Velodrome Deep dive

    What is Optimism?

    Optimism is a side chain that allows Ethereum to run faster. It is a layer 2, similar to Polygon, that runs along the side of Ethereum. It can support all the same Dapps, and is perfectly compatible with each Dapp on the Ethereum network. Optimism reports that as of a year ago, they have saved users $10 million in gas fees across 100,000+ individual transactions.

    How does it work?

    The Optimism side chain allows multiple transactions to be put in a singular block on the Ethereum network. Optimism is considered a rollup- a rollup is where a layer 2 takes transactions that would typically be put directly to the main chain, and writes them to its own series of blocks. The optimistic rollup is said to take an entire week to upload their block to the Ethereum mainnet. A week is a long time for a block to be sitting in purgatory, but the rollup claims to handle a greater amount of transactions per second than the mainnet, which will increase speeds and lower transaction costs.

    What is Velodrome?

    Velodrome is an AMM on running on the Optimism side chain. It is building upon what was already in place at Solidity, and improving upon it by upgrading the mechanics behind its compensation methods. Solidity works well on Optimism, but liquidity providers are punished harshly in terms of the impermanent loss experienced when the tokens in a the pair change prices.

    Velodrome is also dedicated to offering support for their product post launch- something that Solidity never did. They are supported by a small fee on early transactions so the support team can be adequately compensated.

    Methodology: 8 Metrics in the dashboard

    1. Unique users vs. Total transactions
    2. Tokens swapped by TX volume
    3. Liquidity health
    4. Tokens swapped by volume in USD
    5. Velodrome price vs net activity
    6. Velodrome voting activity
    7. LP token activity
    8. Staking rewards
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    The charts above visualize the net flows of VELO, and the price of the coin over time

    • The net flows of the VELO coin were negative in the months that there was actually a net positive flow of tokens into the LP pools
    • This is contradictory to my initial belief of what the graph would look like before creating it
    • The net flows of the token in terms of swap volume do follow in tight correlation for the price chart of the token, which does remain low
    • The net flows are positive as of late, and that may be a sign of things to come for the protocol

    The graphs above give a breakdown of the swap volume in terms of amount in USD

    • Although USDC makes up just a 1/3 of all swap volume in terms of TX count, it accounts for nearly half in terms of USD
    • This means that many of the large transactions that are placed on the the OP network, are being placed while transacting USDC
    • Other than USDC and the native token VELO, all other coins have proportionally less transacted in USD than they do in pure TX volume
    • DAI makesup a much smaller amount of the USD equivielent than it does in TX volume- by over 40%
    • Native tokens and stablecoins still dominate the game- whether they’re native to the layer 1 or layer 2, they make up a massive percent of the volume in USD
    • USDC on its own accounts for nearly 50% of the volume in USD on Velodrome
      • This is not necessarily good nor bad
      • But would like to see some diversity on the network incase theres another UST-esque stable collapse
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    The graphs above represent the liquidity health of Velodrome

    • The amount deposited in Velodrome in USD is represented in blue, while the outflow is represented by the area in Orange
    • Inflows far outweighed the outflows- up until the end of July
    • However, since July August 1st, significantly more money has been leaving than coming
      • The largest example of the discrepancy came between August 9th and 15th, where a lot loss of $21 million left the system
    • The graph to the right depicts the breakdown of stable vs volatile pools, as labeled in the Flipside data
    • There are more than double the amount of volatile pools as there are stable pools
      • This should be looked at as a possible reason for the quick and massive flip in cashflows into vs out of Veldrome
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    The graphs above depict a breakdown of the tokens swapped on Velodrome

    • The most popular tokens swapped were USD, OP, WETH, VELO, and DAI
    • Stable swaps are fairly common, so it should come as no surprise that USDC is number 1 and DAI cracks the top 5
    • VELO and OP are native to the network, VELO to Velodrome, and OP to Optimism. WETH is a native token to the Ethereum network and used in many transactions
    • In the pie chart, the “other” slice represents the rest of the tokens that are transacted that are not in the top 5
    • Stable coins and native tokens make up 90% of all tokens transacted
    • USDC is the predominant stablecoin on almost every network

    The graph above depicts the total swap count and the number of unique users over time.

