Alex Cutler (Co-Founder, Aerodrome) | Fully Diluted with Messari Research

Obviously the key concept around any decks is that in order for there to be trades on that deck there has to be liquidity on these tokens and essentially there has to be tokens available paired that can be traded through. If you have one USDC you want a little ETH, you need both sides that if you have ETH, you want some USDC, it needs to be both sides of that. So liquidity providers are primarily there to provide that liquidity. Hello everyone, welcome to the fully diluted podcast here at Massari. I am Suni, an enterprise research analyst here at Massari. I'm joined here today by Kenji Steinmeats who is also an enterprise research team. Kenji did you want to do a quick introduction? I think you nailed it. Kenji on the enterprise research team mostly covering D5 were very excited to be talking to Alex who is a contributor and co-founder of both Fela Drow and Eradrow otherwise known as at Wacmi Alexander on Twitter. Alex how's it going? Good, thank you guys for having me. Awesome. I'll jump in with the first question kind of T.S. up here. So I always like to start these out by pretending that someone in the audience has no idea what Eradrow or Veladrow is. They're going to be very confused by what we're talking about. So I was wondering if you could just give us a very quick overview and in particular highlighting maybe some of the core differences between the Eradrow, Veladrow model versus other Dex's that are out there. Of course, I mean if we want to start at the highest altitude, right? Of course, Veladrow and Eradrow are both decentralized exchanges and they are the largest decentralized exchanges on both the base side and the optimism main net side. So what makes them different? I think the best way to think about these are as meta-dex's and what we mean by meta-dex is are basically dex's that combine all the best primitives from the Dex landscape. So the best of curve, the best of convex, the best of Univ2, Univ3, the best of even some of these protocols that have been built on top of some of these other protocols like the Vodian mechanic in the curve convex ecosystem. They basically roll all those things into a single streamline design. You have sort of a one-stop shop where they're not your a trader, liquidity provider. You want to be a token locker sort of active participant in the protocol. When you combine these things all together in the way that we do, we think it's kind of the best answer to the Dex trillema. The Dex trillema is basically any decentralized exchange needs to balance the needs of these three audiences, right? Traders, liquidity providers, token lockers. And so basically combine all these things together, rapid, this great economic model, not only do you have this one-stop shop, but you have I think what is credibly the best answer to the Dex trillema that we've seen today. Great. And if you guys, anyone listening, if you want to get sort of a high-level overview as well as read into what we think about error-drome, particularly, but also touching on some aspects of Velodrome, we do have a pro report out called a valuation of error-drome where we go into it available on our research portal. Diving a little bit into the Metadex model here, I think something unique about the Metadex economy is that it involves a few more participants and stakeholders that that of a traditional AMM Dex. And so I'd love to just understand the role of each of these stakeholders who they are, why they're participating, what they're after. And so maybe we'll just do that one by one. And so I basically view at this point, the major stakeholders being liquidity providers, users who are swapping on your Dex's, your token lockers, both VERO and VEVL holders, and also protocols since they're providing incentives or what's referred to sometimes as bribes in the CRV system. And so let's just start with the liquidity provider. So who are they, what do they want, what do they after, and how do they participate? I mean, this gets into very much the nature of a decentralized Dex. So obviously the key concept around any Dex is that in order for there to be trades on that Dex, there has to be liquidity on these tokens. And essentially there has to be tokens available paired that can be traded through. If you have one USDC, you want a little ETH, you need both sides of that. At the VETH, you want some USDC, needs to be both sides of that. In providing that liquidity, they are taking on a degree of risk, right? Because as people trade through that pool, the balance of that pool will change. And there's an opportunity of course for liquidity providers to experience impermanent loss, which would just mean that the net value of that LP position might be lower after some trading than when they initially started it. So you have to find a way to basically reward liquidity providers for providing that service or that liquidity to the overall Dex. In the Dex landscape, this started really with Uniswap and the idea that hey, what we're going to do to compensate these liquidity providers is we're going to give them all of the fees that the traders pay as they use that liquidity. And ideally, you know, overall over time, liquidity providers should be able to make enough on those fees that it offsets any of the impermanent loss and perhaps even makes it like a productive activity for them to engage in. That is like a great model and that's of course where it started, but it is a bit limited, right? Because it limits the growth of that pool and limits the rewards that can flow to liquidity providers just to the amount of fees that are being generated. And if you think about like when projects are trying to bootstrap liquidity or a new token is launching or an ecosystems in a very early phase, generally speaking, there's not going to be enough trading happening to generate enough fees to attract enough liquidity providers, but that liquidity is like sufficient. In spending time in the