Velocimeter Spotlight

Velocimeter Spotlight

Published 26 August, 2024

Velocimeter has been awarded a grant from IOTA and is one of the 25 projects funded by the IOTA Foundation. In total, the IOTA Foundation is distributing $2.74 million to support the development of these innovative projects within the Web3 ecosystem.

Velocimeter

Velocimeter is a decentralized exchange (DEX) inspired by the Solidly model, initially forked from Velodrome v1 contracts. It leverages the ve(3.3) model to provide rewards to voters and liquidity providers (LPs) through protocol emissions, incentives, and trading fees. The platform aims to create a self-sustaining liquidity flywheel, ensuring continuous and efficient liquidity provision across multiple networks.

The ve(3, 3) model was born with the goal to achieve the perfect game theoretical equilibrium with respect to the incentive alignment of both long-term committed token holders and short-term speculators. As a second order effect it offers an alternative to the problem of valueless governance tokens.

What can users do on Velocimeter:

  • Swap: Exchange tokens directly on the platform.
  • Liquidity Pools: Provide liquidity by pairing tokens and stake the LP tokens to earn rewards.
  • Vesting NFTs: Lock tokens to earn rewards and governance rights, with each locked position represented as an NFT.
  • Create Boosted veNFT: Market buy tokens, match them with existing tokens, and lock them into new max locked NFTs.
  • Vote: Use NFTs to vote for pools and earn incentives and trading fees.
  • Rewards: Claim rewards through various methods provided by the platform.
  • Redeem: Redeem options include converting rewards into different forms such as tokens, LP tokens, or locked tokens.
  • Bribes: Vote for selected pool rewards distribution or create bribes to encourage others to vote.

This idea was born as an alternative to previous “ve” token models,  where TVL was being favored over volume, and it should not be like that, since volume drives liquidity, which accumulates more fees. To solve that problem,  Velocimeter’s purpose is to achieve that the pool where you vote is where you earn the most protocol fees. This solves a clear problem observed in other DEXs like Curve where token lockers would earn protocol fees independently of which pool they vote for, resulting in a misalignment of incentives.

Innovations and Value Proposition by Velocimeter

Key features of Velocimeter include:

  1. Option Token Emissions:
    • Velocimeter uses option tokens (oTokens) as a reward mechanism instead of directly emitting the native token. Users can exercise their oTokens in three ways: converting to liquid tokens, converting to LP tokens with a lock, or converting to veNFTs. Each option comes with varying discounts, incentivizing long-term participation and providing flexibility to users.
    • Exercise to Liquid Tokens: Converts oTokens to liquid VM tokens at the highest cost.
    • Exercise to LP with Lock: Converts oTokens to LP tokens with a lock period, offering a moderate discount.
    • Exercise to veNFT: Converts oTokens to veNFTs, providing the highest discount, encouraging long-term holding and participation.
  2. Proxy Gauge System:
    • This system automates the emission distribution to the Master Booster, enabling veNFT holders to influence the buying of VM tokens. This ensures a streamlined process for managing emissions and incentives.
  3. Fee Structures:
    • Velocimeter allows adjustable fees on a pool-by-pool basis. This flexibility helps optimize rewards for liquidity providers by adjusting fees according to specific pool dynamics, ensuring efficient liquidity management and reducing the impact of high-volume pools on the overall system​.
  4. AutoBribe Contracts:
    • These contracts enable projects to fund bribes for multiple weeks, enhancing liquidity incentives. Projects can incentivize veNFT holders to vote for their liquidity pools, ensuring continuous and strategic liquidity provision.
  5. Maxxing Gauge:
    • The Maxxing Gauge collects revenue from exercised oTokens and distributes it to LP providers. This mechanism rewards users who provide liquidity by sharing a portion of the exercise costs, thus aligning incentives and enhancing liquidity depth.
  6. MintTank:
    • The MintTank holds pre-minted tokens that can only be used to mint veNFTs. This ensures a controlled release of new tokens, maintaining the value and scarcity of veNFTs while supporting ecosystem growth.
  7. Emissions Scaling:
    • Velocimeter has the capability to double or halve emissions each epoch based on demand. This dynamic adjustment helps manage supply and incentivize participation according to market conditions​.
  8. LP-backed veNFTs:
    • Ensuring that veNFTs have actual skin in the game by backing them with liquidity pool tokens, aligning the interests of liquidity providers and voters.
  9. Shorter Lock Times:
    • Offering more flexible and shorter lock durations for veLPs, enhancing user convenience and participation.
  10. Auto ReLock:
    • Allowing veLP holders to maintain their voting power by automatically relocking their positions, ensuring sustained engagement and governance participation.
  11. Permissionless Gauges:
    • Allowing anyone to create gauges under specific conditions to foster decentralization and encourage broader participation.

