Hey folks, welcome to my 5th installment to highlight a different altcoin that I’m planning on keeping an eye on before we head into the next altseason (if we’re not there already). Once again, the altcoins I’m specifically looking at are those that I think have not only some major upsides going into the bull market, but ones that also seem to have been a relatively safer hold while we’re waiting on this bear market to end.
Today I’m going to go into a deep dive on the $VELO token, the native token for the Velodrome platform over on Optimism, my favorite L2. Similar to my last article $SNX, you might think that the ship has already sailed given the recent pump:
This of course isn’t financial advice, but I think this pump is really only evidence of what Velodrome is capable doing once it has enough activity and volume:
Velodrome on Twitter: "Yesterday, Velodrome did more volume than GMX.It is the largest protocol on Optimism, hosting more TVL than Uniswap, Curve, Beethoven X, and Kyberswap combined.Indeed, it is now 10th largest DEX in all of DeFi.The "Velodrome Model" is upending the DEX landscape.👇 / Twitter"
Yesterday, Velodrome did more volume than GMX.It is the largest protocol on Optimism, hosting more TVL than Uniswap, Curve, Beethoven X, and Kyberswap combined.Indeed, it is now 10th largest DEX in all of DeFi.The "Velodrome Model" is upending the DEX landscape.👇
In this article, I’m going to breakdown some of the ways that Velodrome easily entices people to keep liquidity on its protocol and I’m also going to make an argument for why even though it looks like Velodrome has already started the race, by no means does it appear to have crossed the finish line (pun intended).
What is Velodrome?
In a nutshell, Velodrome is the premier DEX on Optimism which offers just as good (if not better) swap rates than other big players such as Uniswap:
Unlike Uniswap, because Velodrome is a solidly fork, users can decide to lock-up their tokens for varying amounts of time, earning more emissions and rebases if they choose to lock up their tokens for longer periods of time, as well as getting enhanced voting power (more on that later). $VELO holders can lock up their tokens and mint veVELO NFTs which allow their lock-up’s tradeable and/or stakeable.
As I mentioned in my introduction, Velodrome has a ton of moving parts and factors that help the protocol retain liquidity, and in the world of DeFi, as long as you’re able to retain a lot of liquidity (and activity) for a long period of time, most likely higher APRs and #realyield are bound to follow.
So what are some of these factors? Let’s dive in…
The Biggest Slice of the Pie
When it comes to TVL, on Optimism there’s no one that really comes close to Velodrome, as it has amassed more value then the next 9 protocols combined:
You’ll also notice in the above graphic that the only other major protocol that has bribing mechanisms is Curve.fi, whose claim to fame are efficient stablecoin swaps, yet even with stablecoin swaps, Velodrome is still able to out-compete and offer better rates:
By comparison if you take a look at the top 10 protocols in TVL on Arbitrum (Optimism’s main competitor), you’ll see several protocols in the $100 million TVL-range with several of them being DEXes:
Due to Arbitrum’s mulitple options having similar models, you’ll see a lot of swarm activity with millions of dollars of liquidity going in and out of different protocols overnight. For better or worse, this crazy amount of price volatility in native protocol tokens. (And just to be clear, this is not a knock on all the different Arbitrum protocols out there — volatility can signal a huge potential for profits, and overall I think healthy competition will help ultimately drive Arbitrum forward).
On Optimism with no others in the same league, it’s no wonder why most people go to Velodrome first for the majority of their transactions, and will probably continue to do so until some other protocol rises to the occasion. More TVL means more liquidity, and more liquidity means better swaps, and better swaps means more users. This leads me to my next point…
The Fly Wheel (Or Cycling?) Effect
As you can see from the Velodrome’s graphic above, essentially almost everything is monetized on Velodrome, including:
- Liquidity providers who earn $VELO
- $VELO stakers who vote and earn emissions
- $VELO stakers who vote and earn bribes
You’ll notice a common thread through all these monetary exchanges — they all center around the $VELO token, which incentivizes people to continue to accrue, hold, and/or stake more $VELO. But I like running numbers so let’s break down some of these components to see how profitable they actually are:
Liquidity Providers — earning at degen rates
Any successful DEX needs a great deal of liquidity, but in order to attract liquidity, you need to have some pretty damn good incentives in order for people to stake their crypto there. If you’ve kept up with any of my articles in my Best Stablecoin Strategies series, you’ll know that that there’s a lot of different strategies being built on top of Velodrome, and looking at the APRs, it’s not a big surprise as to why:
To note, the above LPs are just a a sample of their stable strategies, or in other words, strategies that should have minimal-to-no impermanent loss. Alternatively they have dozens of volatile strategies (LPs with impermanent loss) that are +100% APR.
OK, so they have great exchange rates and they have high APRs…so where do these degen-like rates of return come from? Glad you asked.
$VELO Stakers — Why It Pays to Vote
As I mentioned before, in order to participate as a staker, one must lock-up their $VELO in order to mint your veNFT. Like most voting protocols, the longer you decide to lock your $VELO grants the user greater voting power and higher rewards.
Depending on where users voters, they can accrue a certain amount of ‘Voting APR’ which is dependent on the LP’s use. Therefore all other things aside, it should be in the voter’s best interest to choose the LPs that will generate the most trading fees because as a voter, they will receive 100% of those fees.
