@monteluna

Some thoughts on @aerodrome and the recent price action, words said, and yadda yadda: Let me explain why people who are bullish Base but also bearish Aerodrome are actually holding two contradictory statements in their heads. The main problem with Aerodrome is people really don't understand finance. Finance is simply put, all about swaps of time and risk. It's hard to communicate this to people because they don't understand why swaps of time and risk are more efficient, because many people's only exposure to this kind of product is a Mortgage and Insurance. This is also why it took Pendle almost 2 years to finally get people to use it. Pendle is a great example because it's combining a risk swap with a time swap. You have variable onchain interest rates, but using Pendle you can swap your position with a fixed rate that ends at a certain time. This is great because somewhere, there's someone who's happy to take your variable rate and be charged a little extra. Each trade ends with someone who's SHORT the rate (that wants to lock in a specific interest over some time), and someone who's LONG the rate (that wants to possibly lever up or increase their exposure to onchain interest rates. Aerodrome is basically the same thing. When an LP deposits a position on Aero, they give up their fees to AERO token stakers. In return, they receive a fixed amount of AERO proportional to emissions. AERO stakers are basically LONG fees, while LPs are SHORT fees. AERO stakers hold a token that represents future income of fees on the protocol. Now what are fees? A good analogy is Fees = Volume + Volatility. Fees are a combination of volume, and volatility of the tokens themselves since Aerodrome has dynamic fees. When tokens rapidly move up and down, the Volatility increases the fees. As MEV bots, swap aggregators, and market makers utilize liquidity in Aerodrome, they pay a fee to Aerodrome. From this, it's really funny that someone can be bullish Base but against Aerodrome. Most of the liquidity in Base is with Aerodrome, which means as more users tap into the liquidity, the volume of trades increase. Also, when we have price movements both up and down, the volatility increases, which also increases the fees. Aerodrome currently has a Market Cap of $800M, but annualized fees are $180M. Someone who thinks Aerodrome is bad, probably isn't thinking that the fees and locked capital are pretty much guaranteed to go up as more users come onchain. This can only either increase volume or volatility. A little bit on the volatility part, it's also funny when the market goes down and volume spikes, because it means during that week, AERO stakers will get a big payout for that week in fees earned. If the market was efficient, AERO would actually *not* go down when the market nukes, because it means that week the fees earned are large. You can actually verify this by looking at the data when we have big price moves. The volatility can be either when the market goes down, or the market moves up. One of the fun trades I have been doing over the year is accumulating more locked AERO during market downturns, since everyone is afraid and won't buy it. It's completely counter-intuitive that this should happen and AERO buyers basically receive a discount on more future earnings for the protocol. People tend to think about the price of AERO only, but they should be thinking in financial terms about what the expected future cashflows are, since buying AERO is capturing those future cashflows via staking. $1 of bought AERO buys fees for the future. This is the "fundamental value" of AERO. Even if you assume most of the tokens are junk, it still does WETH, CBBTC, and USDC (along with some other forex tokens) volume. You simply cannot be bearish Base/Coinbase while being bearish AERO, because the reasoning means fees accumulated through automated swaps will somehow reduce. It's possible of course, but how that happens with Coinbase and Circle massively expanding is difficult to say. Of course there are other competitors and chains that I like that also do swaps of yield (Berachain, Hydrex), but the move to go multi-chain for Aero should only expand the surface area of available liquidity. Sure, a clone from Robinhood Chain can appear, but Aero can soak liquidity from any other chain by deploying there, and Aero holders will get the benefit of volumes across multiple chain dexes. If you're bearish swap volume and volatility, idk what to tell you except sell all your coins now and buy t-bills. On Uniswap, it's a great product but the token does not return 95% of fees to holders. The post states LPs will receive only 75% of fees earned, while UNI will payout the other 25%. You can totally do a CAPM on annualized fees for both UNI and AERO, and compare it to the actual price. What you'll find is Uni is also underpriced versus it's fees earned, so UNI holders are receiving a discount! The problem is the LPs since this must balance out. For the same amount of capital, LPs *could* earn a full 95% of fees in AERO terms, and also receive a token representing all future cashflows of the system. It's widely known Uniswap LPs are undercutting themselves by supplying capital onto Uniswap, but they don't seem to want to remove capital from Uniswap. The main question for everyone from a purely financial sense is, how long do Uniswap LPs want to continue to be undercut, have their fees taken, and take a variable fee rate instead of a swap that locks in lower fee volatility and gives you upside in future returns? That's why I'm bearish Uniswap! At some point the market should realize supplying capital to Uniswap and receiving a variable 75% is less efficient than taking a fixed rate swap at 95%. Uniswap is fantastic, but the model is for LPs that like to lose money. If they do wake up and realize some semblance of the financial math, the capital pool will drop, leading to higher spreads (via Uniswap math), and MEV solvers will reduce volume onto Uniswap. It does currently have a ton of volume due to the large amount of capital locked in with tight spreads, but if that capital goes to more efficient venues like an Aerodrome, the fees and the future cashflows going to UNI will go down. Lastly on Hydrex: Hydrex essentially is vampire attacking by allowing both Uniswap and Aero pools on it's system, but I'm not sure anyone realizes that yet. I can wrap a Uniswap LP position and give you the same fixed rate on Aerodrome does, but can also service any other defi vaults, including Aerodrome. Hydrex doesn't openly talk about this but it does the same yield swap, but takes any position onchain as a deposit. It's basically a Sushi flip of Uniswap and Aerodrome. Fun to think about once the market realizes this! As usual, nfa dyor.

13 replies

15 recasts

102 reactions