[Serenity Premium] Velodrome Finance and Other Solidly Forks [Initial Review Jan 2023]

Velodrome Finance is an innovative DEX on the Optimism chain. It's an improved fork of Solidly, a protocol launched on the Fantom network by Andre Cronje. Solidly is a combination of Uniswap V2 and Curve's ve- incentive scheme; and Velodrome has modified the parameters of Solidly to make the DEX more logical. The team behind Velodrome Finance previously launched veDAO, an initiative incubated by Information Token. veDAO was one of the earliest projects that were involved in the liquidity providing of Solidly during its launch period.

The Strategy in this Article

This strategy is providing liquidity into the stablecoin pairs in Velodrome. There are many choices of stablecoin pairs on Velodrome to start with; and there are other Solidly forks which have stablecoin pairs as well. For the purpose of this strategy paper, we are using the USDC-sUSD pair.

Current yield: 12.8% (27 Jan 2023)

Our risk assessment: Medium

Our yield projection based on this week's Benchmark Yield: 9.7%

The Concept and How the Protocol Works

Overview

Velodrome is a DEX, functionally similar to Uniswap V2. It allows pools of 2 tokens. Liquidity providers provide the tokens according to the pool ratio, and traders exchange tokens against the pool.

Type of Pools

There are two types of pools in Velodrome, stable pools and variable pools.

1. Stable Pools

Stable pools are designed for assets which have little to no volatility. This means that the formula used for pricing the assets allows for low slippage even on large traded volumes.

x³y + y³x ≥ k

Therefore, the stable pool can tolerate a large imbalance of the two tokens in the pool without affecting much of the price.

2. Variable Pools

Variable pools are designed for assets with high price volatility. These pools use a generic AMM formula.

x × y ≥ k

Variable pools are not different from Uniswap V2.

Fees, Incentives and Distribution

The trading fees for both liquidity pool types are 0.02%, and can be adjusted for up to 0.05%. The trading fee goes to the voters, and NOT the liquidity providers.

Invented by Curve Finance, platform tokens CRV are emitted steadily to liquidity providers as incentives. Holders of staked CRV vote to decide which liquidity pool receives how many CRV incentives, on a weekly basis. Based on this mechanism, third-party protocols (knows as CRV bribing) were created to allow anyone to provide additional incentives to encourage the votes on a particular pool.

Solidly integrated the above voted platform incentives allocation (known as ve- structure) and bribing features into one protocol. This was inherited by Velodrome as well as other Solidly forks. In Velodrome, the official UI has a page for staking platform token VELO and voting; and it also has a page for bribing, allowing anyone to provide additional incentives to attracts votes to desire pools.

The above fees and incentives are distributed as follows: