Providing and incentivizing liquidity are some of the core aspects of the DeFi ecosystem. Nowadays, most protocols are currently facing incentivizing liquidity issues.
This is where Velodrome Finance comes in. The finance protocol focuses on propounding workable solutions to liquidity incentivization. This article is an in-depth review of Velodrome Finance, its functions, goals, team, benefits for DeFi protocols, etc.
What is Velodrome Finance?
Velodrome Finance is the liquidity base layer for the entire Optimism ecosystem. Launched in June 2022, it focuses on properly incentivizing liquidity for DeFi protocols. Interestingly, Velodrome is built on the foundation put in place by Solidly. Making important tweaks and changes to the work done by Solidly to ensure that Velodrome reaches its full potential.
Velodrome is an AMM designed as the central trading and liquidity marketplace on @optimismPBC.
It is the next evolution of the @solidlyexchange model introduced by Andew Cronje.
Launching on May 31st with 10+ partners, it will kick start #OPSummer.
Need a 101?👇🧵 pic.twitter.com/0xgZUedNMN
— Velodrome (🚴,🚴) (@VelodromeFi) May 29, 2022
For a DeFi protocol to function successfully, it needs some form of liquidity. However, acquiring liquidity and providing incentives for liquidity providers (LPs) can sometimes be a herculean task to manage. Hence, there was a need for a protocol like Velodrome Finance. You can see how this protocol works in the picture below:
Source – Velodrome Finance
The protocol introduces an attractive substitute to Solidly. This protocol design goes beyond liquidity, it is also interested in balancing protocol emissions with fees. To achieve this, it makes use of a unique voting mechanism. The voting process is however not foolproof. This is because large stakeholders and protocols can wield their voting power to prevent fee collection from the pools they are invested in.
This major shortcoming by Solidly has been improved on by Velodrome. Velodrome Finance helps to ensure that voting is carried out without bias and LPs are compensated fairly for impermanent losses.
What Problems Does Velodrome Finance Solve?
The importance of liquidity to DeFi protocols cannot be over-emphasized. For a DeFi protocol to function properly, it needs to have some form of liquidity. There are, however, several problems associated with generating and incentivizing liquidity in the DeFi space. These problems include:
- The costly nature of Pool 2 emissions: This form of liquidity incentivization usually fosters “farm and dump” investments.
- Bribing voters: this is a major issue as existing LPs are already ahead as compared to incoming LPs
- Protocol Owned Liquidity (POL) is at times difficult to acquire.
The above are some of the most important issues facing liquidity incentivization on DeFi protocols. To address the above-listed issues, Velodrome introduces several improvements to the Solidly ecosystem. These improvements include:
- Strapping Rewards to Emission – On Solidly, access to rewards is possible before emissions. Velodrome solves this by strapping rewards to emissions. This means that bribes deposited in an epoch will be made available to all voters of that particular epoch irrespective of the time the bribe was sent. This, in turn, will help facilitate much-needed equilibrium among voters and external bribers.
- White-Glove Support – Velodrome will provide its partners and stakeholders with much-needed support post-launch. To achieve this, Velodrome Finance assigns 3% of perpetual emissions to its team multi-sig.
Other important improvements include; Ensuring Productive Gauges and Prolonged Emissions Decay.
Whether you are an individual or protocol, it has never been easier or more incentivized to migrate.
EVM equivalence, low gas fees, ecosystem grants, airdrops, liquidity incentives and much more.
Don’t miss out, racer! pic.twitter.com/UWs679TfZQ
— Velodrome (🚴,🚴) (@VelodromeFi) July 24, 2022
Liquidity Pools on Velodrome Finance
Velodrome offers two major liquidity pools (LPs):
- Stable Pools: Usually designed for tokens with very low volatility.
- Variable Pools: These pools are especially for token assets with high price volatility index.
- To use Velodrome, you need to first connect the dapp to a wallet. Supported wallets include Metamask, Coinbase Wallet, WalletConnect, etc. You need to ensure your wallet is connected to the Optimism network.
- Next, is to Bridge ETH tokens to the Optimism network. This is because users need to hold ETH tokens to be able to participate on Velodrome. The tokens will be used in paying gas fees. To get ETH tokens, users will need to make bridge ETH tokens to the Optimism network. This can also be seamlessly done via the Optimism bridge. However, bridging ETH tokens from a network different from the ETH Network can be done via protocols like Stargate Finance and Bungee Exchange.
- After connecting and funding your wallet with ETH tokens, you can now have access to Velodrome features like Swap, Pool, Vest, Vote, and Rewards.
— Velodrome (🚴,🚴) (@VelodromeFi) July 26, 2022
Velodrome launch will also take place alongside an initial allocation of 400 million VELO tokens. The tokens will be airdropped to community members, protocols, and DAOs that are most likely to be actively involved with the Optimism ecosystem. However, new players could also join in and acquire voting shares via emissions and token acquisition.
Active participants on Velodrome will share 60% of 240 Million VELO tokens. Also, 27% of VELO tokens, approximately 108 million VELO will go to $WEVE token holders. $OP token network users will also receive 18% of the allocation, amounting to about 72 million $VELO tokens.
Source – Velodrome Finance
The platform also set aside 6% of veVELO tokens as Grants for partner protocols post-launch. The team will also receive a total allocation of 40 million with 10% in $VELO and $veVELO tokens. Also, the vesting of 25% of the initial team allocations will take place. It will also help in voting $VELO pairs.
Security in the blockchain and crypto space is of major interest to anyone looking to invest their funds. While Velodrome is still fairly nascent, it is built on the Solidly codebase. The codebase since its debut on the Fantom Network is to a large extent secure with zero records of any security incidents.
While security audits are not a foolproof assurance of security, they to a large extent are a reliable metric to judge the security of a smart contract.
It's a great idea, and veDAO is a great team that was able to execute on it, deployed in a place (Optimism) where it has great product-market fit (i.e. hungry for even more liquidity).
It's been a real pleasure working with the team. Hope it's the first one of many! https://t.co/xLlTaU8l34
— Norswap 🏴☠️🔴✨ (@norswap) July 27, 2022
In conclusion, the team behind the launch of Velodrome is an active participant in the DeFi ecosystem. Prior to the Velodrome launch, veDAO also went live. veDAO was designed to engage with the Solidly platform and is also a product of the Velodrome team.
VELO Price Outlook
At the time of writing this article, the price of VELO is $0.0595 with a 24-hour trading volume of $45,068 with a total and max supply of 296.9 and 400 million tokens. Also, its TVL is $105.1 million.
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