Problems the Protocol is Solving

Velocimeter addresses several critical issues in the DeFi space:

  1. Liquidity and Incentivization: By using oTokens, Velocimeter ensures that liquidity providers are incentivized efficiently while the protocol accumulates a cash reserve, creating a sustainable liquidity model.
  2. Complexity in Yield Farming: Simplified options and automated mechanisms reduce the complexity for users, making yield farming more accessible.
  3. Security and Flexibility: The introduction of features like LP-backed veNFTs and the ability to pause individual pools enhance security and provide greater flexibility in managing liquidity.
  4. Decentralized Governance: Permissionless gauges and community-driven voting ensure that the protocol remains decentralized and responsive to user needs.

Target Users

Velocimeter is designed to cater to a wide range of users in the DeFi ecosystem:

  • Liquidity Providers: Users who provide liquidity to earn rewards and fees.
  • Yield Farmers: Individuals looking to maximize their returns through sophisticated yield farming strategies.
  • DeFi Enthusiasts: Users who seek innovative and decentralized financial products.
  • Governance Participants: Community members interested in participating in protocol governance and decision-making.
  • Cross-Chain Traders: Users who operate across multiple blockchain networks and seek efficient liquidity solutions.

Velocimeter v4

Velocimeter V4 launching on the IOTA EVM is now in the final stages of development and undergoing an audit on Sherlock.

One of the most notable updates is the introduction of LP-backed veNFTs, which align the interests of liquidity providers and voters by requiring locked liquidity pool tokens. This ensures that veNFT holders have a vested interest in the platform’s success. Additionally, V4 offers much shorter lock times and an auto-relock feature, allowing users to maintain their voting power by automatically extending their lock periods with each voting action.

Other major innovations in V4 include the simplification of oToken exercise options, now reduced to two choices to streamline user interaction. Emission scaling has been restructured to grow with the number of active gauges, ensuring dynamic adjustment to market conditions. The introduction of permissionless gauges fosters decentralization, enabling anyone to create gauges under specific conditions. VMCoupons, a new mechanism for distributing option tokens that can be exercised into veLPs, aim to boost community participation. Additionally, the ability to split NFTs without destroying the original, gaugeless LPs earning direct fees, and single pool pausing for enhanced security further elevate Velocimeter’s capabilities.

Sector Outlook

Velocimeter operates within the ve(3,3) DEX sector, a niche in DeFi that leverages advanced tokenomics to optimize liquidity provision, governance, and participant incentives. This sector combines vote escrow (ve) mechanisms with Nash Equilibrium principles to create a balanced and sustainable ecosystem.

Velocimeter uses the ve(3,3) model, a tokenomics design introduced by Andre Cronje. This model combines “vote escrow” (ve) and the Nash Equilibrium concept (3,3) to optimize incentives for participants. In ve(3,3), tokens can be locked to receive voting power and protocol fees while adjusting emissions based on the percentage of tokens locked. This approach encourages deeper liquidity, fairer rewards, and balanced ecosystem participation, enhancing both governance and profitability for token holders and liquidity providers.

The ve(3,3) DEX sector is rapidly growing due to several key factors:

  • Innovative Incentive Structures: The ve(3,3) model aligns the interests of liquidity providers, governance participants, and the protocol, ensuring sustainable growth and deep liquidity.
  • Enhanced Governance: Token holders can influence protocol decisions, such as emission schedules and pool incentives, fostering a community-driven approach.
  • Liquidity Optimization: By incentivizing token locking and reducing circulating supply, ve(3,3) DEXs maintain robust liquidity and minimize volatility.

Similar dApps in the Sector: Several key platforms highlight the importance and growth of the ve(3,3) DEX sector, similar to Velocimeter.

In the ve(3,3) DEX sector, platforms like Velodrome Finance, Aerodrome Finance, Equalizer, and THENA focus on optimizing liquidity provision through their ve tokenomics.

Velodrome Finance, combining features from Curve, Convex, and Uniswap, serves as the central liquidity hub for the Optimism network. It utilizes NFTs for voting on token emissions and receiving protocol-generated incentives and fees​.

Aerodrome Finance, a fork of Velodrome V2, acts as Base’s central liquidity hub. Launched on August, 2023, Aerodrome inherits the latest features from Velodrome V2, combining a powerful liquidity incentive engine and a vote-lock governance model. This setup has enabled Aerodrome to quickly gain significant TVL and become the largest project on the Base network.

