Aero Dynamics: The Economics of Ethereum’s Unified Liquidity Layer

The Past

Aerodrome and Velodrome, both built on the MetaDEX02 model from Dromos Labs, proved that exchanges that put token holders and liquidity providers first win. Together, these protocols have processed $342 billion in trading volume, distributed over $1.3 billion in onchain value to active participants, and captured a leading market share of volume on nearly every chain where they are deployed.

These two protocols have weathered years of changing market conditions and have emerged as battle-hardened category leaders. Aerodrome recently crossed the threshold of earning more than $1 of revenue per $1 of emissions, completely offsetting dilution while maintaining market dominance.

Soon, Aerodrome and Velodrome will come together as Aero, the unified liquidity layer for all of Ethereum.

The Future

While most decentralized exchanges fragment value across isolated chains, distinct treasuries, and disjointed governance structures, Aero will consolidate it.

MetaDEX03, the DEX OS that Aero will be built on top of, carries forward everything that worked in MetaDEX02 and introduces evolved economics designed to scale MetaDEX02’s advantages over its competitors even further.

This piece will build on our November presentation, more fully revealing Aero and the economic system behind it. It will also fill in some key information about the launch that users want to know.

First, we will cover the shift from epoch voting to Predictive Allocation in detail. Then, we will provide some quicker updates on a few other topics—the AERO Fed, the REV Engine, and the Momentum Fund—in advance of more detailed deep dives to come. All of these features will be highlighted in a unified economic framework that will be released after these deep dives.

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Predictive Allocation

Background

When decentralized exchanges debuted, they were simple self-organizing marketplaces. Liquidity Providers deposited assets and earned fees. Although this enabled a whole new level of permissionless, passive market formation, the design could be fragile and reflexive.

Coordinated marketplaces like Velodrome and Aerodrome solved major issues inherent to legacy decentralized exchange design by introducing a new stakeholder group: the token operator. Token operators vote each week to direct the following week’s liquidity rewards. For this service, they earn protocol revenue that has accumulated from those pools that they vote for. This creates a steadier stream of rewards for LPs and creates the conditions for powerful liquidity bootstrapping for emergent tokens without established markets.

Although a step change forward from past systems, incentivizing people to allocate resources based on a pool’s past performance, the weekly voting system created two limitations: it can be slow to respond to emerging opportunities, and it can sometimes stream rewards to pools that are no longer productive by the time a new week begins.

MetaDEX03

In November, we announced that MetaDEX03 would solve both of these issues with the AER Engine’s gauge caps and dynamic emissions.

First: gauge caps would limit the amount of AERO a pool could receive, based on market activity. In doing so, they function as a security feature for the DEX. More specifically, if the value of emissions exceeds the value of fees generated by a pool above a set multiplier, gauge caps can capture the overage and burn it, reducing long-term inflation and extractive farming. The multiplier limit can be set flexibly for different pools based on the liquidity incentives required to optimize for competitive dynamics.

Second: dynamic emissions would flexibly adjust the emissions rate to more precisely align with the ebb and flow of trading activity during the week, surging when activity increased, and reducing emissions during slower trading periods.

As development on dynamic emissions progressed, a more novel and exciting way to accomplish the same goals emerged. The motivating logic was simple: why find truth via one immutable model when we could build a market that finds truth by incentivizing thousands of models to compete?

This new path would allow us to keep smart contract logic simple, serving as the foundation for a future-proof platform powered by the foresight of sAERO holders, an asset unique to Aero. This change would also allow Aero to maintain dominance as the agentic economy grows, and onchain actions become faster, cheaper, and more automated.

Predictive Allocation

This was the beginning of what would become a new onchain primitive: Predictive Allocation, a decentralized mechanism for the concurrent, continuous, and cross-chain allocation of rewards and distribution of revenue. Where token operators are fully aligned with the protocol not just because they receive a share of 100% of protocol revenue, but because they are rewarded more for driving the protocol’s growth.

With Predictive Allocation, instead of token operators voting weekly to direct the following week’s AERO rewards, they will live-allocate rewards to pools in real time. Then, instead of receiving a lump-sum distribution of accumulated revenue, a token operator’s share will stream to them live. Revenue is distributed as quickly as it accrues. And they’ll be making allocations more often.

Where the weekly voting model incentivizes voters based upon a single backward-looking signal—accrued revenue—Predictive Allocation creates a live market where every token operator, whether an individual, a fund, or an autonomous agent, brings their own model of where productivity is heading.

