What is Velodrome Finance?
In the midst of all the DeFi experimenting, a new project has made its way to capture the attention and capital of the users. It is Velodrome Finance, an Optimism-native liquidity protocol that promises long-lasting gains for its community!
To explain Velodrome Finance, it is important to set the context of its inception. Velodrome is inspired by three popular DeFi projects: Curve, Solidly, and Votium. Each of these projects had an important role in the design of Velodrome.
At the beginning of 2022, DeFi pioneer Andre Cronje came up with the ve(3,3) token model. He then applied the concepts to his new pet project AMM called Solidly.
However, after launching in February 2022 Solidly immediately ran into various issues, which led to Cronje leaving the project and its TVL crumbling down. The V2 of the project now has less than $8M worth of TVL.
When Solidly was still on high horses, a group called veDAO formed. Their mission was to become influential Solidly contributors and help the protocol amass more TVL. So, when Solidly disbanded the veDAO team spun up Solidly 2.0 on Optimism. This effort led to the Velodrome we see today.
Since launching on June 1st, 2022, Velodrome went on to become the most popular DeFi protocol on Optimism, with over $236M in TVL as of 2023.
Velodrome has its own native token, called VELO. It is a governance token that works similarly to Curve: users lock their VELO to gain voting power. The longer the lockup, the more voting power you receive.
At first glance, Velodrome Finance derives its value from high capital efficiency liquidity pools. Users don't have to hold the VELO token to use the protocol – not even KYC is required. However, the magic of Velodrome finance resides in the possibilities offered by VEL). Namely, users can use veVELO to vote on which liquidity pools get to receive VELO emissions, and pools earn in proportion to the voting power they accrue per epoch, i.e. each week. veVELO token holders also receive a portion of the trading fees generated by the pools in proportion to their voting power.
So far, Velodrome Finance has had an impeccable track record of zero hacks. Due to the importance of Velodrome Finance in the Optimism DeFi ecosystem, the team is striving to be as transparent regarding security practices as possible. Vulnerabilities that have been resolved are made public, along with their degree of risk. Furthermore, Velodrome pays heavily to anyone who finds vulnerabilities in their smart contracts.
How does Velodrome Finance work?
Velodrome Finance is a fork of the Solidly codebase on the Optimism network. Velodrome's AMM incorporates traits from Curve, Solidly, and Votium.
Velodrome is similarly designed to offer a low fee, and low slippage trades and similarly uses a CRV-like vote-escrowed gauge system for facilitating its token emissions. The maximum lockup period of 4 years is identical to Curve.
As previously mentioned, Velodrome Finance works like Solidly, with improved gauges. In DeFi terms, gauge voting is a process that allows liquidity providers to vote on changes to the parameters of the liquidity pools they are providing assets. This voting mechanism is implemented through a smart contract that allocates voting power to LPs based on the amount of liquidity they have provided to the pool. In simple terms, gauges = protocol parameters.
The key innovation of Solidly was to align protocol emissions with fees generated, not simply liquidity. To do this, it would allow protocols and other large stakeholders to become veNFT "voters", using their locked voting power to direct future emissions and collecting fees (termed bribes in Solidly) from the pools they voted for.
Velodrome has an in-built bribe system where people or projects can deposit tokens to incentivize gauge votes for their liquidity pools of choice. This system has been inspired by Votium, an incentives platform where vlCVX holders (the governance vote of Convex Finance) can receive compensation from buyers interested in amassing voting power.
Velodrome Finance Liquidity Pools
The core functionality of Velodrome Finance is to allow users to trade digital assets in a secure way, with very low fees and low slippage.
Slippage refers to the difference between the expected price of a trade and the actual executed price of the trade. This difference arises as a result of fluctuating prices of the traded assets due to changes in the available liquidity in the market.
Velodrome Finance offers two main trading pools: variable pools and stable pools (like stablecoins and wrapped versions of tokens).
Velodrome Finance veNFT
Users who lock their VELO receive an NFT, called veVELO. It is a tradable token that provides holders with an alternative exit option for their locked tokens or enables them to use the veNFT as collateral in other pools. This increased capital efficiency benefits both the token holders and the protocol, as the tokens remain locked regardless of how they are used.