space, you know that like sufficient liquidity is like a necessary condition for ecosystem growth. You could have for instance, like the most innovative, interesting protocol in the world, building in a given ecosystem, but if traders can't like get their USDC on chain, go USDC to ETH, right? To this protocol token or they have to eat 50% slippage along that path. People aren't going to go use that amazing protocol. It doesn't matter how good it is. So like having enough liquidity is extremely important. Feees weren't enough, right? Essentially to help to like proactively bootstrap liquidity. And so like the next big innovation we saw here was in the curve model. And the curve model said, hey, we're going to give you 50% of the fees, but we're also going to boost your yield through the emissions of the CRV token. So we'll send that pool CRV tokens. So if you're bootstrapping something new, right, you could bribe or you could lock CRV and vote to direct emissions there. And that could allow you before a pool has any real fee traction, right? To bootstrap that with liquidity, create the conditions now where that pool can grow and self-sustaining over time. Essentially in that model, it was like the rewards, you know, were sort of split between LPs and the voters. Voters got the same amount of rewards whether or not they voted for like high fee pools or low fee pools. So it wasn't quite all the way there. So yes, we'll get into this a bit when we get into the voters, but you know, in our system, the reward for providing liquidity is only arrow emissions. You're earning those emissions. It makes it very easy for those pools to bootstrap. You're usually earning at a rate higher than what the fee take would be on those pools. And then return LPs are like staking their liquidity and the fees are going back to voters, which we'll I'm sure get into in just a moment. Then now moving over to the VE arrow and the VE velo blockers, I think a lot of people are confused about this in terms of why they're willing to give up their liquidity, you know, what's the point of voting? How do they vote? You know, what are the decisions that they're accounting for? And, you know, I think a great example that maybe you can touch on, you know, it's being reported that Coinbase Ventures has continuously made more purchases of the arrow token on the local market, they're locking it, they're voting, they're participating. And so maybe you can also touch on, you know, somebody like CB Ventures, what is the point of the arrow or VE velo for them? This is a really interesting one. So I would take us back a few steps back to that kind of idea of the Dex trilumma, because if you look at Uniswap, I think what we can see in that model is that they solve for two of the three audiences pretty well, right? They they solved for traders in providing great efficiency on the trades, and they solve for liquidity providers in the sense of liquidity providers get 100% of the fees at those pools generally. So who's the missing like leg of this stool? It's token holders. Token holders get nothing. There's this idea that there could be a fee switch, but even if they turn on the fee switch, what they would have to do is take away from the rewards of liquidity providers, making them even less competitive, obviously in a marketplace where they are already losing their market share relative to this Metadex model. Curve took like sort of a hedge path, right? This idea of 50% of the fees go to LPs, 50% of them go to to VRCRV, but the main issue there again was this like lack of optimization. It's like a tragedy of the comments issue. You socialize the fees whether or not you're voting for a pool that does like $10 in fees versus $10,000 in fees, and that is in a recipe for maximizing the amount of rewards flowing back to VEC RV. So in our system, as I mentioned, we are emitting arrow tokens to LPs as rewards. And those tokens, you can do anything with them of course. You can swap them, trade them for something else, that's what you want to do. You can LP with them, but the primary utility of the token is to be locked. And when you lock, essentially what you now have the like ability to do is that each week you as a token locker or a voter have the ability to vote on which pools receive emissions. So every week you're going to vote. That essentially is like choosing which pools get rewarded, which LPs are going to grow. Now you're incentive to do this because you know who would just show up to vote each week to direct emissions without some form of incentive. Even if you were showing up, how would we incentivize you to do it in a way that optimizes the DEX? So basically, you know, has the whole thing self-optimized for the most productive pools. The big shift here like from curd is that 100% of the fees being generated, 100% of the voting incentives or bribes in the curve ecosystem, all of these are going to voters each week. And they're only going to the voters of that specific pool. So what that means is just naturally voters are incentivized each week to vote for the pools that are most productive to the DEX. You know, if the RAPD USDC pool does 1.5 million in fees, which I believe is roughly what it did last week, that's going to incentivize a lot of voters to go vote for that one, which is great because that's saying we're going to send more liquidity rewards to the pool doing the most work for us. And if a pool is doing like $10,000 in fees, fewer people are going to vote for that pool. So fewer emissions are going to float to that pool. And so in this way, like token lockers have this incredible power and the other thing is, of course, this is all immutable, right? There's no fee switch to turn on and off. There's no way to change the emissions, you know, this is all just sort of a fixed system. So voters get to go and direct those emissions. They earn back basically 100% of the value that the DEX creates. So it creates a great incentive for participation. Now to your question about