Instead of using past performance to organize liquidity on the platform, the new system will aggregate thousands of views of the future. And operators will be rewarded differentially based on the accuracy of their predictions. This creates a competitive market that rewards token operators for making the system itself more efficient.

With this system, each allocation functions as a prediction of where future trading activity will occur. By positioning ahead of the market, allocators will capture a larger share of revenue when volume materializes. This dynamic can build deep, anticipatory liquidity that produces value for the whole system. At the same time, a pool that stops generating fees can stop receiving rewards sooner as allocations shift.

At launch, Predictive Allocation is currently planned to operate with a 48-hour minimum cooldown window in between allocation changes, allowing participants to adapt to the new system. As users acclimate, the cooldown window will shorten and approach a more fully continuous state. Gauge caps will continue to operate as a check on emissions overallocation.

Users who want to set their allocation strategy, but do not want to micromanage the position can use Autopilot to automate the allocation process.

The data behind the system

Using a data set from the last 180 days with 40 of the top pools on Aerodrome, we see why utilizing trailing fees as a capital allocation signal is sub-optimal. (A quick note, this chart doesn’t represent actual performance of the DEX, as voters operated across a wider range of pools.) The chart shows how close AERO rewards (emissions) allocated using historical fees as the signal were to the actual fees generated during the following window.

Unsurprisingly, a two-week old signal is not very accurate, placing hypothetical emissions “on target” within 2 percentage points (pp) only 48% of the time. If we use a basic predictive signal weighting trailing fees over a 24-hour period and revoting every 48 hours, we improve the “on-target” emissions to 64% and drop “off-target” emissions from 31% to 15%.

Finally, if you include gauge caps that prevent overallocation, i.e. if fees don’t materialize in a time window, “on-target” increases to 70% but “off-target” (>5pp off) drops to 8%, a 75% improvement. In addition, 5.1% of emissions during this time period get burned by the caps.

Predictive Allocation works - the cbBTC story

Narrowing voting windows and adding gauge caps can go a long way to improving the allocation of AERO rewards, but there is a limit on the improvement that can be achieved using past performance of a pool to incentivize the allocation of future rewards. The remaining 30% of emissions allocated “off-target” need something else to close that gap. Forward-looking capital allocators incentivized to bet on future fees can prepare the liquidity environment for new trading activity ahead of time.

Why are we confident this will work? Because we have concrete evidence that it does. The Aerodrome Foundation’s Public Goods Fund’s mandate to encourage protocol growth means that it already engages in a form of predictive allocation to great success. One of the Foundation’s successes was bootstrapping cbBTC.

In 2024 Coinbase launched cbBTC, a new BTC wrapper product across a number of chains. But the Base chain had something no other chain did: AERO. Coinbase Ventures and the Aerodrome Foundation used voting positions to seed liquidity rewards early with the idea that future fees and use cases would materialize—and they did.

Base dominated volumes in the year after the cbBTC launch. But more importantly, Base created the type of activity to make cbBTC a useful and productive asset. Left to their own devices, self-organizing LPs operating on Ethereum Mainnet and Arbitrum paired cbBTC with the incumbent asset wBTC in low-fee arbitrage pairs. On Base, powered by an early form of predictive allocation of resources towards cbBTC’s potential and its fast connection between Coinbase and Base, cbBTC became a spot trading powerhouse. Whereas, on Arbitrum, for example, volumes failed to materialize at any significant level.

So in the six months after the cbBTC launch, what was the signal that fees produced for LPs on Ethereum mainnet vs. Base? The difference shown in the chart below is clear. On Base, LPs received the signal that cbBTC was a useful spot trading asset with the majority of activity happening on Aerodrome pools. On Ethereum mainnet? A hodgepodge of different DEX pools mainly paired with wBTC on different DEXs with different fee parameters.

The result: in the year after launch, cbBTC failed to make inroads on Ethereum mainnet or other L2s. Whereas on Base, useful volumes spiked, unlocking new use cases such as the Coinbase Lend product that is backed by onchain liquidity.

Enabling predictive signals improves outcomes for all MetaDEX stakeholders

A key unlock of the MetaDEX is that it’s built on the understanding that a modern DEX functions as a 3-sided economy, balancing the needs of traders, liquidity providers, and token operators. The shift to Predictive Allocation has impacts on all three groups.

Token operators and liquidity providers (LPs) in the MetaDEX have competing goals. Operators want LPs to provide liquidity as cheaply as possible, and LPs want to maximize rewards all the time. The common ground the MetaDEX provides is that operators are fine paying for a valuable service, active liquidity that can maximally produce future fees from traders. And LPs, in return, want a consistent stream of rewards so that they can adequately price their risk and return.