In addition to the fees, voters also get 100% of the bribes that are associated with that specific LP. Currently there are around 50 or so different LPs that have bribes:
As you can see in the graphic above, assuming that the voting ratio remains for the current epoch, the sAMM-USDC/DOLA pool currently has a Voting APR of 58.81%. In other words, if you were a veNFT holder and you placed your vote with this pool, you would get 58.81% APR in voting rewards.
On an additional note, if you wanted as little exposure to altcoins as possible, the ByteMasons have a built a vault on reaper.farm where you can allow them access to your veNFT where you can currently make returns of 31.996% APR in $USDC:
OK, so it seems pretty profitable to vote, but why are protocols paying people to vote in the first place? Glad you asked that too.
Protocol Bribers — Why It Also Pays to Bribe
Not only are incentives/bribes significant enough to influence people to not want to dump the token, but they’re also significant enough for protocols to want to put more incentives up as bribes:
Velodrome on Twitter: "Velodrome offers the best bribe efficiency in class.On average, every $1 in bribes yields $3.5 in emissions.Helping protocols to build deep liquidity on their pairs at a fraction of the cost of comparable protocols. pic.twitter.com/0xVMKWH0Bf / Twitter"
Velodrome offers the best bribe efficiency in class.On average, every $1 in bribes yields $3.5 in emissions.Helping protocols to build deep liquidity on their pairs at a fraction of the cost of comparable protocols. pic.twitter.com/0xVMKWH0Bf
I’ve heard time and time again that liquidity (or the lack thereof) is what really makes or break a platform. For this very reason, many new start-up DEXes will offer insane APY’s in the 1000–3000% APY range, just to attract more liquidity. And although this strategy might be effective temporarily, usually the honeypot runs out, or at the very least the bees will move on to one that’s sweeter.
What Velodrome has been effectively been able to do, is create a system in which the bribes are really beneficial for everyone, but more importantly, why it keeps liquidity on the platform.
Risks and other Things to Consider
No system is perfect, and from my short experience in DeFi, nothing lasts forever. So before you go aping into Velodrome, here’s a few things that I found worth noting.
Personally it doesn’t matter what the incentives are, I absolutely hate locking up anything, let alone for 4 years. So full disclosure, I do accrue $VELO tokens but I do not participate in vesting. Velodrome has barely been around for a year and there’s no way I would feel comfortable gambling what will happen years down the round in crypto. Technically however, because your veNFT is transferrable, one could argue that they’re really not locked. (Although I would imagine that it would be hard to get what they’re worth at face value.) But if you’re curious about what the re-sell market is looking like, they’re all on Opensea:
Incidentally there are quite a few people that are actively trying to arbitrage these — buying them at a discount in order to flip or use them to earn some nice APR’s.
Just because Velodrome has little competition today does not mean that it will have little competition in 6 months, and some might argue that this competition is already happening — newer arrivals to Optimism are already showing some pretty impressive growth:
Because Velodrome has had such a big share of the pie on Optimism for so long, it’s a little uncertain of how it could/would compete with another protocol(s) that had its own secret sauce offering user better rates.
From my understanding, $VELO does not have total capped supply and the amount printed largely depends on how much the protocol itself is actually utilized. The concept of “inflationary” can be quite scary, especially when we take a look at the total max supply. Upon initial launch, there was about 400 million tokens available , yet if we take a look at the current stats from Coingecko, there is currently a max supply of roughly 850 million:
This means that in the span of about 9 months, the total token supply has nearly done a 2x! This might be terrifying, but there are a couple of caveats to consider. First, the majority of these tokens are still locked, nearly three fourths in fact:
If you want a refresher about the importance towards circulating supply and FDV’s, I recommend an article I wrote before about the dangers of dilution and how it can impact future price action:
Another factor to consider is the team’s initial total allocation of $VELO, which at the time of launch was 40 million tokens, represented 10% of total initial supply. Today, due to dilution that amount is less than 3%. According to the docs, a good chunk of these tokens were intended to be used by the to vest into the protocol, but the rest to be distributed as such:
Considering that nearly a year has already passed from token launch, the 15.5 million token vesting period is nearly over, with the remaining 7 million tokens soon starting their 12-month linear unlock. Personally I like the fact that this is a linear vesting schedule (as opposed to a cliff), so hopefully there won’t be a massive dump happening all at once.
Is Velodrome’s model sustainable for years? Honestly I don’t know. All I can say is that they currently serve as a Super Wal-mart in a town where all the small businesses simply don’t have the liquidity to compete. As long as this is the case, I believe that people are going to continually go visit Velodrome to get the most bang for their buck.
Regardless of whether there are a lot of tokens left to be printed, if the sentiment and utilization of Velodrome’s flywheel remain intact, I would imagine that there would a net-sum positive pressure to hold/lock $VELO as opposed to selling will stay intact as well.
And lastly, I am fully aware that I did not cover all the aspects and benefits of Velodrome’s flywheel. If you feel like there’s something I missed, good or bad, please feel free to let me know in the comments below.
Thanks for taking the time to read this and be sure to follow me on twitter (https://twitter.com/CryptosWith) to get all my latest updates. Also, looking for a gift for your Crypto-loving/hating friend? Give them a REKT journal to cheer them up!
Disclaimer: And as a final reminder, this is not financial advice and this is for educational and entertainment purposes only. Please as always, do your own research and find what investments are best for you. Have fun everyone!
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Why I’m Keeping my eye on Velodrome ($VELO) for the next altseason was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.