Kicking off this series on the MetaDEX, Part 1: On DEXs breaks down the business model of a Decentralized Exchange (DEX) and outlines the core challenges leading DEXs have faced. The MetaDEX’s primary design change to address these challenges has been economic, and central to this change has been the token design. To introduce the MetaDEX, it is best to begin by discussing the role of the native token in DEXs.
As shown in Curve’s example, a native token can have several key uses for a DEX. It can:
Drive enduring usage by rewarding valuable participants
Direct value through governance control
Coordinate behavior by requiring certain actions to unlock functions
A token can act as a powerful, unifying element of a DEX economy, balancing the interests of various stakeholders and facilitating the protocol’s decentralized management. Thoughtful token design has advanced the MetaDEX beyond previous DEX models, as shown below in the case of Aerodrome.
A DEX economy needs a token that can distribute and manage generated value
As a DEX, Aerodrome has the potential to generate enormous value through trading fees and liquidity incentives deposited by partners on Base. Indeed, Base’s growth has allowed Aerodrome to stand out as one of the most productive protocols anywhere onchain—along with several other DEXs.
A major takeaway from Part 1: On DEXs is that a DEX economy built to win requires a token because a token allows the DEX to fully distribute and manage its generated value in a way that keeps users on the platform. Uniswap, whose token does not participate in its economy, is an example of a protocol that lacks this feature; it is unable to prevent LPs from moving to protocols offering more than just trading fees.
How best to distribute and manage this value is a complex issue in DeFi. Designing app tokens requires careful consideration of not only legal and regulatory factors, as highlighted in a16z’s insightful piece on the topic, but also competitive and structural concerns. Due to the lack of extensive precedent, no universally superior token models have emerged. Tokens generally offer at best some degree of value distribution or management, but rarely both, and rarely to the fullest extent possible.
Tokens should fully distribute value
The share of value that goes to a protocol’s users is critically important—and often overlooked. In a permissionless, decentralized setting, the protocol that most effectively distributes value to its stakeholders in proportion to their contributions will outperform others that do not. This is because users will naturally gravitate toward systems that provide them with the greatest surplus, and offering complete, efficient distribution is in effect the most any protocol can offer. This dynamic is crucial in DeFi and will be explored in more detail in a future discussion.
There is plenty of precedent in protocol token models offering partial distribution. Pancakeswap allows CAKE stakers to participate in a share of fee generation on a subset of pools. Curve distributes fees and incentives across LPs, veCRV voters, and additional layers such as Convex.
But for the most part, DeFi protocols reserve fees within a DAO treasury and promise tokenholders they’ll get access to this treasury in some way. All of these structures present major limitations for tokenholders, who often have no direct influence in how value is distributed, and in several cases do not see the vast majority of value that is generated. All too often, DAO treasuries become captured by insiders and vendors, without regard for the projects’ long-term health.
Distributing all value to participants over even insiders is an exceedingly rare feature in DeFi. Of the top 10 most productive DeFi dApps, only two distribute all produced value to tokenholders: Aerodrome and Velodrome.
Tokens should manage value
Another precondition for an effective token model is the token’s ability to manage generated value in a way that encourages active participation by holders. The thinking here is twofold:
Passive stakeholdership isn’t of much use in decentralized systems. Businesses have a purpose for passive equityholders or lenders; they provide capital so that executives and their employees can carry out a business plan on their behalf. Fully decentralized systems, however, have little need for any central agents to conduct business and correspondingly, there is little need for a class of capital provider that does little else for the system.
Tokenholders receiving distributions are likely to act in ways that maximize the protocol’s value generation in the long term. Even when systems are fully decentralized, they may benefit from human intervention and decision-making, in the way that markets can act as effective optimizers.
Having a class of long-term tokenholders that receive value distributions is helpful when these tokenholders are given some control over key protocol functions. Because these tokenholders are highly incentivized to maximize their distributions over time, as a group they should act for the protocol’s benefit. The advantage is clear compared to passive tokenholders, who would have little reason to remain engaged in their protocol’s functions. The upshot here: in effective token models, tokenholders are just another class of user, operating a protocol to their own ends.
Token design that accounts for specific tokenholder roles remains a highly underplowed design space in DeFi. Among the top 10 most productive DeFi dApps, once again, only two require active participation to receive distributions: Aerodrome and Velodrome, the two leading examples of the MetaDEX.
The MetaDEX’s token model both fully distributes and manages value
MetaDEX takes a novel approach, one aligned with stakeholder capitalism and a16z’s recommendation that participation be required to share in value distribution.
Value Distribution: On Aerodrome, 100% of the value generated from fees and incentives is distributed to veAERO voters, permissionlessly and immutably, on a weekly basis.
Value Management: To be eligible for these distributions, veAERO holders must perform their essential role for the protocol, which is to direct AERO emissions to the liquidity pools on the DEX.
This model allows for the fair and predictable distribution of protocol value, removing space for arbitrary decision-making observed in DAOs and developer teams. In its place, veAERO voters perform well-defined tasks to most efficiently manage the protocol.
MetaDEX tokens in depth
AERO: the engine’s fuel
AERO is Aerodrome’s native token. It is a standard ERC-20 token and has no unique capabilities. Its primary role is to distribute value across the entire Aerodrome economy.
