What is Aerodrome Finance ($AERO)? An ultimate guide

Understanding Aerodrome Finance ($AERO)

The rising popularity of Layer 2 (L2) solutions on Ethereum (ETH) has fostered new ecosystems of decentralized applications (dApps), with some L2 platforms and their dApps becoming particularly popular among crypto users.

One notable example is Base L2 and its decentralized exchange (DEX), Aerodrome Finance (AERO). Aerodrome Finance is a DEX operating on the Ethereum-based L2 chain, Base.

Launched in August 2023 by the team behind the Velodrome DEX on Optimism L2, Aerodrome shares many features with its predecessor.

Today, Aerodrome is among the leading DEXs on Base L2, alongside Uniswap (UNI). According to data compiled by on-chain analyst Sealaunch on Dune, Aerodrome accounted for 48.6% of DEX volume on Base as of July 31, 2024, surpassing Uniswap's 41.8%.

Despite this, Uniswap had a higher percentage of daily active users on Base, with 84.4% compared to Aerodrome's 4.4% on July 31, 2024. The disparity between Aerodrome's low daily active user percentage and high DEX volume percentage indicates that the platform is favored by high-volume traders and whales.

As of the time of writing, Aerodrome is the top dApp on Base in terms of total value locked (TVL). DefiLlama data shows Aerodrome's TVL was $644.5 million as of July 31, 2024.

How does Aerodrome operate?

Similar to Uniswap, Aerodrome functions as an automated market maker (AMM) that leverages liquidity pools to facilitate cryptocurrency trading without relying on a centralized operator.

Liquidity pools are collections of tokens deposited by users who provide pairs of cryptocurrencies. In return, these users earn a share of the trading fees generated by the pool.

For instance, the ETH-USDT liquidity pool on Aerodrome consists of both ETH and USDT tokens. To contribute to this pool, a user must deposit an equivalent dollar amount of ETH and USDT. In return, the user receives a liquidity provider (LP) token as proof of their contribution.

What sets Aerodrome apart from older decentralized exchanges like Uniswap is its innovative token mechanics.

Aerodrome liquidity providers who stake their LP tokens are rewarded with a token known as AERO, distributed weekly. Additionally, LP token stakers receive a governance token called veAERO.

Holders of veAERO tokens have voting rights and earn protocol trading fees in proportion to the amount of veAERO they have staked. This unique structure not only incentivizes liquidity provision but also engages the community in the governance and financial success of the platform.

AERO tokens: Tokenomics and updates

AERO is the native token of Aerodrome Finance. As of August 1, 2024, AERO ranks as the 208th largest cryptocurrency by market capitalization, valued at $443.9 million.

Initial supply and allocation

The total initial supply of AERO was set at 500 million tokens. Of these, 450 million, or 90%, were locked as veAERO tokens. Here’s the breakdown of the veAERO token allocation:

• Airdrops: 40% of the locked veAERO tokens were distributed as airdrops to veVELO stakers in August 2023.
• Ecosystem and public goods: 21% of the locked veAERO tokens were allocated for ecosystem pairs and public goods.
• Aerodrome team: 14% of the locked veAERO tokens were designated for the Aerodrome team.
• Protocol grants: 10% of the locked veAERO tokens were allocated to protocol grants.
• AERO pools votepower: 5% of the locked veAERO tokens were allocated to AERO Pools votepower.

The remaining 50 million AERO tokens were allocated as follows:

• Voting incentives: 8% of the AERO supply was set aside for voting incentives.
• Genesis liquidity pool: 2% of the AERO supply was paired with USDC and deposited into the genesis liquidity pool to support AERO swaps at launch.

Inflation and governance

AERO's supply is not fixed. Initially, 10 million new AERO tokens were released weekly. In the first 14 weeks post-launch, emissions increased by 3% per week. Afterward, emissions were designed to decrease by 1% per week. 

When weekly AERO emissions fall below 9 million, veAERO holders will assume control of AERO’s monetary policy, with the option to:

• Increase emissions by 0.01% of the total supply (0.52% annualized).
• Decrease emissions by 0.01% of the total supply.
• Maintain the current emission rate unchanged (as a percentage of total supply).

veAERO holders who participate in voting will receive AERO tokens based on their stake.

Recent developments

Notable events related to Aerodrome Finance include:

• November 2023: Aerodrome and Velodrome suffered a DNS attack, leading to an estimated $250,000 loss for users. The attack involved social engineering to gain control of domain names and redirect legitimate traffic to malicious sites.
• March 2024: The introduction of Slipstream, an upgrade for concentrated liquidity pools, based on a fork of the Uniswap v3 protocol.
• Late February 2024: The Base Ecosystem Fund, led by CB Ventures, invested in Aerodrome’s AERO token. The size of the investment was not disclosed.

Price analysis

Early market data on CoinMarketCap indicated that the AERO token traded at approximately $0.09 in early February 2024. By August 1, 2024, its price had surged to around $0.78, reflecting a 750% increase. 

The token saw its peak performance on March 1, 2024, rising 91% following the Base Ecosystem Fund’s investment announcement. AERO reached an all-time high of $2.33 on April 22, 2024.

Decentralized exchanges (DEXs) like Aerodrome Finance are crucial elements of their blockchain ecosystems. These platforms enable peer-to-peer cryptocurrency trading without the need for centralized intermediaries, relying on automated market makers (AMMs) and liquidity pools to facilitate transactions.

Aerodrome Finance has rapidly gained prominence due to its innovative token mechanics and its ability to attract high-volume trading. Since its inception, the platform has stood out for its unique approach to tokenomics, which includes rewarding liquidity providers with AERO tokens and involving veAERO tokens in governance decisions. This structure not only incentivizes participation but also aligns users' interests with the long-term success of the platform.

The platform's appeal is further enhanced by its focus on high-volume trading. Aerodrome has become a preferred choice for traders seeking efficient and cost-effective transactions, contributing to its robust liquidity pools. This high trading volume is beneficial as it reduces slippage and improves the overall trading experience for users.

Liquidity providers are drawn to Aerodrome because of its attractive fee-sharing model. By depositing assets into the platform's liquidity pools, users earn a share of the transaction fees generated, creating a steady income stream and incentivizing continued participation. This model has proven effective in attracting substantial liquidity to the platform.

Additionally, Aerodrome’s governance model, involving veAERO tokens, allows the community to influence the platform's monetary policy. This participatory approach ensures that token holders have a direct stake in the platform's governance and long-term success. The structured emission of AERO tokens, with periodic adjustments based on community votes, helps manage inflation and supports sustainable growth.

Overall, Aerodrome Finance exemplifies how modern DEXs can drive innovation within the decentralized finance (DeFi) sector. By combining efficient trading solutions with compelling reward structures and robust governance mechanisms, Aerodrome has become a central player in the evolving DeFi landscape.