Compared to self-organized liquidity, epoch voting represented a step forward. Aggregating fees over time provided a more consistent signal as to what liquidity would be valuable long-term. In return, LPs got a consistent stream of active tick rewards, often in excess of the fees they were generating.

However, while MetaDEX02 improved the baseline from fee-only DEXs, it still can produce inefficient results. Predictive Allocation enables the design space for predictive signals. For example, on the CL100-WETH/cbBTC pool over the last year, a basic predictive signal using weighted 24-hour trailing fees, improves how emissions track actual fees by almost 80%. That’s 80% more efficient results for token holders, 80% more consistent returns for LPs.

But how will this impact sAERO token operators? Previously, veAERO and veVELO voters used a complete picture of the revenue each pool accumulated over the prior week to ensure their votes earned the highest possible return. Because everyone had a complete picture, everyone earned virtually identical rewards, and no one was incentivized to vote for future performance. Predictive Allocation can be expected to offer incentives by providing more opportunities for upside by betting on future growth, thereby increasing the already high revenue accruing to allocators to more established and less volatile pools. Just like the Aerodrome Foundation with cbBTC, allocators betting on more accelerated growth and making successful predictions end up benefitting the entire system, along with themselves.

In the case of cbBTC, we see that under Predictive Allocation, allocators that had a strong belief in the growth of cbBTC would have consistently outperformed an average allocator. The earliest cbBTC voters would have achieved 43% higher fees than expected based on past performance. As expected, over time that edge would have disappeared as growth became more predictable.

In MetaDEX02, the epoch system incentivized voters to free-ride on the growth minded allocation strategies of others, such as the Aerodrome Foundation, by only focusing on pools’ past-performance. But with Predictive Allocation on Aero, bootstrapping a successful fee-producing asset will be rewarded because growth leads to more rewards for the entire protocol.

Predicting trends and flows in bluechip assets is a valuable activity. But for allocators that favor more upside, long-tail assets can offer more opportunities. Correctly predicting a window where a token takes flight could provide tremendous upside while the rest of the market adjusts.

Support tools

Not all allocators will want to participate at this level of granularity. Fortunately, the design space for designing products and strategies that utilize Predictive Allocation is endless, especially for a new class of DeFi users: AI agents. For allocators looking for a hands-off approach, they’ll be able to configure management of their position through Autopilot (an upgrade to Relay). As time goes on, AI agents will craft strategies for themselves, but also will provide a wide variety of strategies to stakers. We are in the early stages of building an agent marketplace that will curate these opportunities for users to select their risk profile, but also what assets they want returned.

One other key stakeholder group that will experience positive impacts from the upgrade to Aero and Predictive Allocation is the community of projects and token launchers incentivizing on Aero. Aero will give projects a whole host of new ways to achieve their intended outcomes. At launch, projects will be able to flexibly stream incentives in any token, either to stakers allocating rewards or to LPs directly.

Under veVoting, liquidity payments became a key method for projects to incentivize deep liquidity, bootstrapping numerous successful projects. Like with epoch voting though, liquidity payments can be improved. Under MetaDEX02, tokens used as incentives unlocked and released to voters at a single point in time. For projects, this meant a large amount of new supply hit the market at once—not ideal.

For voters, it was difficult to value liquidity payments prior to an unlock as both rewards and incentive value could shift dramatically after that supply hit the market. This meant emissions might be inefficiently allocated giving LPs potentially volatile signals. Streaming to predictive allocators allows projects to direct liquidity incentives to parties that stay aligned over time, while allocators receive a steady stream of information rather than having to bet on the uncertainty built into one-time events. LPs will also have a more predictable experience with the stream of AERO rewards updating gradually vs. oscillating between large, weekly shocks.

We also anticipate that the option of streaming incentives will improve the Aero Ignition launch model, by creating even more optionality for issuers, while also creating a compelling experience for other token launch products. More details to come on how Predictive Allocation will impact the token listing and gauge creation process.

A Unified Economic Theory

New innovations like Predictive Allocation are only valuable if they are a part of a sustainable economic system. MetaDEX03 will supercharge a lot of the same tools and concepts that made MetaDEX02 successful. We and our data partner Vending Machine will be publishing more information on the economic impact of the combined force of these changes in a forthcoming piece. The information below is a preview of this deeper dive.

