In decentralized finance (DeFi), platforms increasingly focus on providing users with cost-effective and efficient trading experiences. The rise of Layer 2 solutions has significantly reduced entry barriers for users and projects by addressing scalability and high transaction fees. Liquidity provisioning has also become a cornerstone for sustainable DeFi ecosystems, enabling better market stability and incentivizing user participation. By integrating these elements, platforms are transforming how decentralized exchanges operate, combining governance, trading, and incentives in one ecosystem. One such example is Velodrome Finance, a premier liquidity layer on Optimism.

What is Velodrome Finance (VELO)?

Velodrome Finance launched on June 1, 2022, as an Automated Market Maker (AMM) on the Optimism Network, drawing inspiration from the Solidly Exchange model introduced by Andre Cronje. Spearheaded by Alexander Cutler, Velodrome quickly became a dominant player in the DeFi space on Optimism, amassing over $236 million in Total Value Locked (TVL) by 2023. The platform introduced its native governance token, VELO, which allows users to lock their tokens for varying durations to gain proportional voting power, similar to Curve’s model.

In September 2022, Velodrome Finance partnered with Revest Finance to integrate its Yield Futures Protocol, Resonate. This collaboration enabled Velodrome to create an active pool on Resonate, further diversifying its DeFi offerings. Resonate leverages Financial NFT (FNFT) technology to separate principal and interest components, matching users for upfront payments on future yield.

Velodrome has focused on incentivizing liquidity provisioning and governance participation throughout its development, making it a cornerstone of the Optimism ecosystem. Its rapid rise reflects the strength of its innovative AMM model, which combines decentralized governance, yield opportunities, and efficient liquidity distribution, ensuring a scalable and sustainable protocol for DeFi users.

How Does Velodrome Finance Work? Protocol Design and Security

Velodrome Finance is a cutting-edge Automated Market Maker (AMM) on the Optimism Network. Its design incorporates features from Curve, Convex, and Uniswap, creating a liquidity hub optimized for the decentralized finance (DeFi) ecosystem. Central to Velodrome’s success is its dual-token model, protocol mechanics, and governance structure, all of which work together to balance liquidity provisioning, trading efficiency, and decentralization.

Dual Token Mechanism

The Velodrome ecosystem uses two main tokens: VELO and veVELO. VELO is the utility token distributed as rewards to liquidity providers (LPs) and is essential for protocol operations. veVELO, the governance token, is minted when VELO is locked for durations of up to four years, with longer lockups granting greater voting power. Locking VELO also generates veVELO NFTs, enabling users to participate in governance decisions. veVELO holders influence the distribution of VELO emissions to liquidity pools by voting during weekly epochs. In return, voters receive trading fees and other incentives from the pools they support, aligning governance with economic incentives.

Liquidity Provisioning and Market Dynamics

Liquidity is the backbone of any AMM, as it allows users to trade tokens efficiently with minimal slippage. LPs deposit pairs of tokens (e.g., stablecoins or ETH and other assets) into liquidity pools, which traders use to swap assets. However, LPs face impermanent loss risks due to price volatility. Velodrome mitigates this by rewarding LPs with VELO emissions, distributed proportionally to their share of the liquidity pool. The distribution of VELO to pools is determined by veVELO holders’ votes, creating a dynamic and responsive system that channels rewards where liquidity is most needed.

Incentive Structures and Epochs

Velodrome operates in seven-day epochs, during which votes, emissions, fees, and incentives are calculated. veVELO voters direct VELO emissions to pools, and their rewards include trading fees generated by the pools and external incentives deposited by protocols seeking liquidity. For example, protocols can incentivize specific pools by depositing tokens, which are distributed to veVELO voters to attract more votes and liquidity. This mechanism creates a flywheel effect: more incentives lead to increased liquidity, which drives higher trading volumes, generating additional fees and reinforcing the ecosystem’s growth.

