Aero, the exchange formed by the merger of Aerodrome and Velodrome, has published an explanation of how it pays liquidity providers (LPs). Under the model, LPs can choose to earn $AERO, a stream of token rewards that @aeroxyz says is targeted to exceed the value of the trading fees their deposits generate.

The argument rests on how Aero views the value of liquidity. Deeper markets attract more traders, assets and builders, and the same liquidity can support other products that earn revenue beyond swap fees. Aero describes these as positive externalities, meaning value an LP creates for others without being paid for it. Its reward model is designed to pass part of that value back to LPs.

How AERO Rewards and Token Operators Work

According to Aero's documentation, LPs deposit tokens into pools to enable trading and earn AERO Rewards. They can instead choose to earn a portion of the trading fees. Token Operators, who are holders of staked AERO (sAERO), allocate the rewards to pools. In return they receive 100% of the exchange revenue from the pools where they direct rewards, including trading fees, MEV capture, Liquidity Payments and Launch Payments.

This replaces fixed emission schedules with a continuous stream of rewards that responds to expected trading volume, the documentation says. DeFi Prime, citing Aero's launch document, reported that when an LP chooses AERO rewards, the position's trading fees become exchange revenue for those allocators.

Aero says Token Operators earn pool revenue only from the markets they support. That gives them a reason to anticipate which markets will become busier and to allocate rewards early, drawing liquidity before trading demand arrives.

Gauge Caps Limit Rewards to Projected Revenue

To keep rewards sustainable, Aero sets a dynamic Gauge Cap for each pool. The cap limits the rewards a pool can receive based on its projected revenue. TokenPost reported that the long-term target is for average rewards across the exchange to equal about 1.2 times projected revenue, and that AERO above a pool's cap is left unminted.

Aero says Gauge Caps can also rise when market conditions change. If volatility increases the revenue a pool is expected to generate, its cap can rise with it, allowing rewards to increase when liquidity is often most valuable and costly to provide.

The launch target of about 1.2x applies across the exchange as an aggregate, rather than to each pool individually. Aero says these dynamics, together with the adaptive caps, are meant to keep LP compensation competitive while protecting the economics of existing token holders.

The model is new. Dealroom noted that Predictive Allocation is untested at launch, and that Aero faces much larger rivals such as Uniswap and PancakeSwap.

Background: The Aerodrome and Velodrome Merger

As The Block reported, Aerodrome and Velodrome merged to launch Aero, an onchain spot exchange across Ethereum mainnet, Base, Robinhood Chain, Ink, OP Mainnet, Arc and Arbitrum. CoinMarketCap Academy reports that AERO and VELO convert to a new AERO token, split 94.5% to Aerodrome holders and 5.5% to Velodrome holders, while locked veAERO and veVELO positions become sAERO.

Sources

  • Aero documentation: About Aero

  • TokenPost: Aero Merger Replaces Weekly Voting With Revenue-Linked Emissions

  • The Block: Aerodrome and Velodrome merge to launch Aero across seven blockchain networks

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