earn on the trading fees generated by the pools they voted for, proportional to their voting power
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Finally, veVELO holders also earn on the bribes paid to the pools they voted for, as well as veVELO rebases, which are non-dilutive, meaning veVELO holders receive veVELO from them and not VELO
There are two types of pools at the Velodrome:
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“Variable Pools” for uncorrelated assets, like the VELO/ETH pair.
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“Stable pools” for correlated assets, such as stablecoin pair USDC/sUSD or stable asset pair WETH/sETH.
I find the stable pools particularly interesting 1) they currently offer some of the best yields on stables in DeFi, 2) they are on an L2, and 3) It is possible to enjoy their returns without facing the price volatility and inconsistent loss prospects that come with floating pools.
The top 8 stable pools on Velodrome per APR right now – image via Velodrome
Let’s say you have some stables on Optimism and you want to park them somewhere in the chain and get some yield.
Here’s how you would do it in one of the Velodrome’s stable pools:
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Go to app.velodrome.finance/liquidity and connect your wallet to the Optimism network
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Scroll down to your desired pool and click the “Manage” button.
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On the following screen, enter how much liquidity you would like to provide
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Scroll down and press the “Deposit and Wager” button.
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Use your wallet to allow Velodrome access to your funds, after which your liquidity will be deposited and wagered
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Manage your position (i.e. deposit or withdraw funds) of the Pools page and claim your VELO rewards over time from the rewards page by using your pool’s “Claim” button
Velodrome is a DeFi underdog story that comes to fruition on Optimism.
It’s also a testament to the open-source nature of crypto, inasmuch as Velodrome, where Solidly failed, picked up the pieces and has risen like a phoenix from its ancestor’s ashes.
If you’re looking for decent returns, make sure you follow Velodrome for the foreseeable future.
Why this matters: ETH open interest options have overshot Bitcoin for the first time ever, indicating bullish sentiment on the upcoming merger as investors go long ETH calls.
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