    • The orange line represents the number of unique users over time- as it shows linear growth over the last month
    • However, the number of unique users is quite small. It peaked out at 45, and by the August 14th, was down to 25
      • The long run does show constant growth over time
    • The blue line shows the total swap count over time. Linear growth is displayed, but it is incredibly volatile.
    • The two lines do more with close correlation
    • The last week of July showed immense growth, but it quickly regressed by the beginning of August. However, this graph can be better explained by the volatility chart below
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    The graph above depicts the number of mints and burns over time of the Velodrome LP token

    • Every day since its launch, there have been more LP tokens minted than burned
    • This is a positive sign for the overall health of the network
    • In its peak, there were 4-5x the number of mints compared to burns per day in mid-late July
    • Even recently, this trend remains true
    • The only severe dip in activity is August 5th, where both mints and burns fall drastically (while staying in proportion)
    • The number of both mints and burns increased proportionally and linearly over time since its inception
    • The mint and burn amounts have steadily decreased since mid July, but are still in great proportion
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    The graphs above depict the rewards claimed over time, in relation to the price of Velo, and the total rewards claimed by address

    • The amount in rewards claimed in USD has nearly a perfect correlation with the price of VELO
    • The price of VELO appears to be slightly amplified compared to the the amount claimed in USD, but they are very very close
      • This is likely because the amount available to be claimed, is a function of activity. Increased activity typically results in higher price, and vice versa
    • The top 3 addresses make up over 60% of all rewards claimed
      • This raises questions about the decentralized nature of the protocol

    What do the USDC flows tell us about the health of the network?

    • There are appears to be an inverse relationship between the net amount of USDC swapped, and the net amount swapped in USD
    • Typically when users are swapping USDC, they are doing it in a few, but massive swaps.
      • This is likely the case because users want to face minimal transactions costs. This also means that they have absolute faith in the transaction to succeed, and not get lost in crypto-space
    • Overwhelming faith in the chain is good- especially for Arbitrum. Given the long period of time (7 days) that it takes for this layer 2 to sync up with the original layer 1 (Main Ethereum chain)
    • Given that this is the big knock against using a layer 2, this is a good sign
    • However, the net flows in USD have been consistantly negative since the end of July- but that does line up with most of the cryptoverse the last few months

    Conclusions

    Based on the charts above, I have several takeaways regarding the future of the protocol

    1. The amount withdrawn from pools lately is concerning- especially given how well the market has performed in that timeframe

      • Ethereum is up roughly 10% in that time frame, yet money continues to flow out
      • However, this may be offset by the fact that the price of VELOW and the flows of the token have been net positive in that time
    2. The user base gives rational for concern

      • Although the total number of users and the number of unique users has seen linear growth, the number of both is remarkably small
      • This includes a mere 40 unique users publishing transactions in this AMM
    3. The lack of diversity in token swaps may be a problem

      1. Stable coins and native tokens represent 89% of the transactions within Velodrome
      2. This may pose a problem- such as DAI or USDC having a UST-esque collapse
    4. The number of locked vs. unlocked VELO favors the locked overall- but maybe not forever

      1. There is 15x more locked than unlocked VELO
      2. That number is quickly declining- since last week of July
    5. LP token activity over time looks promising

      1. There are consistently 4-6x more mints then there are burns
      2. This is a positive sign for the future, and liquidity is in surplus
      3. Even as other metrics have fallen in recent weeks, LP token minting remains proportionally larger than the burns
    6. Most of the rewards claimed in the Velodrome network are from 3 addresses- which isn’t great

      1. Having such few addresses claiming so much of the rewards speaks volumes about the lack of decentralization

      2. Decentralization is the primary value of what the blockchain offers- without it, we lose much of the value and lay a tight cap on the ceiling of the protocol in the long run

      3. The price of Velo holds a tight correlation to the amount claimed in rewards

        1. This makes sense, as rewards are typically a function of volume, which plays a massive role in the availability of potential rewards
    7. The net flows in USDC are a mixed sign

      1. While its positive to see active stablecoin volume on the L2, the volume is overwhelmingly flowing out of the protocol

      2. This isn’t outrageously bad as the entire market is in a similar position, and it is good to see people trusting the L2 even with extended sync times to the main chian



        Overall, there is a lot to like about Velodrome. The speed at which the network operates and the integration with Optimism and then the eventual integration with Ethereum are great. That being said, the protocol is quite small as of now, which makes it a risky investment. If you are a retail investor looking to purchase $VELO be aware that you would be 1 out of ~40 active/distinct users on the network. The lack of decentralization is concerning. Theres a big risk here in terms of investing- so buyer beware.