Aerodrome stands out as a unique decentralized exchange (DEX) on Base Layer 2. Since its debut, it has consistently ranked among the most widely used applications on the chain. The protocol currently hosts $1.3 billion in total value locked (TVL), accounting for 50% of all deposits in Base smart contracts. Its native token, AERO, has been one of the top-performing DeFi assets this fall, surging 125% since early September.
Before its rapid price appreciation began, Aerodrome’s TVL hovered around $500 million. That stability had been a major headwind for AERO, which traded 80% below its all-time high—until the bull run in September sparked a rebound.
This article breaks down how Aerodrome works and examines the risks and opportunities tied to this leading decentralized exchange.
How Aerodrome Operates
Like many decentralized exchanges, Aerodrome uses an automated market maker (AMM) model. This allows users to swap hundreds of cryptocurrencies with minimal slippage and earn fees by providing liquidity.
As a “MetaDEX,” Aerodrome distinguishes itself through its tokenomics. It combines the liquidity mechanisms of Curve and Convex with the passive market-making techniques pioneered by Uniswap. In practice, this creates a veTokenomics-based AMM on Base that empowers token holders to direct emissions toward specific liquidity pools via voting.
Unlike Curve, which distributes only 50% of trading fees to veCRV holders, Aerodrome returns 100% of protocol fees to veAERO participants. Those who lock more tokens gain greater voting power and earn higher rewards. Although liquidity providers do not earn trading fees, they receive inflationary AERO emissions, which they can hold, sell, or lock for more voting power.
Through Aerodrome’s incentive marketplace, users can lock crypto tokens as rewards for veAERO voters who allocate emissions to designated pools. This creates a robust liquidity bribery market and offers an additional revenue stream for veAERO participants.
In Epoch 60 (the week ending October 23, 2024), Aerodrome recorded its sixth-highest total rewards and second-highest trading volume. With $3.63 billion in volume, veAERO lockers earned $5.85 million in fees and incentives.
Key Investment Factors
Aerodrome’s tokenomics encourage long-term-oriented holders to lock their tokens, which helps offset AERO’s high inflation rate—currently 37% annually.
At present, 50% of the AERO supply is locked with an average lock time of 3.86 years. This limited availability creates a supply-demand imbalance, making the token more prone to upward price moves even with modest buying pressure.
The rise in Aerodrome’s market cap is well justified. Increased distribution value raises the total yield for liquidity providers, attracting new deposits and improving the protocol’s bull market fundamentals. This, in turn, boosts investor willingness to buy AERO.
That said, while veTokenomics can successfully drive token prices and deposits higher, it also introduces inherent reflexivity. The 80% drop in AERO amid stable TVL last April clearly shows that when investor demand shrinks, the market struggles to absorb highly inflationary tokens.
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Frequently Asked Questions
What is Aerodrome?
Aerodrome is a leading decentralized exchange on Base Layer 2 that uses an automated market maker model and veTokenomics to reward liquidity providers and token holders.
How do veAERO lockers earn rewards?
veAERO lockers receive 100% of the trading fees generated on Aerodrome. They can also earn extra incentives by participating in the protocol’s liquidity bribery system.
What are the risks of investing in AERO?
The token has a high inflation rate, and its price is sensitive to changes in investor sentiment. Sharp declines can occur even when Total Value Locked remains stable.
Can I provide liquidity on Aerodrome?
Yes, users can become liquidity providers and earn AERO emissions. However, they do not receive a share of trading fees directly.
How does Aerodrome compare to Uniswap?
Aerodrome incorporates voting incentives and fee redistribution inspired by Curve and Convex, offering a different reward structure compared to Uniswap’s classic model.
Is Aerodrome available only on Base?
Yes, Aerodrome is native to the Base blockchain and leverages its scaling benefits for fast and low-cost transactions.