like, okay, so I can see maybe, you know, why a Dgen, you know, might come in and lock some tokens and participate in this way. But like, what is Coinbase Ventures up to? This is super cool. So like Coinbase Ventures, and this is always very important to note, like, Erichro never sold any tokens. The team didn't get any like liquid token allocations. There's no like exits. There's no VC overhang. So Coinbase Ventures has gone out on the market and purchased all of their tokens. And what they have done from what I've seen from the on-chain sluths, you know, is primarily lock those tokens. So what is this getting them? It's a few things that are very, very cool. One is that they, of course, get the benefit that any token blocker gets, which is their earning rewards on that locked position. So there is a constant stream every week of rewards that Coinbase Ventures is earning. And they can vote for whatever they want, right? They want to grow their eth and Bitcoin position. They can vote for eth and Bitcoin pools. So that's just the general reward we all get. But we know that they've got bigger objectives, right? They want to see the base ecosystem succeed. They want to support their port co-companies, companies in which they have other investments, and their liquidity on-chain. So each week when they are going and voting, they're going to vote at least with some eye towards, you know, the return on that participation, but also these bigger goals. So like what we've seen them do is things like when CBBTC launch, so Coinbase is like Bitcoin wrapper, they shifted a significant amount of their voting power towards the CBBTC pools. And what that meant is on day one of that launch, there was going to be a ton of emissions and rewards flowing to CBBTC liquidity providers, which means liquidity would grow, streams volume would grow. And I mean, it was crazy. It took one week for CBBTC volumes on Eradrome to flip wrapped BTC volumes on mainnet Ethereum. I'm just guessing here, I haven't double checked this, I'm guessing it's true. Like I think probably for the entire existence of WBTC and Uniswap and mainnet ETH, the top on-chain Bitcoin pool has been on Ethereum and has been on Uniswap. Because that's just where all the liquidity is, that's where all the activity is. The idea that Coinbase was able to launch this new Bitcoin product incentivize it through their own voting position. And within one week, the top Bitcoin pool was now on base in Eradrome. I think just shows the power of the way in which like, arrow can be used, blocked arrow can be used to achieve these broader purposes. And again, they didn't even have to be altruistic in this. I mean, they were achieving, you know, a goal that was important for Coinbase, but they are also earning back the fees that this pool is generating. So they're building up more Bitcoin that they now hold on their balance sheet, which is very, very cool. And you know, if they had a new port co-launchy on base, they could vote to support the liquidity in the same way. If there were new emergent based projects that they were interested in acquiring a position on without having to do some sort of OTC deal or buy off the market, they could just vote for those pools and earn back the rewards. So it ends up being this like tool with just a ton of different utility and application. Just to give some quick context here, I think for for arrow roughly, I think at this point, over 50% of circulating supply is locked as VE arrow. That's locked for an average duration of over 3.8 years with the max possible locked duration being four years. There also is a liquid NFT exchange for both VE arrow and VE vello. It's not going to be as liquid as the circulating token, but there is a way to transact your locked positions. And I think just going back and re-emphasizing something you talked about in the beginning there, that I don't think is appreciated enough. You've been able to turn the DEX model, which has traditionally been fairly zero sum between token holders and liquidity providers into a positive subgame, where now both parties are immensely satisfied and both parties want the same thing, which is high productivity, both high productivity in your metadata X's and also success for arrow and vello tokens. It's been something that's been hard to explain. What does this practically allow you to do? But what are the tangible advantages of this? Because you now have your tokens with real utility backed by growing valuations that you can now sort of put in play within your DEX economy. What are some specific advantages that you've seen play out as a result of you being able to leverage? Almost a third leg of incentivization and value. I think the whole idea of like a DEX having a token was born of the sushi swap moment, where there was this idea of like, okay, uniswap could be vulnerable if they only reward liquidity providers with fees. Because if you can offer a token with some degree of value on top of that fee yield on a DEX that is comparable right in an execution and all of that, you have the ability potentially to vamp away a lot of the liquidity. But what happened over time with sushi, right? They did this sort of emitting of tokens, they boosted those LP rewards for a period of time. But because that token didn't have enough utility, eventually, you know, people just sold the token. It went to zero. The additional rewards weren't really worth that much more and like the market moved back to uniswap. So it's really important. And it's actually probably another thing that I think the market confuses because when they think about like token emissions boosting LPs, they think traditional liquidity mining. They think something like sushi or even the way in which, you know, many other like layer two tokens are distributed. Like come do a thing for a period of time or give out a bunch of tokens. Tokens really don't do anything. It's like maybe Dow governance or, you know, hey, maybe in the future IOU, we're going to figure out some