Aerodrome Finance: the future of the DeFi sector or an AMM protocol that provides nothing new?
More and more decentralized crypto exchanges are actively emerging in the DeFi sector, and to compete, new features or mechanisms need to be developed for them. That's precisely what the team at Aerodrome Finance, one of the newest DEX exchanges on the decentralized finance market, has done.
What is Aerodrome Finance?
Aerodrome Finance is a next-generation AMM protocol designed initially as the central liquidity hub (hub) of the Layer 2 blockchain protocol Base.
The Aerodrome Finance protocol was launched in August 2023. According to the DeFi Llama service for October 2024, Aerodrome Finance is the leading DeFi protocol in the Base ecosystem regarding the number of blocked assets (TVL), which exceeds $1.29 billion. The Uniswap exchange has the exact figure in this ecosystem of only $220 million, although it is in second place after Aerodrome Finance.
How does Aerodrome Finance work?
To understand the Aerodrome Finance DEX exchange, it is necessary to understand the principles of AMM protocols.
AMM or Automated Market Maker, also known as Decentralized Exchange (DEX), is a liquidity protocol that calculates the price of traded assets based on a special algorithm rather than an order book, as is the case with classical exchanges. Well-known examples of such protocols are DEX exchanges:
Besides such advantages as swaps (token exchanges) with low slippage, income from trading commissions, and the possibility of any user becoming a liquidity provider, Aerodrome Finance has one key feature. Unlike the abovementioned platforms, the Aerodrome Finance DEX protocol uses its unique liquidity mechanism based on native AERO tokens.
AERO token
AERO is a native token of Aerodrome Finance's DEX protocol used to incentivize traders and liquidity providers in the Base ecosystem. Notably, AERO is both a utility and governance token. AERO holders can lock their tokens for a week to a month and receive non-fungible tokens (NFTs) called veAERO in exchange.
The veAERO NFT tokens give holders the right to participate in managing Aerodrome Finance's DEX platform. One of the decisions in which veAERO token holders participate concerns determining reward levels for DEX protocol liquidity providers who contribute digital assets to Aerodrome Finance pools.
Moreover, veAERO holders participating in the voting are rewarded with 100% of the commissions that come into a specific pool from trading activity in the DEX protocol. This mechanism not only allows attracting liquidity providers but also encourages them to become active participants in the ecosystem, including for protocol management.
Aerodrome Finance outlook
As of October 2024, the Aerodrome Finance team has not yet presented a roadmap for developing its DEX protocol, so it is unknown what changes and improvements are planned for its operation.
Nevertheless, it can be observed how fast Aerodrome Finance's TVL grows. For example, at the beginning of 2024, the value of assets blocked in Aerodrome Finance amounted to $438 million, which means that by October of the same year, this figure had already grown by more than 2.5 times.
In addition, Aerodrome Finance is the leader among all DeFi protocols in the Base ecosystem, outperforming even well-known protocols such as Uniswap, Aave, SushiSwap, and others by TVL. This already says a lot about the prospects of the project because, thanks to its incentive mechanism, the Aerodrome Finance protocol attracts liquidity more actively than any other.