Every week, the protocol directs a preprogrammed amount of AERO emissions to liquidity pools to attract liquidity providers (LPs) and compensate them for the risk they take on. In return, the system builds up deep liquidity to generate trading fees for Aerodrome.
Upon receiving AERO, LPs have several ways they can use it to their benefit: they can simply hold the AERO in their wallets, redeposit as liquidity for AERO pools, swap it for other tokens, or perform a unique action available only with AERO—locking it as vote-escrowed AERO, or veAERO.
Locking AERO for veAERO
AERO’s second role is to grant its holder the option of locking it as veAERO and performing tasks in exchange for a share of value generated by Aerodrome.
When holders lock, they receive an NFT that represents their veAERO. The duration of the lock-up determines the amount of veAERO that the NFT controls. The calculation for the amount of veAERO is:
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For example, locking 100 AERO for one year creates an NFT that controls 25 veAERO. This 25 veAERO decreases linearly to zero as time passes.
At any point, users have the option to extend the lock period for their veAERO NFT up to four years, which adjusts the veAERO amount to match the total AERO locked. Additionally, users can lock more AERO into the same NFT. To simplify this process, Aerodrome provides an Auto-lock function that automatically re-locks AERO for the maximum four years.
Once the lock expires, the NFT’s owner can redeem it for the original amount of AERO locked plus accumulated bonuses. Throughout the lock duration, no net AERO is created or destroyed.
How a voter participates in the MetaDEX is up to them. As detailed below, what a veAERO voter gets out of Aerodrome depends on how they choose to use it.
veAERO: A Strategic Responsibility
If AERO exists as the reward token, veAERO is what gives control over the rewards. veAERO holders have a special responsibility in the Aerodrome economy: they have the opportunity to direct a share of emitted AERO toward any pool for rewarding LPs. In return, each week they receive 100% of fees and incentives generated by the pools they’ve directed AERO to.
Because veAERO holders only benefit from the pools they vote for, they are motivated to make strategic decisions, in contrast to veCRV voters, who receive a share of the entire DEX's fees and incentives regardless of their actions.
Giving individual voters a stake in their choices provides a vital coordination mechanism, reflecting the highly diverse priorities of Aerodrome’s distributed holder base. Different stakeholders, such as partner protocols, funds, and larger investors like Coinbase Ventures, each have unique motivations. For example, some focus on supporting specific pools, while others aim to maximize liquid rewards. This alignment of interests ensures that market forces drive efficient outcomes, with voters supporting pools that align with their goals and receiving the specific benefits they seek.
veAERO: A Moat
It is in part Aerodrome’s ability to cater to users’ specific needs that has given it a noticeably broad veAERO holdership among similar DeFi protocols.
As the number and breadth of veAERO holders grow, so does Aerodrome’s economic resilience. The community’s stake in Aerodrome's success makes it central infrastructure that attracts and retains participants, reducing the appeal of competing DEXs. Switching to a competitor would require significant effort and loss of ongoing participation in Aerodrome's economy, making it an unattractive option.
Moreover, because Aerodrome distributes 100% of its value to participants—and does so in a way where individual participants are able to dial in their preferred outcomes—it becomes difficult for competitors to offer more compelling incentives. This broad participation strengthens Aerodrome's position as the leading DEX, creating a formidable moat that is challenging for rivals to overcome. This is key to the protocol’s resilience.
Refreshing the stakeholdership
Token locks for governance helps build a dedicated community, but rigid lock terms can alienate members who prefer flexibility. Non-transferable locks also prevent the community from refreshing itself with new, committed users. While stability is important, a healthy economy needs some fluidity to maintain engagement.
Aerodrome solves this by wrapping veAERO as a transferable NFT, allowing users to sell their locked positions. This flexibility attracts a broader range of participants and reduces the need for derivative layers that extract value. By enabling exits through sales, the system keeps the community dynamic and engaged, ensuring that new buyers are committed to the protocol.
Just like any community, the MetaDEX is strongest when it can evolve with the times.
veAERO voters are the last word
Because Aerodrome is a decentralized protocol, veAERO voters should be understood as the primary stewards of the protocol’s operation and longevity, as well as the primary beneficiaries, with no other insider group being privileged.
In fact, even core contributors who helped to build and shape Aerodrome are not treated as a separate entity from veAERO voters—they are veAERO voters, funding their operations from continuously locked veAERO positions.
This radical alignment between core contributors and other protocol stakeholders is virtually without precedent in conventional organizations or even onchain protocols. Typically, teams are tasked with building and maintenance in exchange for vested tokens, ultimately funding their operations through token sales or other sorts of value extraction.
This alignment also follows from the logic of decentralized organizations: if there is only a limited role for a centralized team in the long term, then there should be limited privilege for such a team. Offering limited privilege has two benefits. First, compensating core contributors in a non-privileged way reaffirms their role as nothing more than power users, limiting principal-agent issues. Equally importantly, it allows for redundancy in team contributions; in this arrangement, other teams can work on the protocol with the promise of benefiting in a manner similar to the first, reducing reliance on the original contributorship. The result: an open organization, endlessly adaptable and fully in the service of its users.
Emissions are a key part of the MetaDEX economy
The MetaDEX’s token model is central to its outperformance among DEXes and to its radical adherence to decentralization and incentive alignment. Equally central is its compensation model through AERO emissions. The next installment will discuss these emissions, exploring their integral role in the MetaDEX economy and layer ecosystem.
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