Velodrome’s TVL Alchemy: ve(3,3) Mechanism, veVELO Distribution, and Bribery

Velodrome is a native DEX on Ethereum's second-layer Optimism. As of January 29, the TVL of Velodrome was $133 million, an increase of 78.31% in the past month. Both in terms of TVL and growth rate, it has surpassed the top multi-chain DeFi projects on Optimism, such as Aave, Curve, and Uniswap. With the moats of the top projects, it is becoming increasingly difficult for native projects to develop. So what is the reason that Velodrome has gained such an advantage?
Velodrome's ve(3,3) mechanism
Velodrome was adapted by the veDAO team from Solidly, which was launched by Andre Cronje's team. Some modifications were made on this basis, and the token design also referred to Solidly's (3,3) mechanism.
There are two tokens in Velodrome: VELO is an ERC-20 token used to reward liquidity providers; locking VELO will result in veVELO (also known as veNFT), which is an NFT governance token. The prefix ve comes from vote-escrowed in Curve veCRV, which means voting custody. Designing veVELO in the form of NFT also solves the problem that pledged tokens cannot be traded, but veVELO NFT has no liquidity in the secondary market.
The (3,3) mechanism was first adopted by Curve to strengthen incentives for long-term token holders; the (3,3) game theory was designed by Olympus DAO, and when everyone stakes tokens instead of selling them, everyone gets higher returns.
Among the major participants in Velodrome, traders pay only 0.02% to 0.05% transaction fees in Velodrome. Even without the liquidity aggregation of Uniswap V3, they may still have a better experience due to the lower fees.
For liquidity providers, there is no transaction fee income in common AMMs, and they rely entirely on Velodrome's mining rewards VELO.
veVELO holders can obtain four rights: governance rights, which determine the weight of VELO allocated to each liquidity pool; all transaction fees; all bribe rewards; and reducing the dilution of voting rights through rebase.
Then, the more bribes and transaction fees there are in Velodrome, the higher the income of veVELO holders, the price of VELO may rise, the higher income of liquidity providers will attract more liquidity, and better liquidity will further increase transaction fee income, forming a flywheel effect.
The initial supply of VELO tokens is 400 million, of which 60% is allocated to the community, including WEVE holders, Optimism users and DeFi users on other chains. The remaining 40% is allocated to partner projects, the Velodrome team (part of the tokens are used to lock and vote for VELO trading pairs), the Optimism team, and the initial liquidity pool.
The tokens allocated to liquidity providers decrease weekly, starting with 15 million VELO (3.75% of the initial supply) in the first week, and the total supply is expected to reach 1.8 billion VELO in 200 weeks.
VELO Staking and veVELO Holding Status
From the above, we can know that VELO and CRV are both assets that will experience long-term inflation. Curve is crucial to stablecoins, liquidity pledge tokens, anchor coins, and yield aggregator projects, so various projects compete to accumulate CRV, forming a "Curve War". If participants do not have enough demand for VELO, Velodrome will inevitably go into a death spiral, but from the current situation, Velodrome is still the project with the highest TVL on Optimsim, and there is a trend of forming a "Velodrome Race".
According to the statistics of Dune Analytics @0xkhmer, from Epoch1 to the current Epoch35 (one Epoch per week, each Epoch starts at 8:00 am every Thursday Beijing time), although the supply of VELO is increasing, almost all of the newly added VELO is used for lock-up, and the amount of VELO in circulation has hardly changed. In Epoch1, the locked VELO was 163 million and the circulating VELO was 141 million; and in the current Epoch35 stage, the locked VELO is 645 million and the circulating VELO is 157 million.
Apart from the Velodrome team, the company that holds the most veVELO is Beefy, a multi-chain yield optimizer. Beefy began accumulating veVELO around Epoch 20. Its beVELO vault helps users automatically obtain VELO rewards and reinvest, and charges a certain fee. After staking VELO, users can obtain tradable beVELO tokens that can be traded on the secondary market. Beefy also usually reserves a portion of VELO to facilitate user withdrawal. The staking APY of beVELO is usually higher than 100%.
In addition to Beefy, other projects that have seen a large increase in veVELO holdings in the last two Epochs include 200 Keys, Synthetix, Frax, Inverse Finance, Revenant Labs, etc. However, no project has yet obtained a relatively large proportion of veVELO voting rights.
veVELO's income structure
Among the three sources of income for veVELO holders, the highest source of income is bribes, while transaction fees and rebase income are relatively small. Why are more and more projects willing to use bribes instead of using their own governance tokens as mining rewards as initially adopted? Because bribes are more effective. According to Velodrome's calculations, every $1 bribe will bring about $1.5-2 in VELO rewards for the corresponding trading pair.
In the Epoch34 that has ended, the Rebase APR was 18.06%, the average bribe APR was 65.47%, the average transaction fee APR was 3.76%, and the total APR was 87.29%.
As shown in the figure below, during the period of Epoch10-Epoch33, the average APR was higher than 100%. In Epoch34, the APR dropped because the VELO price rose too fast relative to the bribe funds. Since the transaction fees and bribes collected come from the voting trading pairs, different veVELO holders receive different bribes and transaction fees due to different votes, while the rebase rewards are the same.
It can be seen that Velodrome’s bribe funds set a historical record in Epoch34, with a bribe amount of US$449,104 that week and a total bribe amount of approximately US$5.1 million.
Synthetix is ​​one of the important sources of Velodrome bribes. Multiple trading pairs including SNX/USDC, USDC/sUSD, and WETH/sETH need to attract liquidity on Velodrome. The bribe funds given by Synthetix are OPs awarded by Optimism. In addition, Liquity's WETH/LUSD, Beefy's WETH/BIFI, Alchemix's alETH/WETH, Inverse Finance's DOLA/USDC, etc. all use OP as bribe funds. Almost no project uses stablecoins for bribes. The recent OP price has risen a lot, which explains why the bribe funds have hit a new high recently. However, the OP tokens given by Optimism to ecological projects are limited, which also foreshadows whether the Velodrome mechanism can continue.
It is worth noting that recently, Lido, a leading liquidity staking platform, has also started to bribe in Velodrome, with wstETH/WETH paying 7,000 LDO per week and wstETH/OP paying 1,000 LDO per week. This has brought a new source of income to veVELO holders.
Summary
Velodrome adopts Solidly's (3,3) mechanism. Although the supply of VELO continues to increase, in the past six months, almost all of the newly added VELO has been used for lock-up. The amount of VELO in circulation is basically the same as in Epoch 1, which shows the effectiveness of this mechanism. Projects such as Beefy are actively accumulating more VELO.
The main source of income for veVELO holders comes from bribes, which make the project more efficient in attracting liquidity. Recently, bribe funds have hit a record high, but part of the reason is the increase in the price of bribe tokens. Synthetix, Liquity, Beefy, Alchemix, Inverse Finance, etc. all use OP tokens officially given by Optimism for bribery, which also makes the price of Velodrome and OP tokens, the number of OP tokens given by Optimism to ecological projects, and other factors highly bound.