Preface

When we think of innovations and developments in the DeFi world, platforms like Uniswap and Curve often come to mind. However, in today’s rise of Layer 2 solutions, more and more new platforms are choosing to build their future on low-cost, high-efficiency blockchains. Velodrome Finance is one of the most noteworthy among them.

What is Velodrome Finance?

Velodrome Finance is a decentralized exchange (DEX) built on Optimism. It’s not just a platform for trading services but also aims to redefine the efficiency and community participation in DeFi through its unique tokenomics, liquidity incentive mechanisms, and community governance model.

Why Choose Optimism?

Why did Velodrome choose to build on Optimism? Optimism is an Ethereum Layer 2 scaling solution that offers the following advantages:

• Lower transaction fees: Transaction and operational costs are significantly lower compared to the main Ethereum network.
• Faster transaction speed: Improved user experience, ideal for high-frequency trading or complex strategies.
• Ethereum compatibility: Enables developers to easily migrate or deploy EVM (Ethereum Virtual Machine) applications.

By leveraging Optimism’s efficient environment, Velodrome not only improves user trading efficiency but also allows liquidity providers (LPs) to deploy capital more effectively.

How Velodrome Finance Works

The core operational mechanism of Velodrome Finance is an optimized and innovative approach to the traditional Automated Market Maker (AMM) structure. Similar to many DeFi protocols, Velodrome allows users to swap tokens across different liquidity pools. However, its uniqueness lies in its integration of liquidity provision, voting governance, and reward distribution into a dynamic incentive model, making resource allocation across the ecosystem more efficient.

Each liquidity pool’s weekly $VELO reward emissions are distributed based on voting weight. These weights are determined by $veVELO holders, meaning that those who hold and lock $VELO tokens have the power to decide which pools should receive more incentives. This model creates a unique bribery mechanism, where protocols or projects can encourage $veVELO holders to vote in favor of specific pools in exchange for additional rewards (usually in the form of bribes). In other words, Velodrome is not just a trading or liquidity platform; it is a community-governed economic system that directs liquidity to the areas of highest demand. Users benefit from lower slippage and higher efficiency because liquidity is allocated effectively, rather than being distributed evenly across pools.

This design enables Velodrome to stand out on Optimism, becoming one of the most important infrastructures on the chain and offering a fresh perspective on liquidity distribution within the entire DeFi space.

Velodrome Finance Liquidity Mining

Velodrome has designed an attractive incentive mechanism for liquidity providers (LPs). When you provide assets to a liquidity pool, you can earn:

• Transaction fee income: This is the basic reward.
• Platform token rewards (VELO): The weekly distribution ratio is determined by governance votes.
• Potential bribes: Some projects offer extra rewards to encourage voters to vote for their liquidity pools.

In this way, not only LPs benefit, but even voters themselves can earn additional income, creating a mutually beneficial cycle within the entire ecosystem.

Velodrome Finance Tokenomics

Velodrome Finance uses a cleverly designed dual-token economic model that combines functionality and governance, driving the operation and development of the entire platform. These two tokens are $VELO and $veVELO, each with unique functions and roles, working together to create a stable, efficient, and decentralized liquidity layer.

$VELO: The utility token of the platform

$VELO is Velodrome’s native utility token (ERC-20), primarily used as a reward for liquidity providers. It is issued through weekly emissions, encouraging users to provide liquidity and participate in the operation of the protocol. The initial total supply is 400 million, with 60% (240 million) allocated to the community members and early users who contributed the most to the development of the protocol, such as $WEVE holders, Optimism active users, and loyal supporters of cross-chain DeFi.

$veVELO: The governance token in locked form

$veVELO is an ERC-721 format NFT representing a locked governance token. Anyone holding $VELO can choose to lock it and receive corresponding $veVELO in return, gaining governance rights and voting power. The lock-up period can last up to four years, and the amount of $veVELO received is proportional to the lock-up duration: for example, locking 100 $VELO for four years will yield 100 $veVELO, while locking it for only one year will yield 25 $veVELO.

This mechanism encourages long-term user participation in governance, and since the launch of Velodrome v2, it also allows permanent locking of $veVELO, ensuring governance weight doesn’t decay over time, further strengthening governance stability.

Overview of Initial Token Allocation

Velodrome considers fairness and decentralization in the design of token issuance. The initial token allocation is as follows:

• The community will receive 60% (240 million $VELO), including early contributors such as $WEVE and Optimism network users, as well as other DeFi users with the potential to drive platform development.

• Protocol partners receive 24% (96 million tokens), mainly in the form of $veVELO airdropped to protocols with close cooperation potential with Velodrome.

• The foundation reserves 10% (40 million tokens) for continuous governance voting and protocol advancement. These tokens are permanently locked as $veVELO and continuously participate in governance and issuance incentives.
• The Optimism Foundation allocates 5% (20 million tokens) as a symbol of support for the entire Optimism ecosystem.
• Genesis initial operating fund pool allocation 1% (4 million coins), providing basic liquidity for the initial launch of the platform and enhancing user trading experience.

Sustained Emission and Team Compensation Mechanism

In addition to the initial token distribution, Velodrome has designed a continuous emission mechanism to support overall operations. Every week, new $VELO tokens will be issued, with the emission amount gradually decreasing to prevent inflation. 3% of these newly issued tokens will automatically flow to the foundation to support protocol development and operational expenses.

The team compensation has been carefully arranged, with approximately 15.52 million $VELO reserved as compensation for contributors. These tokens will be fully distributed by June 2023. Some of these tokens have even been repurchased by the protocol, demonstrating a commitment to market stability and fair distribution.

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Summary

For users who value cost efficiency, effectiveness, and governance participation, Velodrome undoubtedly offers an attractive option. It is not just an exchange; it is a liquidity coordination platform, a community governance tool, and a financial laboratory on Layer 2. The design of VELO and veVELO breaks away from traditional centralized distribution logic, handing power back to the community. Its voting mechanism makes reward distribution fairer and more dynamic. As more funds, projects, and DAOs choose to join this ecosystem, Velodrome’s role will become increasingly critical.