[AlphaGrowth] Increasing Utilization for the Base AERO Market

Context:

The AERO Market on Base represents an unrealized opportunity for growth, and has a clear set of communities to serve.

Below, we outline a strategy for healing the AERO market through focusing on the AERO ecosystem as a unique sub-niche with its own motivations for using Compound.

veAERO Leaderboard:

This is the veAERO Leaderboard:

It’s a Dune Dashboard which shows the protocols that have decided to integrate Aerodrome into their Strategies for Protocol Owned Liquidity.

  • $62.4M in locked veAERO exposure
  • 67 Protocols in competition with each other to build more veAERO.

These protocols have made a bargain, where in exchange for LP Incentives, they have submitted themselves to AERO’s volatility, and a game of constant accumulation and dilution.

As an asset, veAERO represents the ability to direct yield toward a DEX Liquidity Pool. Compound might see veAERO as a perennial incentive program which can boost yield for our structured products, and motivate protocols to manage their POL Strategies with Compound.

We don’t need to own veAERO to provide these incentives – we just need to support the objectives of major players on that Leaderboard, and provide them with an advantage over their peers.

Compound as a Solution:

Compound can provide two solutions around the AERO market on Base:

  1. We can help protocols build their veAERO position through automated structured products.

Long positions would use automated strategies to leverage an asset that the partner treasury holds to build POL and veAERO.

  1. We can help protocols hedge against their veAERO position, allowing them to scalp volatility to outperform their competitors.

If we grow supply side liquidity, we can provide Delta Neutral Vaults for veAERO, and help treasuries protect their locked exposure against downside volatility.

Our AERO market has had negative interest rates for weeks, and during that time, the price of AERO has dropped 56.5% in value.

There is only 5.9M in available supply-side liquidity, but the veAERO Leaderboard has 67 treasuries that could have used that liquidity to hedge their veAERO. We were paying people to positions, and the market remained under-utilized.

The right partner could have eaten up that supply, and used the following strategy:

  1. Deposit 15M in Collateral.
  2. Borrow 5M veAERO at $2.
  3. Repay 5M veAERO loan at $1.
  4. Buy 5M in veAERO from the difference.
  5. Rotate Collateral into a POL building strategy.

5M in veAERO is a massive advantage on this list, because all of these treasuries saw their veAERO holdings halve in USD terms over the course of one month. Compound could have helped them protect themselves, and increase their standings amongst their competition.

The hierarchy of veAERO positions translates directly to Yield for their LPs, so any meaningful advancement on this leaderboard means serious advantage in building up POL, and offering yield to community members who are also Liquidity Providers.

Imagine we had helped Inverse Finance gain $5M in veAERO holdings through facilitating a hedge position, and in return, they provide COMP - DOLA LP with even $1M in veAERO voting power?

How else would Compound gain access to $1M of veAERO voting power, in a month?

The Assets and New Markets Business Unit is a dedicated team, who would provide the type of focus that markets like AERO need to succeed.

Action Steps:

We have already taken steps toward these objectives:

  • We have secured grants and have had offers from builders to create a veAERO hedging product.
  • We have assisted fBOMB with their Collateral Listing on the ETH market on Base.
  • We have developed a strategy which would help our current partners build veAERO and POL, and are ready to build with Vaultcraft.

We need support from Compound Governance to enable the policies and listings necessary for these experiments, and to fund the New Assets & Markets Business Unit.

Additional Resources for Further Understanding:

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I get the sentiment because the demand to collateralize veTokens is probably very high. How does one liquidate veAERO if needed? I dont think there is an easy way to do that

veTokens are notoriously illiquid on secondary markets, even veAero has issues selling at substantial discounts. Not sure if this is viablee

Treasuries would not be depositing veAERO as collateral.

The hedging is about relative exposure – so if you hold 1M veAERO, your treasury would deposit 3M or 4M worth of collateral:

  • cbBTC
  • wstETH
  • ETH

DCA entry Borrow 1M AERO @ 2.2.

Sell half of what you borrow, when you borrow it, and LP with the other half – so you have an AERO - USDC LP

  • Earn 46% APR on the LP.
  • Earn 51% APR on the Lock.

Deposit all APR into Collateral, and scale into your LP.

Withdraw the LP and Repay the loan when AERO is @ 1.
Pull out your collateral, back to your treasury.

Profit ~$600k USDC. Buy more veAERO.
You’d also get a bonus of 40% to your deposited 600k USDC in veAERO through Flight School.

Now you have 1.84M veAERO.
.:.

Not without risk, but if you want to climb the veAERO ladder, not a bad way to do it.

67 potential treasuries who might make that trade.

I dont believe that many treasuries will be taking directional bets like you outline even though it is a good trade

A lot of them are extremely risk off

Why would a project put up $4m of collateral to borrow against $1m of veAERO?

BTC doesn’t dump.
AERO dumps frequently.

These protocols are all long and locked AERO.
They want to accumulate more.

They could assume a “delta neutral” position, where they shortsell AERO using an AERO - USDC LP Strategy to subsidize funding rates.

This would reduce their exposure to veAERO during periods when AERO drops 50 to 80%, which has happened at least twice in the last year.

These companies - their treasuries go from being worth 20M to 10M in veAERO, and they are basically in hostage, due to their need to incentivize LP.

I am assuming that a treasury holds BTC as an asset, and would use it as collateral, to neutralize their exposure to locked veAERO, and then use that shortsell to accumulate more veAERO through the hedge.

Afterward, you get to keep your BTC.

The percentage is about LTV.

Could be 50 cbBTC to $1M in AERO.

.:.

There is a risk that AERO will moon. but, I think that if you used the LP strategy, you could still avoid liquidation.

The strategy makes sense to me, and it is a good way to increase utilization of the AERO market on Base.

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If you are criticizing this strategy, then, you should think to yourself,

“If I were in charge of Growth for the AERO Market on Base, how would I increase legitimate, long term demand for borrows of AERO as an asset?”

The solution is either LP Farming, or Shortselling.

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