Enhanced Features and V2 Innovations

Launched on June 2, 2022, Velodrome’s original version provided essential AMM functionality, rewarding LPs through VELO emissions distributed by gauges. However, Velodrome V2, introduced on June 22, 2023, marked a significant upgrade. It added decentralized governance, dynamic fees, concentrated liquidity support, and Velodrome Relay for improved user experience. The upgraded protocol introduced a modular architecture, including a liquidity pool factory registry, updatable gauge factories, and enhanced reward mechanisms. This ensured scalability, security, and adaptability to evolving market needs.

Immutable Protocol Design

A standout feature of Velodrome is its immutable architecture, ensuring that protocol rules, such as token emissions and liquidity allocation processes, remain fixed over time. Even with the launch of Velodrome V2, backward compatibility with V1 tokens and features was maintained, safeguarding user trust and continuity in operations.

Source: velodrome.finance/docs

Security

Velodrome Finance prioritizes robust security measures to ensure its users’ and partners’ safety and trust. Recognizing the inherent risks within the DeFi landscape, the protocol employs a comprehensive security framework encompassing audits, bug bounty programs, and emergency response mechanisms. While no system can be entirely risk-free, Velodrome’s commitment to proactive measures and transparency strengthens its position as a trusted decentralized platform.

Smart contract audits form the backbone of Velodrome’s security strategy. The protocol underwent a detailed review by Code4Rena before its v1 launch in June 2022, addressing vulnerabilities and ensuring operational integrity. As the platform evolved, its v2 iteration and Relay features underwent dual audits by Spearbit in 2023, ensuring that updates such as decentralized governance and dynamic fees adhered to the highest security standards. These efforts culminated in a published report in July 2023. Further bolstering security, the Slipstream concentrated liquidity module, and the Superchain release underwent rigorous scrutiny by ChainSecurity and Sherlock in 2024, ensuring enhanced scalability and performance without compromising user safety.

Source: velodrome.finance/docs

To engage the wider community in maintaining security, Velodrome introduced a bug bounty program in June 2022 through a partnership with Immunefi. With rewards of up to $200,000, partially matched by the Optimism Foundation, this initiative incentivizes ethical hacking and the discovery of vulnerabilities, creating an additional layer of defense.

Velodrome relies on its Emergency Council, comprising team members and Optimism ecosystem leaders in critical situations. This council can take immediate actions, such as disabling compromised features or updating governance settings, to protect the protocol’s integrity. Velodrome also demonstrates its commitment to transparency by making its codebase publicly available on GitHub, encouraging community collaboration and review. Through its layered approach to security, Velodrome ensures its users a resilient, trusted, and innovative environment.

Velodrome Finance Use Cases

Velodrome Finance’s protocol design and incentives empower users and protocols alike, fostering deep liquidity and efficient trading in the decentralized finance (DeFi) ecosystem. Here are three key use cases that highlight Velodrome’s functionality:

• Liquidity Provision and Trading: Velodrome lets users become liquidity providers by depositing token pairs into pools, supporting efficient token swaps with minimal slippage. Providers earn VELO token rewards proportional to their contributions, while traders benefit from low fees and deep liquidity. This dual mechanism enhances market efficiency and user participation.
• Governance and Incentives: VELO holders can lock their tokens to receive veVELO, a governance token that allows them to vote on liquidity pool emissions. Voters receive trading fees and additional incentives from protocols that seek to direct liquidity toward specific pools. This structure creates a mutually beneficial relationship between voters, liquidity providers, and protocols.
• Protocol Liquidity Management: Protocols can leverage Velodrome’s flywheel mechanism to direct VELO emissions toward their liquidity pools. By incentivizing liquidity providers and veVELO voters, protocols can build deep, sustainable liquidity for their tokens. This increases token utility, reduces price impact during trades, and attracts long-term holders.

Velodrome Finance Main Features

Inspired by the Solidly Exchange model, Velodrome integrates Curve, Convex, and Uniswap features, delivering a comprehensive platform designed for efficient liquidity provision, robust governance, and user-centric functionality.

AMM Model and Trading Efficiency

Velodrome Finance’s Automated Market Maker (AMM) model ensures seamless token swaps with minimal slippage. Borrowing from Curve’s stablecoin-focused efficiency, Convex’s yield optimization strategies, and Uniswap’s intuitive interface, Velodrome offers a superior trading experience. Liquidity providers benefit from competitive incentives, while traders enjoy deep liquidity and low fees. This blend positions Velodrome as a vital component of the DeFi ecosystem, particularly on the Optimism network.