THENA operates on the BNB Chain and opBNB, offering a comprehensive trading hub with a spot DEX, perpetuals DEX, and gamified trading competitions. THENA is powered by a self-optimizing ve(3,3) model, which serves BNB Chain projects with their liquidity needs. It supports trading hundreds of spot and perpetual pairs with up to 60x leverage in a permissionless and non-custodial manner.

Equalizer is a DEX on the Fantom network that adapts Andre Cronje’s Solidly model. It uses a perpetual model to balance rewards for token holders and liquidity providers, with fee structures designed to support low slippage trades. Equalizer employs a vote-escrowed model to drive liquidity incentives towards the highest volume pairs.

Business Model

Note: The exact fee percentages and amounts for different actions and transactions are not specified in the project’s documentation.

How the Protocol Makes Money

Velocimeter generates revenue through various fees associated with its operations. These fees are strategically designed to ensure the sustainability of the protocol while incentivizing user participation and maintaining a healthy ecosystem. The key sources of revenue include:

  1. Option Token Exercise Fees: When users exercise their oTokens (option tokens) to convert them into liquid VM tokens, liquidity pool tokens (LP), or veNFTs, they pay a fee. This fee is calculated based on the Time-Weighted Average Price (TWAP) of the Velocimeter token and the discount rate.
  2. Trading Fees: Fees collected from trades executed on the Velocimeter DEX.
  3. Bribes and Incentives: Fees and bribes collected from veNFT holders who vote on specific liquidity pools to direct emissions towards them.
  4. Gauge Creation Fees: Fees charged for creating new gauges, which are used to direct emissions to specific liquidity pairs.

What Fees are Charged and How They are Distributed

Velocimeter’s fee structure ensures that various stakeholders in the ecosystem are adequately rewarded while contributing to the protocol’s treasury and overall sustainability.

  1. Option Token Exercise Fees:
    • Liquid Tokens Exercise: Users pay the highest fee when converting oTokens directly into liquid VM tokens.
    • LP Exercise: Users pay a lower fee when converting oTokens into LP tokens with a lock period.
    • veNFT Exercise: Users pay the least fee when converting oTokens into veNFTs.
    • Distribution: These fees are redistributed to the treasury, Maxxing Gauge LP depositors, bribes, and the Master Booster.
  2. Trading Fees:
    • Collected from every trade on the DEX.
    • Distribution: A portion goes to liquidity providers as rewards, while another portion is directed to the treasury.
  3. Bribes and Incentives:
    • veNFT holders who vote on specific pools may receive bribes and incentives.
    • Distribution: Fees collected from bribes are used to incentivize liquidity providers and veNFT voters.
  4. Gauge Creation Fees:
    • Fees are charged for creating new gauges.
    • Distribution: These fees are directed to the protocol treasury to fund further development and operations.

Fee Distribution Mechanism

Velocimeter’s fee structure ensures that various stakeholders in the ecosystem are adequately rewarded while contributing to the protocol’s treasury and overall sustainability. The distribution of fees is designed to ensure the protocol remains sustainable and beneficial to its users. Here is how the fees are allocated:

  • Treasury: The collected fees (option exercise fees, trading fees, bribes, and gauge creation fees) are directed to the protocol’s treasury. The treasury funds are used for buybacks, burns, development, and other operational expenses. The Treasury receives 5% of the total revenue directly.
  • Maxxing Gauge LP Depositors: The Flow Maxxing Gauge hosts Velocimeter Token LP with staking and locking capabilities. When users exercise their oToken to LP, they build their LPs and stake them into the Flow Maxxing Gauge. This allows users to earn more rewards, including a portion of the exercise cost paid by other users. This revenue sharing mechanism allows users to get paid by those who sell the reward token to the LP. The Maxxing Gauge receives 70% of the total revenue, of which 72% is used to buy VM for the Master Booster, and the remaining 28% is sent back to the Treasury.
  • Master Booster: This contract combines various boosting strategies, including boosting veNFT creation, protocol incentives, and LP creation through staking into the gauge. Additionally, the Exercise Sortoor receives 30% of the total revenue, which is used to buy VM and allocate it to the Master Booster.
  • veNFT Holders: veNFT holders receive rewards based on their voting power, incentivizing active participation in governance.

Tokenomics

Why the Protocol Needs a Token

The primary use case of Velocimeter tokens (VM) is to incentivize liquidity provision and participation in governance. By distributing these tokens as rewards and incorporating them into the governance process, Velocimeter ensures that participants are actively involved in the ecosystem’s growth and stability. Additionally, the ability to create liquidity pools and vote on gauge allocations allows users to directly influence the protocol’s operations, making the system more decentralized and community-driven. Velocimeter is live on multiple chains, including Mantle ($MVM), Base ($BVM), Fantom ($FVM), and Canto ($CVM), each using its specific VM tokens.

