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Back to Aerodrome Finance
Overview
Mechanism map
Yield-Incentivized Governance
Yield-Bearing Staking
Vote-escrow (Velodrome version)
Volume-Driven Buybacks
Aerodrome Finance

Aerodrome Finance

Aerodrome Finance is a further development of the Velodrome AMM model; it is an AMM endowed additionally with a liquidity incentive program and a governance model.

Mechanism map

  • Vote-escrow (Velodrome version)
  • Volume-Driven Buybacks

Token functions

Yield-Incentivized Governance

The primary function of the AERO token is yield-incentivized governance:

  • The governance rights are only activated after the AERO -> veAERO lock-up.
  • Locked veAERO position enables participation in governance decisions regarding emission distribution and other matters.
  • Active participation in governance is rewarded with protocol fees

This means that token holders can obtain protocol fees under two conditions: (1) locking AERO in veAERO and (2) participating in voting using the veAERO position.

Please note, that veAERO holders receive all trading fees generated by LPs. In turn, LPs receive newly minted AERO tokens according to governance decisions.

Value drivers

Transferability Restriction

represents the necessity to lock AERO in vote-escrow contract in order to activate its utility

Represents AERO lock-up for a period of up to 4 years, with a natively enabled permalock feature (in the sense of the ability to automatically extend the lock indefinitely). Voting power is linearly proportional to remaining lock time.

Note, that locking transforms ERC20 AERO tokens into an ERC721 NFT representing a user's locked position.

[7] = ƒ(lock_time, price_at_lock, locked_quantity)

Conditional Action

Represents participation in protocol governance (voting) to acquire governance value (bribes) and receive additional incentive (protocol fees)

Represents participation in protocol governance (voting) to acquire governance value (bribes) and receive additional incentive (protocol fees)

Value capture investment profile

Base deployment addresses are available here).

1. THE VOTE-ESCROWED GOVERNANCE (VELODROME IMPLEMENTATION)

The AERO inherit VELO codebase. The token's value capture implementation follows a structured flow where users interact with multiple protocol components.

  1. The process begins when a user locks their AERO tokens to receive veAERO through the voting-escrow contract (in addition to position management and delegation functions), with the ability to redeem these tokens upon lock expiry. Users can then participate in protocol governance by voting through the Voter contract, which interfaces with both gauge and reward systems. These gauges are created by interaction with the corresponding function of the Voter, and the VotingRewardsFactory creates the reward pools for the gauge (one for fees, the other for bribes).
  2. These pools receive fees from gauges and additional incentives from gauge owners. Once the epoch concludes, rewards become claimable via Voter functions ; where the Minter contract notifies reward amounts and mints new AERO tokens as needed, while the RewardsDistributor handles the distribution of rebase rewards to veAERO holders. This creates a comprehensive system that handles both active participation rewards (voting/gauge rewards) and passive benefits (rebases).
  3. As can be observed, mints go to rebases (and LPs of pools based on the voting results), and all fees are distributed to veAERO holders based on their vote allocations. It means that for which pools veAERO position voted, from those pools fees are received.

[8] = binary

Cashflow

represents Aerodrome protocol fees yield, distributed to active governance participants

Reflects cashflow, originating from Aerodrome trading fees and distributed accordingly to veAERO weight .

All trading fees of each pool are given up by the LPs and used to remunerate the veAERO holders voting for emission of AERO to this pool proportionally to the weight of their vote.

The LPs are instead compensated in the form of AERO emission (see Governance).

[21] = ƒ([8], pool_fees, pool_incentives)

Governance

represents governance value that originates from influencing AERO emission distribution and emission policy

Represents governance value originating from influencing protocol-wise decisions, first of all AERO emission.

Holders of veAERO NFTs are able to vote on the following questions:

  1. Epochal (weekly) emissions of AERO to liquidity pools. These emissions go to the liqudiity providers of those pools (provided they stake their LP tokens).
  2. After week 14, AERO emissions decay by 1% per epoch. Once this decrease makes them fall below 9M per epoch, veAERO holders acquire control over emissions in the sense that they become able to adjust the emission each epoch by 0.01% in either direction (with an imposed limits of maximum emission of 1% per epoch and minimum emission of 0.01% per epoch).