One key change in MetaDEX03 will be the removal of the anti-dilutive rebase for sAERO positions. During a rapid growth and bootstrapping phase, the rebase served a valuable role, providing new lockers with a measure of protection against dilution. However, in its more mature state, Aero will already be optimized to grow revenue per token over an extended time period without having to protect stakers from unproductive supply growth. In service of this goal, changes to the Momentum Fund (described below) will include potentially burning both liquid and locked supply rather than only having a mandate to buy and lock liquid supply.

The AERO Fed and Emissions

The current emissions rate for Aerodrome equates to annual dilution of roughly 11%. At the launch of Aero, Aerodrome will expand to absorb the Velodrome economy. The Aerodrome Foundation’s current plan is that emissions for Aero will continue Aerodrome’s annual dilution rate of roughly 11% of the AERO supply (Aerodrome+Velodrome). However, due to the anti-inflationary tools shared above (Predictive Allocation, Gauge Caps and Momentum Fund), this should be viewed as a base rate only, but realized inflation could be dramatically lower. The primary goal is to make the Aero launch successful, so these parameters could change if there is an extreme change to market conditions.

In the coming weeks, in conjunction with another contributor to Aero, analytics and strategic data providers Vending Machine, we will publish a comprehensive framework for how the Fed will operate. Using quarterly analysis reports with space for emergency actions every month, the Fed will use a rules-based approach to recommend changes to emissions. As with MetaDEX02, the standard inflation curve will have a deflationary bias and a rigorous approach will be used to make any changes. More details on this approach will be provided soon.

Expanding the Stack: The REV Engine

As highlighted in November, Aero will introduce the REV Engine, a system that expands the revenue surface beyond trading fees and liquidity payments. The REV engine will internalize value streams that most DEXs are unable to tap into or leak to external parties. These are fees generated by services on top of the existing spot trading infrastructure that should belong to token operators subsidizing those services.

In practice, different REV streams will produce value for ecosystem stakeholders in different ways. Aero is set to launch with two new revenue streams.

• Internal MEV Auctions: Slipstream V3 intercepts MEV revenue at the protocol level, redirecting value that would otherwise flow to centralized sequencers and external bots back into the ecosystem.
• Bridge and Aggregator Fees: Metaswaps are chain-agnostic swaps that route from an origin chain through the deepest liquidity on any chain and end up on the destination chain the user desires. Bridges, aggregators, and spot DEXs all take their cut of this activity when done separately. Aero will be able to unify this service into one seamless flow and offer it for a lower cost than utilizing each service independently. Fees net of fixed costs will be used to support the Aero token. More detailed information on Metaswaps will be released soon.

Other near-term planned REV engine sources:

• Ancillary Services: Revenue from veNFT marketplaces, auto-compounders, and liquidity management tools flows back into the system.
• Agent Marketplace: The proliferation of protocols and services built on top of MetaDEX infrastructure will dramatically increase in the agentic economy. By meeting certain security requirements and by dedicating a certain percent of revenue to buyback and burns of AERO, people and agents can get listed on a curated marketplace.

More details and estimates on the impact of each of these will be coming in future updates.

Crucially, 100% of these non-swap revenue feeds accrue value to the ecosystem. This transforms Aero from a single-product fee generator into a multi-product platform that can generate fee revenue from multiple uses of the same liquidity.

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Structural Supply Reduction: The Momentum Fund

The final layer of Aero’s economic stack reinforces the token from the supply side. The Momentum Fund, the Aero Foundation’s flagship program, operates a rules-based sAERO position with three mandates: forward looking allocation to strategically important pools (like major token launches), extending allocation power to ecosystem builders, and deploying protocol revenue to buy back and burn AERO.

Backtests on Aerodrome data indicate this strategy could have removed over 100 million tokens from circulation over a two-year period, while still building robust capital reserves. The net effect is a reduction in circulating supply, perfectly complementing MetaDEX03’s extra revenue streams.

Developing the best experience for LPs

Predictive Allocation will direct rewards in a forward-looking way to bootstrap new trading activity. But once pool volumes are consistently high, flexibility for LPs ensures the highest level of market dominance.

Aero is designed to offer liquidity providers the best rewards onchain through two layers that give LPs unparalleled flexibility and capital efficiency.

• Layer 1: Trading Fees. Liquidity providers can choose to earn a share of the trading fees flowing directly from the volume they enable. This represents a clear advantage over competing protocols that redirect a large portion of fees elsewhere.
• Layer 2: AERO Rewards. LPs can also choose to earn AERO rewards, allocated by sAERO holders.

This dual-layer model means LPs on Aero have the power to choose their preferred strategy: fee capture or optimized AERO rewards, tailoring their approach according to their preference and pool selection.