Velocimeter requires a native token to incentivize participation, facilitate governance, and ensure the sustainability of its ecosystem. The tokens serve multiple functions within the protocol, aligning the interests of liquidity providers, voters, and the community while ensuring efficient operation and growth of the platform.

What the Token is Used For

  1. Incentives for Liquidity Providers (LPs):
    • Tokens are distributed as rewards to LPs for providing liquidity, thus ensuring sufficient liquidity in the DEX.
  2. Option Tokens (oTokens): Used as reward tokens, allowing LPs to exercise options for liquid tokens, LP tokens, or veNFTs, offering flexibility and strategic benefits.
  3. Governance:
    • veNFTs and veLPs: Tokens locked into veNFTs or veLPs grant voting power, enabling holders to participate in protocol governance. This includes voting on gauge allocations, emission schedules, and other critical decisions.
    • VMCoupons: Distributed as incentives, these can be exercised into veLPs, promoting active participation in governance and long-term commitment to the protocol.
  4. Staking and Rewards:
    • Tokens can be staked to earn additional rewards, promoting long-term holding and reducing circulating supply.
    • Maxxing Gauge: Collects revenue from oTokens and redistributes it to LP providers, enhancing the incentive structure.
  5. Revenue Sharing:
    • Exercise Fees: Revenue generated from oToken exercises is shared among LPs, the treasury, and other stakeholders, creating a sustainable income model.
    • AutoBribe Contracts: Enable projects to fund bribes for multiple weeks, ensuring continuous incentive alignment.

Total Supply and Distribution

The total initial supply of Velocimeter tokens varies by chain, with specific allocations to ensure balanced distribution and incentivization:

  1. Initial Supply:
    • Fantom & Base: 6,000,000 tokens
    • Mantle: 2,550,000 tokens (with unclaimed tokens burned, potentially reducing supply significantly)
  2. Distribution Breakdown:
    • Team & Protocol: 412,500 tokens allocated for each.
    • Early Campaigns: 500,000 oTokens distributed through the veBOOSTER campaign.
    • Public Farming: Remaining tokens available for farming, with any unclaimed tokens burned to reduce supply and enhance scarcity.
  3. Chain-Specific Tokens:
    • Fantom: $FVM
    • Base: $BVM
    • Canto: $CVM
    • Mantle: $MVM
  4. Emission Adjustments:
    • Emissions can be doubled or halved each epoch based on protocol needs, ensuring flexible and responsive supply management.
  5. Factory Arrays: Allow for new innovations without altering current deployments, ensuring ongoing adaptability.

Risks & Security

Audits

Velocimeter is currently being audited through Sherlock with a reward pool of 110,000 $USDC. The audit focuses on the smart contracts, particularly the new features introduced in Velocimeter V4, such as ve(3,3) DEX with veLP, permissionless gauges, and an adaptive emission schedule. The audit runs from July 1, 2024, to July 25, 2024.

Potential Risks

  1. Governance Manipulation:
    • For All Users: The ve(3,3) model can be vulnerable to governance manipulation if a few entities acquire a significant portion of veTokens. This centralizes voting power and can lead to decisions that may not benefit the broader community. Ensuring a decentralized distribution of voting power is crucial to mitigating this risk​​.
  2. Token Inflation and Dilution:
    • For All Users: Continuous token emissions can lead to inflation, diluting the value of existing tokens. Protocols must balance reward mechanisms with measures to control inflation, such as buybacks and burns, to sustain token value​.
  3. Smart Contract Risks:
    • For All Users: Despite thorough audits, smart contracts can still harbor undiscovered vulnerabilities. Continuous monitoring and regular updates are essential to maintaining security. Users should also be aware of the risks inherent in interacting with complex DeFi protocols​​.
  4. Liquidity Risk:
    • For Liquidity Providers: There can be periods of low liquidity, which can affect the execution of trades and the stability of the protocol. Ensuring adequate incentives for liquidity providers and having mechanisms to handle low liquidity scenarios are essential​​.
  5. Economic Exploits:
    • For All Users: The ve(3,3) model could be susceptible to economic exploits, such as Sybil attacks or vote-buying, where bad actors manipulate the system for unfair advantages.

Team

The Velocimeter team maintains a level of anonymity, with certain members being fully anonymous while others are partially anonymous. To receive the IOTA EVM grant, the team completed a KYC process ensuring that key individuals were vetted.

Project Investors

Velocimeter does not have any investors.

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