Designed to optimise the provision of liquidity, Aerodrome is a fork of Velodrome (which operates on the L2 Optimism, member of the Superchain ). The platform allows users to generate passive income by participating in liquidity pools and receiving incentives in the form of native AERO tokens. This guide details how liquidity provision on Aerodrome works, explains where returns come from and outlines strategies to maximise your earnings, even as a beginner.
What is a ve(3,3) DEX? A ve(3,3) DEX like Aerodrome marks a major evolution from traditional DEXs and their conventional liquidity pools. The ve(3,3) model, introduced by Solidly and popularised by Velodrome , is based on a mechanism that combines vote-escrowed tokens and incentive governance. Whereas traditional DEXs are limited to redistributing transaction fees to liquidity providers (LPs), a ve(3,3) DEX allows participants to lock their tokens in order to obtain veTokens. This system offers them the opportunity to maximise their returns through customised boosts and to actively participate in the governance of incentives.
The key advantage of this model is that it efficiently directs liquidity to strategic pools while aligning the interests of LPs and the projects that fund their liquidity. This approach improves returns, stabilises long-term liquidity and reduces selling pressure on native tokens through extended lock-in. The system also ensures more efficient trading with low slippage, made possible by optimised concentration of liquidity. By aligning the interests of all players, this model fosters dynamic governance and a stronger ecosystem.
Understanding returns: where do they come from? Liquidity providers (LPs) on Aerodrome benefit from returns from three main sources:
Trading fees : Each transaction on Aerodrome generates fees that are redistributed to LPs in proportion to their share of the pool.Token incentives (AERO rewards) : Aerodrome distributes native AERO tokens on specific pools to encourage the provision of liquidity. These rewards are calculated according to the amount of liquidity provided and the length of participation.Boosted returns via veAERO : By locking their AERO tokens in the form of veAERO (vote-escrowed AERO), users can increase their rewards. This system encourages long-term staking, reduces selling pressure and enhances participation in governance while optimising returns.How do I start providing liquidity on Aerodrome? 1 - Acquire compatible assets :
Make sure you have compatible assets, such as ETH , USDC or other tokens supported on Base. Buy these tokens on centralised platforms such as Coinbase or Binance, then transfer them to a Base-compatible wallet (such as MetaMask or Rabby). Keep a few ETH dollars in your wallet to cover network transaction fees. 2 - Connect your wallet to Aerodrome :
Go to the Aerodrome platform. Connect your wallet (MetaMask, Rabby or similar) and switch to the Base network. 3 - Add liquidity :
Access the "Liquidity" section to discover all the liquidity pools available on Aerodrome. Here you will find different types of pools:
Active: displays all available pools. Stable: groups together pools of correlated assets (such as stablecoins or tBTC-cbBTC), where the risk of impermanent loss is minimal.Volatile: contains pools of uncorrelated assets (such as ETH-USDC), with a higher risk of impermanent loss.Concentrated: brings together pools using concentrated liquidity technology. These pools offer potentially higher returns due to greater efficiency, but require more active management and carry a higher risk of impermanent loss.Incentivized: brings together pools benefiting from AERO incentives, generating higher RWAs.Participating: displays the pools where you have already deposited liquidity.Based on the assets in your possession, select the liquidity pool that matches your objectives to deposit your assets in.
4 - Store your LP tokens :
After adding liquidity, you will receive LP tokens that represent your share in the pool. You can exchange these LP tokens for your initial assets when you wish to exit the pool. Keep them safe!" Stake these LP tokens on Aerodrome to start earning trading fees and rewards in AERO. The option becomes available as soon as your assets are deposited and your LP tokens received. Please make sure to stall your LP tokens, otherwise you won't get any returns. 5 - Boost your rewards with veAERO (optional for advanced users) :
Lock your AERO tokens to get veAERO. This allows you to vote on incentive distribution and increase your reward multiplier.
6 - Manage your positions:
Easily track your positions, APRs and rewards from the Dashboard tab. Here you can harvest your returns, as well as add or remove liquidity in just a few clicks.
Advantages and disadvantages of providing liquidity at Aerodrome Advantages: Multiple revenue streams : Benefit from trading fees, token incentives and boosts via veAERO.Lower fees with Base : Low transaction fees on Base maximise your net returns.User-friendly interface : Aerodrome makes liquidity provision accessible, even for beginners.Participation in governance : Locking AEROs into veAERO gives you voting power and boosts your rewards.Proven security : The ve(3,3) DEX model, already validated by Velodrome, offers proven reliability.Dominant liquidity : Aerodrome is the leading protocol on Base with a TVL in excess of $1.4 billion, far ahead of Uniswap which tops out at $320 million.Drawbacks: Impermanent loss (IL) : Price variations between assets can reduce the value of your position, particularly in pools of concentrated liquidity.Volatility of tokens : The fluctuating value of AERO rewards can impact your returns in both directions.Overestimated APRs : The rates shown for concentrated liquidity pools represent a theoretical maximum. In practice, these returns would require too narrow a price range, unsustainable in the face of costs and risks of impermanent loss. Actual returns are generally more modest.Complexity of veAERO : The lock-in system can confuse beginners and locks in your funds for a defined period.Risks to consider Impermanent loss (IL) : This risk inherent in providing liquidity is minimal for stable pairs (USDC/DAI), but can significantly affect volatile pairs such as ETH/USDC during sharp price swings.Vulnerabilities of smart contracts : Despite Aerodrome's audit and the proven reliability of the ve(3,3) model, no protocol is completely immune to flaws. Caution and diversification remain essential.Market and regulatory risks : Market and regulatory developments may influence the value and operation of AERO and Base.Conclusion Aerodrome is an efficient solution for providing liquidity on Base. By combining trading fees, incentives and boosted returns, liquidity providers can generate passive income within a major DeFi ecosystem. Beginners will benefit from focusing on stable pairs and reinvesting their gains, while gradually discovering advanced features such as veAERO. With a measured approach and a good understanding of the risks, Aerodrome proves to be a powerful tool for developing your crypto portfolio.
