If one were to guess which DEX is facilitating DeFi’s highest volume trade pair, most will think of DeFi OGs like Uniswap. But alas, the underdog has prevailed, and it is Aerodrome on Base that is responsible for the top volume pair: WETH/USDC.

Not only is Aerodrome’s WETH/USDC volume on Base nearly thrice that of Uniswap V3’s on Ethereum Mainnet, but it is also ~2.25x of Coinbase Exchange’s ETH volume:

With Aerdrome’s massive share of trade volume securing its position as a mainstay in the DeFi industry, does it make sense to stack AERO now?

Aerodrome - Base’s liquidity magnet

Aerodrome is an AMM designed to serve as the central liquidity hub on Base. Aerodrome was forked from Velodrome V2, and users can utilize Aerodrome for swapping and liquidity provisioning.

At present, Aerodrome’s revenue far exceeds that of other DEXes.

Aerodrome’s impressive revenue stats can perhaps be attributed to it being a liquidity magnet on Base, such that most transactions on Base go through Aerodrome:

But how was Aerodrome able to attract so much liquidity and volume, and even steal market share from OGs like Uniswap?

The answer to this lies with Aerodrome’s incentivization mechanism: vote-escrow AERO (veAERO).

AERO / veAERO utility and tokenomics: incentivizing a self-optimizing liquidity flywheel

First, users can lock AERO to obtain veAERO, with the amount of veAERO received being linearly dependent on the vote-escrowed period. Longer vesting time results in more veAERO received:

• 100 AERO locked for 4 years will become 100 veAERO.
• 100 AERO locked for 1 year will become 25 veAERO.

The amount of veAERO one holds can be interpreted to be one’s voting power; veAERO holders vote on which pools will earn AERO emissions, and they will also receive 100% of incentives and fees for the pools they vote for.

Hence, if a protocol wishes to build liquidity, the protocol will offer incentives to veAERO voters to vote for the protocol’s pool. After a successful vote, this pool will subsequently receive AERO emissions, which LPs will earn, thereby incentivizing liquidity provisioning in the pool.

Having deep liquidity consequently provides traders with low slippage, which attracts greater trade volumes and generate more fees, which ultimately goes back to the veAERO voters.

This flywheel can be illustrated by this diagram here:

AERO emissions

With this flywheel out of the way, let’s take a deeper dive into AERO’s supply-side tokenomics. AERO has an uncapped total token supply, while circulating supply sits just under 590 million.

The supply of AERO inflates every epoch (1 epoch = 1 week) through emissions distributed to liquidity providers, beginning with 10 million AERO in Epoch 1, and increasing at a flat rate of 3% till Epoch 14. Following which, emissions decrease at a flat rate of 1% per epoch until emissions are less than 9 million AERO (~Epoch 67).

At this point, veAERO voters can vote on whether emissions should remain unchanged as a percentage of total supply, or should be increased or decreased by 0.01% of total supply.

veAERO rebase

To account for potential vote power dilution for veAERO, veAERO holders will receive a rebase proportional to AERO emissions and to the ratio of veAERO:AERO supply.

The projected distribution of AERO, accounting for emissions and rebase, is as follows:

Evaluating AERO

Just like how Jupiter (JUP) may be seen as a proxy to the Solana ecosystem, I believe that Aerodrome (AERO) is also a proxy to the Base ecosystem, and with USDC transfer volume on Base, the number of monthly active addresses on Base, and contract deployments on Base going on a tear, the bull case for Base appears to be strengthened.

And with the bull case for Base, comes the bull case for AERO, summarized as follows:

1. More users onboarded on Base = more volume = more fees for protocols.
2. Protocols start deploying on Base, and to seed liquidity for their native token, they need to incentivize LPs.
3. LPs are incentivized through AERO emissions, so protocols will need to either lock AERO for veAERO to vote for their pools, or give incentives to veAERO voters.
4. More liquidity attracts traders, with fees going to veAERO voters, thus incentivizing even more AERO holders to lock their AERO for veAERO.

Here, Steps 3 and 4 are arguably the most crucial steps as the locking of AERO for veAERO reduces the liquid supply of AERO, thereby effectuating scarcity which, in theory, would drive the price of AERO upwards.

Furthermore, with the recent integration of EURC on Base, and the teased release of cbBTC following the WBTC debacle, the longevity of this bull case’s premise (more users onboard to Base) is somewhat assured.

On the flipside, the supply of AERO is uncapped, with new emissions every week. If growth of the Base ecosystem slows, and less AERO is locked for veAERO, AERO’s inflation may be detrimental to its price.

One may also wonder what might happen once the initial batch of locked AERO starts to unlock (especially for whales who locked their AERO for a longer time duration). After all, AERO is up ~14x since the start of the year and traders may want to start taking profits off the table.

Nevertheless, while the case for dumping AERO may be made, I believe that most veAERO lockers are in fact protocols on Base, and it is in their self-interest to keep locking AERO for veAERO to influence AERO emissions.

Concluding thoughts

In the previous cycle, BSC blew up in popularity due to its ease of access and integration with Binance. And with Coinbase’s Smart Wallets bringing people onchain, I believe the Base network will witness a level of growth similar to BSC back in 2021.

Hence, given the rapid adoption that Base is currently and may continue enjoying, I anticipate Aerodrome’s future to remain bright.

That being said, I am not a current AERO holder as I am turned off by its uncapped total supply. I used to own a little bit of AERO after its launch but I have already sold all (at $0.05 fml), and I personally feel that buying AERO now may be rather late.

Instead, an alternative that I turned to is holding COIN to gain exposure to both Coinbase’s and Base Network’s growth.

While upside is definitely lesser (COIN is only up ~31% YTD compared to AERO’s 14x), COIN remains a comfy hold for me and the occasional options trade here and there can hopefully narrow the disparity in returns (or maybe this is just copium :/).