Additional revenue streams:

Aero also has two built-in mechanisms to provide more rewards to both classes of LPs.

• Dynamic Fees: An updated dynamic fee module will increase fees during times of high volatility, generating more value to compensate LPs for risk.
• Internal MEV Auctions: Aero will launch with a system to capture MEV and internalize it for the benefit of LPs.

Both of these revenue streams benefit everyone. LPs that earn trading fees will receive fees from these additional sources directly. LPs earning AERO will benefit from the Predictive Allocation system as sAERO holders can more immediately allocate additional rewards to capture these revenue streams.

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Launch Details

Token Distribution

The Aerodrome and Velodrome communities will receive 100% of the initial AERO supply at launch. This means all positions—Team, Foundation and retail—will migrate the same way at the same rate. No dilution will occur beyond the migration of these existing positions.

• 94.5% to AERO and veAERO holders
• 5.5% to VELO and veVELO holders

The distribution mirrors each protocol’s share of total value created in the year prior to the Aero announcement. Every holder who upgrades to AERO will maintain the same economic claim they hold today, unified under one token.

Both liquid tokens and locked tokens will migrate at the same rate. sAERO positions will retain the correct number of tokens and lock times of their underlying veVELO (accounting for the exchange rate to AERO) and veAERO positions. Total supply of Aero will be calculated as following:

• Aerodrome positions will migrate 1-1.
• The total supply of Aero is then Aerodrome total supply at launch/.945.
• The Velodrome supply will migrate into the newly created 5.5% of supply at the ratio of Velodrome total supply at launch into that fixed number of tokens.

Migration Details

Migration will occur during a single epoch. After epoch flip on both Aerodrome and Velodrome, migration for both liquid and locked positions to Aero will go live. At this point, the Aero migration supply will become fixed. While token holders should expect plenty of advance warning, there is no deadline to migrate. However, because Aerodrome and Velodrome are built on immutable smart contracts, veAERO and veVELO will continue to receive rebases. This means that after subsequent epoch flips on the old protocols, your individual migration ratio decreases in line with the new tokens you received from rebases. However, your ownership of the new protocol remains the same as it was during the first week. The exact math will be published closer to migration. Liquid tokens will always migrate at the same rate.

While there is no deadline for migration, and migration will always be available via smart contract, at some point the front ends supporting Aerodrome and Velodrome will be retired. Because there are no epoch flips with Predictive Allocation, positions can migrate and earn at any time. We are actively working with CEX’s to support the migration of the liquid tokens and will have more details closer to launch.

In order to incentivize migration and provide the best chance for Aero to succeed, the Aerodrome Foundation will incentivize initial allocations and liquidity formation with something close to the amount of fees veAERO and veVELO voters would have received the last epoch on Aerodrome and Velodrome. These rewards will start streaming at 0:00:00 UTC of the Thursday following the last epoch of the old protocols.

All pools with liquidity currently on Aerodrome and Velodrome will be available on their respective v3 chains on Aero, and LPs will have seamless migration available in the UI as well. However, because Aero will launch on net new chains, the initial liquidity payments from the Foundation will be strategically allocated across chains and pools that maximize Aero’s competitive opportunity at launch rather than being directly proportional to historical fees generated by pools on Aerodrome or Velodrome. During migration LPs will have the option to stake their positions if the pool is expected to earn early rewards or leave the positions unstaked to earn fees. If the pool will be supported by the opening week stream of rewards from the foundation, it will be clear in the UI.

During the migration week, existing Aerodrome and Velodrome gauges and factories will be retired and the front ends will also support the migration to Aero. The Aerodrome Foundation will eventually reclaim the fees stuck on these retired gauges. Migrating veVELO and veAERO voters will receive a new stream of rewards on v3 gauges and the foundation will earn back the week one Aero rewards it provided, allowing for very little loss of value during the migration.

veAERO and veVELO positions will be burned and entirely new positions will be minted. (This means new token and nft ids.) It also requires that all veAERO and veVELO positions will need to withdraw from any contracts they might be housed in to migrate. This includes internal products like relay vaults, but also any external contracts that have custody over veNFTs.

Operational Hub

Aero’s home base will be Base, the leading ETH L2 ecosystem that has grown alongside Aerodrome for over two years. With low costs, high throughput, and a thriving onchain economy, Base provides the foundation for Aero operators to scale across Ethereum. It also connects liquidity on Aero to millions of Coinbase users.

Audits

Aero will go through multiple rounds of audits beginning April 2026.

Launch Timeline

Depending on successful audits we believe Aero will launch in July, 2026.