sort of yield. return on this token, but like in the meantime, people end up just looking at this thing where, you know, these things were the billion dollars, but I can't do anything with it. Even in the case of unions, like this sort of capitulation on the idea of like, well, at least which probably isn't coming on. And, you know, it's been billions of dollars of unlocked union tokens hitting the market. So, you know, fundamentally, why am I holding this thing? What does it do? And the big difference, you know, with with airdrome and velodrome is that, like, it went maximal token utility on day one, right? It was the 100% of the value created by these Dexas going to the token, immediately enforced in day one ability to direct all of the emissions. Again, immutably directed or immutably enforced on day one. And what that means is like, when we're emitting the token, right, to liquidity providers, this isn't just like this sort of empty vessel that will eventually collapse. It's actually something that's very, very useful. Coinbase thinks it's useful. All of these protocols that have accumulated things that's useful. Dgen think it's useful. And so, what that unlocks is the ability to use these incentives to essentially, pamper away market chain, similar to what sushi did. But rather than it being like this quick path to zero, it's actually quite sustainable. So, basically, anytime like we see a pool, somewhere in D5, somewhere in crypto that is doing volume, right? That's activity. That's value being created. That could be a mean coin. That could be a utility coin. It could be a ERC 20. It could be something on Salona. Anytime we see it creating some sort of value, we have the ability just to bring a representation of that to AirDrome and base. You know, it could be a coinbase version of it like CVPTC. There's a great new protocol called universal assets that's bringing like universal versions of this and working through coinbase custody to bring those representations on chain. We can certainly go to classic route of using like a wormhole bridge or something and bring those tokens on chain. Or maybe there's like a crazy new meme on uniswap on base that seems to like, be getting some traction. As long as we see a token that has traction, we can just direct emissions to a pool with that token. And then it's just a matter of weeks before AirDrome's the primary trading venue for that token. And we've even seen like some of these like universal representations like doing volumes that it's not topping their native ecosystems. But like, it's kind of nuts. The amount of trading volume happening on them. And then there's a network effect to that too, where coinbase is never going to be able to list all of these things. And for good reason, each of these ecosystems is not going to be able to create tokenized representations of tokens from everywhere. There is a distinct possibility that AirDrome is the single best place to trade just about everything. Everything you can trade on a DEX, everything you can trade in in other ecosystems. And thus you don't ever have to sort of like leave the ecosystem again. That's the power of having the token model plus the LP model is just that you can bootstrap any of these pools. And because of the predictability and the stream of rewards, it's a better experience for liquidity providers than the volatility of these fee-based models. And generally speaking, you're probably going to get rewarded more on average. So you have just this advantage of like, why would you go anywhere else? So yeah, but to your point, like, this is all built on the back of the fact that the token has real utility is immutable. It's never going away. We can't change it. Nobody can change it. It's not an IOU like, it's built in. And that's a big difference. You just can't compare token emissions on AirDrome to like token emissions on protocols for the token doesn't do anything. I've actually said, like, I think it's closer in analogy to the role that like emissions play within Bitcoin or emissions play within ETH or Slonum because it is inessential like a mutable function of a broader system. Like the system does not work without it. And so you just can't compare it to like the tokens that don't do anything. I don't think you can have like a real conversation about Dex's and not at least touch on LVR, Toxic Flow. For listeners, that's just the idea that a lot of Dex volume is kind of the second leg of a sex-dex arbitrage. In our view, at least my view, I should say, it seems like an issue. I have no idea how big of an issue it is or if it's really something that we should be focusing on right now as someone building a Dex. How are you guys kind of looking at it right now? I think we have a similar point of view in the sense of there may be an issue there, but the whole idea is still just a bit hypothetical in some senses or at least nobody's really quantified the impact. And of course, quantified whether or not the impact is actually worse than some of the positive benefits like just volume generally creates, right? It's the classic mid-curve thing of like volumes bad, volumes bad, volumes good, right? So I think there's a lot of questions around it, but that said, like let's assume that there is like a pile of value out there not being captured by liquidity, you know, on the basis of LVR, some degree of Toxic Flow. There's a few key things there. Like one is as like liquidity depth and execution moves on chain and like there are days where air drones doing more rapid volume than coin-based exchange is doing, right? So I think there's an argument that we'll increasingly see like on chain venues actually being the primary liquidity hub and so the Toxic Flow may exist elsewhere, but the biggest answer to this is just dynamic feed module, whereby the fee being charged by liquidity providers or by the protocol itself is adjusting dynamically based on volatility or other conditions within the market. So that's ensuring, right, that the cost of