The governance value is accounted in monetary form (bribes). Bribes existence allows veAERO holders to generate value from external stakeholder interests (bribes/incentives), creating a market for governance power. Added to the cashflow section chart.

[3] = ƒ([8], user_vote_allocation, user_strategy_representation)

Yield-Bearing Staking

This token function represents the yield originating from the protocol's anti-dilution mechanism (rebase emissions). It ensures that long-term holders maintain their proportional ownership of the protocol.

This yield becomes available immediately after the veAERO token lock-up, with no additional actions required.

  • The mechanism automatically distributes rebase emissions to veAERO holders based on their proportion of the total veAERO supply.
  • The yield generation is calculated by the relationship between the locked veAERO supply and the total AERO supply.

Value drivers

Transferability Restriction

represents the necessity to lock AERO in vote-escrow contract in order to activate its utility

Represents AERO lock-up for a period of up to 4 years, with a natively enabled permalock feature (in the sense of the ability to automatically extend the lock indefinitely). Voting power is linearly proportional to remaining lock time.

Note, that locking transforms ERC20 AERO tokens into an ERC721 NFT representing a user's locked position.

[7] = ƒ(lock_time, price_at_lock, locked_quantity)

Cashflow

represents the yield and protects veAERO from inflationary dilution. It arrives from rebase mechanics and is received proportionally to the amount of veAERO.

Reflects the rebase yield distributed to veAERO holders for inflationary dilution protection. Typically, when an inflationary token is vote-locked, the relative weight of a user's position decays due to inflation. However, AERO inherits the VELO mechanism design and uses an integral offset of this risk in the form of emissions (rebases) directed to all veAERO holders.

[22] = ƒ([7], veAERO_supply, AERO_supply, emission_total)

rebase=0.5⋅emission_total⋅(1−veAERO_supplyAERO_supply)2rebase = 0.5 \cdot \text{emission\_total} \cdot \left( 1- \frac{\text{veAERO\_supply}}{\text{AERO\_supply}} \right)^2rebase=0.5⋅emission_total⋅(1−AERO_supplyveAERO_supply​)2
  • emission_total — is the total token epochal emission volume
  • veAERO_supply — is the supply of veAERO; that is, the totality of the voting power that determines the size of the locked portion of AERO
  • AERO_supply — is the total supply of AERO. Acts as a normalising coefficient

Vote-escrow (Velodrome version)

AERO inherits token model and value-capturing mechanisms first appeared in Velodrome (VELO).

AERO has a single Value-Capturing Mechanism composed of two OoVs (Future Cashflow and Governance) conditioned on Risk Exposure-activated Conditional Action and one OoV (Future Cashflow) conditioned only on Risk Exposure (veAERO lock-up).

The value-capturing mechanism operates through a dual-track value capture system:

  • First, users lock AERO to veAERO (the lock-up condition)
  • Then, the AERO->veAERO lock-up unlocks two distinct value streams

The first stream requires active participation through voting or delegation to capture both governance benefits over emission distribution and associated rewards from fees and incentives. The second stream automatically generates value through rebases based solely on the locked position, creating a baseline reward for lock-up commitment.

This architecture creates a balanced system that rewards both passive commitment and active protocol participation, while ensuring that maximum value capture requires full engagement with protocol governance.

Volume-Driven Buybacks

Aerodrome uses a portion of its fee proceedings to finance AERO buybacks through various programs.

The bought-back tokens are not burned, but rather, locked to veAERO, which decreases the liquid supply but increases the supply of revenue-generating tokens.

This does not engender a deflationary appreciation in the usual way.

Value drivers

Cashflow

Reflects the passive appreciation for all AERO holders due to the buyback program

Due to the AERO buyback program, all AERO holders have an unconditional exposure to passive appreciation of the token due to the constantly exerted upward price pressure.

[23] = ƒ(circulating_supply, buyback_volume)

  • circulating_supply — is the total circulating supply of AERO
  • buyback_volume — is the bought back amount of AERO in a given timeframe