Aerodrome: Base’s Leading DEX

Key Takeaways

What Is Aerodrome

Aerodrome is a decentralised exchange, meaning it lets people swap crypto tokens directly with each other without a middleman holding their funds. It currently runs on the Base blockchain, and has become the dominant place to trade tokens there since launching in 2023.

Unlike a traditional exchange that matches buyers with sellers, Aerodrome uses a model called an automated market maker (AMM). Instead of an order book, trades happen against pools of tokens supplied by users. Anyone can deposit two tokens into a pool and earn a share of the trading fees generated whenever someone swaps between them.

This is the same basic model used by other DEXs like Uniswap. What sets Aerodrome apart is how it rewards the people who supply liquidity to these pools, and how tightly that reward system is tied to the AERO token itself.

How the Token Model Works

AERO holders can lock their tokens to receive veAERO, a voting token that lets them decide which liquidity pools receive newly created AERO rewards each week. In return for voting, holders collect all the revenue generated by the pools they support, including trading fees and payments from projects trying to attract votes toward their pool.

This creates a cycle. Projects that want deep liquidity on Aerodrome pay veAERO holders to vote for their pools. Voters earn income for participating, while liquidity providers receive AERO rewards for supplying assets to the pools.

Those rewards are funded by newly created AERO tokens. This helps keep liquidity available for traders, but it also means the total supply of AERO can increase over time.

Aerodrome at a Glance

The platform’s scale and usage can be understood through two simple measures: total value locked and trading volume.

Total value locked, usually abbreviated as TVL, is the value of crypto assets that users have deposited into Aerodrome’s trading pools. Those assets provide the liquidity needed for people to swap tokens, so TVL helps show the liquidity available on the platform. The chart below shows how the amount of liquidity held in Aerodrome’s trading pools has changed over time

Aerodrome total value locked (TVL) ( Source )

Trading volume is the total value of tokens swapped through an exchange. Looking at volume over a longer period can help show how actively a platform has been used across different market conditions. The chart below shows Aerodrome’s trading-volume history since launch.

Aerodrome decentralised-exchange trading volume.( Source )

What's Changing: The Aero Upgrade

The team behind Aerodrome and its sister protocol Velodrome has spent significant time developing a major technical upgrade called MetaDEX03. The goal is to reduce costs and improve trading efficiency for anyone using the exchange.

Alongside this upgrade, Aerodrome plans to merge with Velodrome and include a name rebrand as "Aero." Instead of only operating on Base, the new version will launch across several blockchains, including Ethereum mainnet. This would mark the first time Aerodrome expands beyond its current home network.

As part of the transition, existing AERO holders are expected to migrate into the new unified Aero system, with current Aerodrome AERO positions planned to convert one-for-one. A new voting token called sAERO will sit alongside it.

Risks and Considerations

One feature of Aerodrome’s token model to understand is ongoing token issuance. The protocol currently issues new AERO tokens at an annualised rate of roughly 11% to keep liquidity providers compensated. This ongoing issuance means the total supply of AERO can increase over time, which is an important feature of the token model.

Like other decentralised exchanges, Aerodrome carries technology and security risks that could potentially affect users. It relies on smart contracts, ie code that automatically processes trades and holds assets in pools. If that code has a flaw or is exploited, users could have difficulty accessing funds or lose assets in an affected pool.

Competition is also intensifying. Traders and liquidity providers can move to other exchanges or blockchains that offer lower costs, deeper liquidity, or better rewards. Aerodrome currently focuses on spot trading, meaning direct token swaps rather than more complex products like futures.

Conclusion

Aerodrome’s level of use is closely linked to activity on Base and to how its planned expansion develops. Activity on the exchange is closely connected to the AERO reward and voting system described above.

The planned expansion to Ethereum and other networks is a key upcoming development. The results will depend on whether Aero can attract trading activity across additional networks.