Before we get started, this is not a recommendation or endorsement to buy any token mentioned. DeFi Dad disclosed he currently holds VELO. Holding VELO is not necessary to act as a Velodrome LP.
Previously, we have covered a newer automated market-maker (AMM) and liquidity marketplace called Velodrome. Velodrome launched in June 2022 on the Ethereum L2 Optimism during the market contagion that followed the collapse of Terra and UST. Building off the foundational work of the short-lived Solidly protocol by Andre Cronje, Velodrome aims to provide a solution to bootstrap liquidity by aligning protocol emissions with fees generated, not just liquidity. Velodrome made a number of adjustments and improvements, including a built-in bribe function that allows anyone to incentivize voting for their preferred liquidity pool. Bribes are distributed only to voters on the incentivized pool proportionally to the votes cast.
Here’s a reminder of how the ve(3,3) tokenomics works:
- veVELO holders vote on which liquidity pools receive weekly VELO rewards, and pools earn in proportion to the voting power they accrue each week.
- The Velodrome LPs in these pools earn the VELO weekly emissions, based on how much liquidity they have in a pool, instead of the trading fees.
- Meanwhile, veVELO holders earn the trading fees generated by the pools they vote for in proportion to their voting power, as well as bribes paid to the pools they vote for.
Velodrome has two different types of pools: Volatile Pools for uncorrelated assets (ie ETH-DAI) vs Stable Pools for correlated assets (ie USDC-DAI or ETH-stETH) which offer a low-slippage AMM trading experience similar to Curve.
Putting aside Velodrome for a moment, a narrative that’s caught fire in crypto is about Liquid Staking Derivatives (aka LSDs). ETH LSDs have become a major interest among investors speculating on the value accrual of protocols that control such substantial amounts of staked ETH and earn a portion of the staking yield earned through the Proof-of-Stake network consensus.
As we approach the Ethereum network Shanghai Upgrade in March, all eyes are on the upcoming withdrawals enabled for ETH validators, including ETH LSD holders. Since the launch of the Beacon Chain on December 1, 2020, a major milestone preceding the Ethereum Merge in September 2022, all ETH deposited into validators in 32-ETH increments has essentially been stuck. Liquid staking protocols like Lido have been instrumental in attracting more ETH to be deposited to validators, but it’s been a one-way street, a blackhole of liquidity. ETH goes in, but doesn’t come out. As a result, we’ve seen immense network effects take hold for stETH by Lido, the most dominant form of liquid staked ETH while other liquid staking protocols have grown substantially but never quite caught up. Check out the 6.6M ETH staked on Ethereum in just LSDs below, with 73.84% in stETH by Lido, 15.8% cbETH by Coinbase, and 5.49% rETH by Rocketpool.
Source: ETH Liquid Staking Chart by DeFiLlama
One prediction discussed among ETH holders is that once ETH withdrawals are enabled in March, we could see an exit of ETH liquidity from Lido stETH and a shuffle to other protocols with higher net yield and lesser fees. One of those LSD protocols looking to fiercely compete with Lido as a more decentralized liquid…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
