How Does Velodrome V2 Work?
Velodrome V2 is the leading decentralized exchange on Optimism, combining features from Curve and Uniswap with a vote-escrow (ve(3,3)) tokenomics model. Users can swap tokens, provide liquidity, and lock VELO tokens for governance power and fee revenue. With ~$16M TVL, it is preparing to merge with Aerodrome (Base) to form a unified cross-chain DEX called Aero.
TVL
$14M
Sector
DEX
Risk Grade
B
Value Grade
C+
Core Mechanisms
4.1.1
Constant product AMM with both volatile (xy=k) and stable (Curve-style) pool types on Optimism
Dual pool types enable efficient swaps for both correlated and uncorrelated token pairs
5.1.3
Vote-escrow model (veVELO) where users lock VELO for up to 4 years to receive veNFTs with governance power and fee revenue
Based on Solidly/ve(3,3) design — lockers direct emissions to pools and earn trading fees from those pools
7.1.2
Gauge-weighted VELO emissions where veVELO holders vote to direct weekly rewards to specific liquidity pools
Initial 15M VELO/week with 1% weekly decay — gauge votes determine which pools receive farming rewards
2.1.2
Percentage-based swap fees distributed entirely to veVELO voters who directed emissions to that pool
Fee-to-voter model aligns incentives — voters earn fees from pools they support
2.2.4
Split revenue model where trading fees go to veVELO voters and emissions come from protocol supply
Creates a market for emission direction via bribe mechanisms
1.1.3
NovelDynamic emission schedule with anti-dilution rebase mechanism for veVELO lockers
ve(3,3) rebase mechanism partially compensates lockers for emission dilution — novel alignment design
How the Pieces Interact
Large veVELO holders can permanently capture emission allocation, directing rewards to their own pools and creating governance extractable value through bribery markets
Emissions attract mercenary capital to pools that may not have organic trading demand, resulting in wasted rewards and capital inefficiency
If liquid wrappers for veVELO emerge, they defeat the lock mechanism and make governance power tradeable, undermining alignment incentives
Rebase mechanism creates complexity — if rebase undercompensates, lockers face net dilution; if it overcompensates, it reduces incentives for new lockers
Bribe markets allow external protocols to buy emission direction cheaply, potentially directing rewards away from the most productive pools
What Could Go Wrong
- Vote-escrow governance (veVELO) is susceptible to bribery markets and governance capture by large lockers directing emissions to self-serving pools
- Upcoming merger with Aerodrome to form Aero introduces significant token migration risk and potential value dilution for VELO holders
- Weekly VELO emissions with 1% decay create persistent sell pressure that must be offset by trading fee revenue and bribe income
Governance Capture Through Bribery Markets
ModerateTrigger: A small number of large veVELO holders or bribe-funded protocols capture majority of emission votes, directing rewards to unproductive pools
- 1.Large veVELO holders or bribe protocols accumulate dominant voting power — Emission allocation becomes concentrated on a few pools regardless of organic trading demand
- 2.Productive pools lose emissions, LPs exit for better yields elsewhere — Trading liquidity for popular pairs deteriorates, increasing slippage
- 3.Traders migrate to competing DEXs with better execution — Trading volume and fee revenue decline significantly
- 4.Reduced fee revenue makes veVELO locking less attractive — New lockers stop entering, existing lockers don't re-lock after expiry
- 5.Flywheel reverses as fewer voters leads to more concentrated governance — Protocol enters governance death spiral with declining TVL and volume
Risk Profile at a Glance
Overall: B (26/100)
Lower score = safer