Innovative veNFT Governance

Governance within Velodrome Finance is powered by the innovative veNFT mechanism. Users who lock their VELO tokens receive a veVELO NFT, a tradable token that allows holders to participate in governance decisions while retaining capital efficiency. These veNFTs can be used as collateral in other pools, traded on platforms like OpenSea, or held for long-term gains. This model fosters a dynamic, community-driven ecosystem where users directly influence token emissions and protocol decisions.

Security and Resilience

Security is central to Velodrome’s design. Velodrome leverages optimistic rollups for transaction verification and dispute resolution while operating on the Optimism network. Additionally, rigorous smart contract audits, ongoing monitoring, and an active bug bounty program bolster platform security. These measures ensure a robust infrastructure, safeguarding users and liquidity from potential vulnerabilities.

What is the VELO Coin?

VELO is a governance and utility token powering Velodrome Finance’s liquidity and voting mechanisms. Its total supply counts 1.92 billion units, of which 864.38 million are already in circulation (December 2024).

Designed to incentivize liquidity and foster community-driven governance, VELO serves as a critical component in the protocol’s ecosystem. It rewards liquidity providers and grants governance power through its innovative vote-escrowed VELO (veVELO) system.

VELO emissions are distributed weekly to liquidity providers, with the allocation determined by veVELO holders who lock their VELO for up to four years. This lock-up period directly impacts the governance power received, with longer durations granting higher voting weight. In return, veVELO holders earn trading fees and additional incentives from the pools they vote to support, aligning the protocol’s growth with user participation.

Source: velodrome.finance/docs

The initial distribution of VELO prioritized contributors to Velodrome’s mission, including community members, partner protocols, and the Velodrome Foundation. Weekly emissions started at 15 million VELO and decay over time, ensuring sustainable rewards. With Velodrome V2, the emissions schedule was reset to maintain liquidity incentives.

The protocol also supports seamless upgrades. The transition to Velodrome V2 introduced features like concentrated liquidity and dynamic fees while maintaining compatibility with the original VELO token. Holders could convert VELO V1 to VELO V2 at a 1:1 ratio, ensuring continuity.

VELO’s governance model empowers the community to influence protocol decisions, including emissions allocation and development initiatives. This model, combined with its utility in incentivizing liquidity and supporting the Optimism ecosystem, positions VELO as a vital asset within decentralized finance.

The initial distribution of VELO tokens ensured alignment with Velodrome’s mission to become the liquidity base layer for Optimism. Community members received 60%, partner protocols 24%, the Velodrome Foundation 10%, Optimism 5%, and Genesis Liquidity Pools 1%. These allocations supported contributors, protocols, and liquidity providers, fostering long-term engagement and ensuring robust participation in the ecosystem.

Source: coinmarketcap.com

Is VELO a Good Investment?

VELO, as the native token of Velodrome Finance, plays a crucial role in a thriving DeFi ecosystem on the Optimism network. Its utility in governance and liquidity incentives can drive adoption and enhance its value proposition. On the other hand, potential risks include the volatility and security challenges inherent in DeFi projects, such as smart contract vulnerabilities. Additionally, the competitive nature of the DeFi space requires Velodrome to continuously innovate to retain user interest and market share, which could impact the project’s long-term sustainability.

How to Own VELO?

To own VELO, you can use the services of a centralized crypto exchange. Start by creating a Gate.io account and get it verified and funded. Then ,you are ready to go through the steps to buy VELO.

News on Velodrome Finance

On December 9, 2024, Velodrome Finance announced via its X channel that it had joined the Routescan ecosystem. This integration enables users to track all Velodrome transaction actions on Superscan, the official explorer of the Superchain Ecosystem. A new receipt feature, exclusively designed for Velodrome, provides detailed breakdowns of swaps and other actions for improved transparency. The collaboration highlights Velodrome’s commitment to enhancing user experience and marks the start of further advancements.

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