any sort of Toxic Flow is basically being charged and right back to the people in the liquidity pool or to the protocols, a whole that's providing that service. We will be launching our dynamic feed module early next year and what this does is it is part of why it's so exciting to us is like if we already have the best on chain pools for Bitcoin and FX, you combine that with a dynamic feed module that's going to adjust based on volatility, you have like a legitimate order book competitor here, right? Like on chain might give you better execution and rewards comparable to an order book like experience while also having all the benefits that being on chain does versus being in some sort of centralized product. And so for us, it's always been like, yeah, we don't think it's that big of an issue, but also we're going to have this dynamic feed thing. So if it is an issue, like we're going to knock it out that way. Anyhow, we've done some back testing on our dynamic the algorithm and like we could not be more excited to see it play out. Awesome. Yeah, it seems like everyone was up in arms about it for a little bit and then we've realized hey, like there's some pretty simple solutions we can throw on pretty soon. So excited to hear that. I think as we move into an interesting stage of the cycle here in crypto and just been lots of talks of what administration regime change can do for DeFi and DeFi value accrual token value accrual and token utility, I think has been the main issue play game deceptor. And it's something that you guys have been quietly like working on fixing. And so you know, I'm wondering if you just have any general advice or outlook on the rest of the DeFi protocols out there, we know these things can make money. We know these things have product market fit. But how do you think they should think about using their token within their economic model and whether or not they should look at the meta-dex model and perhaps draw upon some inspiration. I guess I would say a few things. One is protocols that have used the excuse of legal overhead. No more excuse there. I didn't believe half of you. It was just all going to your dow treasury. Like come on, no more excuses here. So that's one. The other piece though is that like I said, we bet on maximal token utility on day one and enforcing that immutably. And it's so important to enforce this stuff in immutable ways because that's what actually gives people confidence that this isn't just a parameter that a team or Dow could change. So I would encourage everyone to like whatever conservative approach, you know, you might go in redistributing value created, go maximally and like box yourself into a corner on this, make it immutable. Like don't pussy foot go all in. I expect we'll see a lot of, you know, new things emerging. You know, we'll probably take the same sort of maximal like approach that we did. And anybody who's pussy footing around it I think has the risk of being disrupted by those new folks. But I would say just one more thing and it goes back to this token piece. And I think I mentioned this somewhere in here, but the foundation that that you know supports runs air germ. All of their tokens are locked. There is no liquid vesting token for any contributor or team member. How do they support themselves? Is they're not selling tokens? They're not doing OTC deals. They're not raising money. They support themselves through the utility of the token. Then being locked means the AirDrome Foundation is a participant in the system just like Coinbase Ventures who have not bought just like Enejo DeGen who farmed some error, locked it, participate each week. The incentives are 100% aligned with the foundation through every other locking participant. And I think it is crazy impactful when your incentives are aligned with not only productivity, because again, more rewards means more rewards for everybody. Foundation included. But also sustainability of like there is no giant moment where 300 million tokens get unlocked and distributed to contributors by mansions and like, just check the fuck out. It has to work and it has to continue to work. And every decision that the foundation is going to choose to make is going to be made with the incentive of the more the system produces the longer it lasts, the better we all do. And so like I would really encourage protocols, right, to shift away from a mentality of the utility of these tokens is to sell them either privately or the investing deals and you go on the market and you sell it to like make the bet if you're going to say this token is useful, make the bet on that utility like support yourself on that utility, ride the ups and downs on that utility, but like incentivize yourself for long term. And like, you know, I think a lot about protocols that I think if they had not given themselves giant investing allocations, if all those tokens were locked away forever and the only way for them to like get a piece of the success was like through the same reward mechanisms that anybody gets a piece of the success, the evolution of these protocols would look totally different, right, their life cycle, they would have launched V2s, they would have optimized more for rewards. They just like the design decisions would have been totally different versus like sort of sputtering out. And so I think the biggest favor you can do yourself as a builder is don't give yourself those liquid tokens, don't sell any to VCs, maximal utility, bet on it and like find success that way. It's just like, it's a cleaner path. Yeah, that's perfect. Just to wrap it up here, you know, plenty of things we could have asked about, I think going forward, their drone is particularly exciting, given all the success that's expected at base, with coin base and just to show some love to Velodrome, I think the OP Superchain is coming and Velodrome is looking to be the decks on the Superchain. And so I'm very excited to see what you guys have in store. And yeah, thanks for listening.