Users can check the veNFTs directly on OpenSea. veNFTs can be listed on any marketplace. For more details about the veNFT status, they can go to the Velodrome Discord and interact with the bot.
How to make money on Velodrome Finance?
Velodrome Finance currently offers some of the juiciest yields on stable pools, with APYs going as high as 30% on some pairs. Furthermore, you can enjoy depositing liquidity with Velodrome Finance without facing the price volatility and impermanent loss scenarios that come with the Variable Pools.
The only requirement for using Velodrome Finance is to bridge your crypto assets to the Optimism network. In order to bridge to Optimism, you will have to bear the Ethereum gas fees, but once it's done, it's done!
Here's how you make yields with Velodrome Finance:
1. Open the Velodrome Finance app
2. Scroll down to your desired pool and click the “Manage” button
3. Input how much liquidity you want to provide
4. Press the “Deposit and Stake” button
5. Approve the transaction
6. Profit
In addition to the yields from providing liquidity, you will also be rewarded with VELO tokens. You can claim your VELO rewards over time from the Rewards page using your pool’s “Claim” button.
veVELO
Users who have claimed your VELO tokens are faced with two options: sell their token, or lock VELO to receive veVELO. While selling the token is a recipe for instant profits, users who choose to stake their VELO are poised for long-term gains.
Why lock tokens in the first place? For one, users receive veVELO, which can be traded like any other token. The lockup period is no longer a barrier for the users, who also get to share the fees generated from trading pools. You heard that right, holding veVELO accrues fees just by holding it.
Here's how you lock your VELO tokens:
1. Open the Velodrome Finance app
2. Click on the "Lock" tab
3. Input how many tokens you would like to lock
4. Input the lockup duration (the longer the lockup, the higher the rewards)
5. Approve the transaction
6. Profit
With your newly minted veVELO tokens, you can now hold them and watch as the fees accrue in your wallet.
For users who want to squeeze every profit opportunity out of Velodrome, there is the option of participating in the bribing game. In the context of DeFi, bribes mean voting for which liquidity pool should receive VELO emissions, and in what proportion. By voting for the pool using your veVELO tokens, you will be rewarded in proportion to your vote and the VELO emissions allocated towards the pool.
Here's how you participate in bribes on Velodrome Finance:
1. Open the Velodrome Finance app
2. Click on the "Incentivize" tab
3. Choose your desired pool
4. Input the number of veVELO tokens you would like to bribe
5. Approve the transaction
6. Click "Bribe"
Voting for gauges aka bribing can be done once a week. At the end of each epoch i.e. week, rewards are distributed to the voters in proportion to their voting power. You can claim your reward anytime after the epoch ends!
Price Prediction for Velodrome Finance — Can it hit $1000?
Buying and hodling VELO — the native token of Velodrome Finance— is one way of potentially making money on Velodrome Finance.
By looking at its current price, it’s natural to think about the chance of VELO hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever-changing factors.
Let’s examine the potential growth of the VELO token by analyzing its tokenomics. VELO’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} VELO tokens being in circulation today, that means a price of {PRICE} per VELO.
How did we come to that calculation? It’s quite easy, the price of a VELO token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each VELO coin.
By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of VELO at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for VELO to hit that price.
At a price of $1000 per token, that means the current market cap of VELO would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.
Now let’s shift our attention to the fully diluted market cap.
Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.
The fully diluted market cap represents the total value of a coin if all tokens were in circulation. VELO’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} VELO which means that no more coins above that number will ever be created.
These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.
How does this impact the price of VELO? Taking into account the current price of a VELO token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. VELO coins that have been burned are not taken into consideration because they have been permanently removed from circulation.
Whether it seems gigantic or not, the number we came to above only takes into account the current price of a VELO token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the VELO protocol fully diluted market cap.
These are all crucial details to know when calculating if VELO can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.
The future of VELO depends solely on its growth as a network used by tens and hundreds of millions of users.
If you’re looking to add some VELO to your portfolio, the most trusted places to get some are Binance and Coinbase.