Aerodrome creator boasts 80% efficiency gain by becoming more like a prediction market

One of DeFi’s biggest developers is taking inspiration from an unlikely place: prediction markets.

On Monday, Dromos Labs, the firm behind the Aerodrome and Velodrome decentralised exchanges, announced at the EthCC conference in Cannes a new feature called “Predictive Allocation,” which it says will increase the efficiency of how its protocols distribute token rewards by 80%.

The feature, set to go live in July, brings the same kind of asymmetric upside that exists in prediction markets to the company’s exchanges, Alex Cutler, CEO of Dromos Labs, told DL News.

“You have the ability to place a bet on something and if your bet is correct you get an outsized reward.”

Prediction markets, like Polymarket and Kalshi, have captured the attention of DeFi developers — including Ethereum co-founder Vitalik Buterin — because of their ability to aggregate information and get closer to the truth than conventional sources.

How it works

Aerodrome and Velodrome both use a vote-escrow model pioneered by Curve Finance to direct liquidity. Here, those who own governance tokens can vote on which liquidity pools receive more tokens as rewards, incentivising liquidity providers to deposit assets.

In return, governance token holders receive so-called bribes to direct rewards to certain liquidity pools.

Currently, token holders vote weekly on which liquidity pools receive the most token incentives.

That will change to a new system where token holders can change their votes in real time. This, according to Cutler, will make the system more efficient and incentivise liquidity providers to be more proactive.

In short, governance token holders can bet on where the best rewards will be before the demand materialises, and those who predict demand best stand to earn the most rewards.

It isn’t a true prediction market like Polymarket and Kalshi, but should benefit from the same market forces.

Cutler said the change will bring Aerodrome and Velodrome another step closer to being able to compete with rival centralised exchanges, which typically provide traders with slightly better prices on swaps.

“If you are able to allocate capital in a predictive way to create markets that don’t exist yet or don’t exist in the correct size, that is not the kind of thing you could do on a centralised order book,” Cutler said.

The feature should also help Dromos Labs as it prepares to launch a new exchange on Ethereum later this year to compete with market leader Uniswap.

AI in DeFi

The new feature is also a bet on the increasing use of artificial intelligence in the $130 billion DeFi ecosystem.

Cutler said big market makers like Wintermute already use algorithms to optimise which liquidity pools on Aerodrome and Velodrome they vote for.

As AI becomes more powerful, those market makers will use it to gain an even bigger edge.

“Imagine a marketplace of agents competing for capital because they think they’ve got the best predictive piece,” Cutler said.

The increased competition should boost market efficiency and create better prices for traders using Dromos Labs’ exchanges.

Dromos Labs’ big year

The Predictive Allocation feature is the latest big update from Dromos Labs in recent months.

In November, the Aerodrome developer announced plans to launch a new exchange and token later this year.

The new protocol, called Aero, aims to further simplify the process of swapping tokens across different blockchains and get better at drawing in investors who provide liquidity, which will allow it to offer crypto traders better prices than its competitors.

Aero will launch on Ethereum, putting it in direct competition with Uniswap on the blockchain where the latter has long dominated.

“We’re very excited for that markets-based competition, where it’s 100% about, ‘what is the most capital efficient?’” Luis Alberto, the executive director of the Aerodrome and Velodrome Foundations, previously told DL News.

“Even if you like the Uniswap brand, if you’re a trader, you’re going to take the most efficient route possible, because you want to trade the best price possible. And so it doesn’t matter who’s offering it.”

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at [email protected].