AERO's Generous Rewards Still Face Inflationary Pressures After Merger

Written by DhruTech

Compiled by AididiaoJP, Foresight News

Aerodrome is the largest decentralized exchange by trading volume on Base. It merged with Velodrome on October 21, 2026, with effect from midnight on the 22nd, and has since operated under the Aero brand across seven chains. Prior to the merger, it had led in trading volume on Base for 22 consecutive months.

It uses a ve(3,3) model: newly minted AERO is continuously emitted, and lockers vote to direct the distribution of these emissions, with transaction fees from the voted pools distributed to voters. The protocol itself retains almost no fees.

The issue is right here. Is a token worth holding when the protocol gives away almost all of its earned fees and relies on token inflation to buy liquidity?

Aero allocates a higher fee share to holders than any major DEX. Over the past twelve months, it distributed 70.6% of fees to locked voters, while Uniswap distributed only 6.3%. The remaining 29.4% went to liquidity providers, with Aero retaining none.

Based on fee base, Aero is roughly one-ninth the cost of Uniswap, but provides a higher absolute amount to holders: over the past twelve months, AERO holders received $86.9 million, while Uniswap holders received $58.8 million.

However, higher distribution does not equal profitability. Over the four cycles ending October 15, for every $1 of new AERO minted, staked voters received only $0.52 in fees and bribes, with the remaining ~$0.48 effectively diluted away. Over 21 full months, only two months achieved “recovered at least as much as minted,” and both were driven by one-time bribes from the project’s launch period—not ongoing transaction fees.

The old system has been net printing money. Over the past twelve months, the value of newly minted AERO exceeded the transaction fees and bribes received by holders by approximately $19.6 million. However, this gap was masked by large pool bribes scheduled for 2026: these bribes were counted as holder income, effectively covering the inflation. Removing the bribes and annualizing the October rate, the gap ranges between $80 million and $105 million.

The merger is designed to close this gap. Under the old system, weekly voting and emissions followed a fixed schedule, minting roughly the same amount regardless of revenue changes. The new system shifts to continuous distribution, with rewards denominated in USD and capped for each pool: rewards cannot exceed 1.2 times the predicted revenue.

Taking the inverse of 1.2 times means that for every $1 of AERO issued, the pool earns only $0.83, and holders also recover approximately $0.83. This is a clear improvement over the old system’s $0.52, but still below $1. In other words, the new mechanism does not break even for the protocol—it intentionally builds in a design where $0.20 of subsidy is provided for every $1 of revenue.

Half of the day-one data is positive; the other half requires monitoring.

Within 24 hours, 81.6% of the veAERO lock weight was converted, but only 10.9% of positions were migrated. A total of 6,654 sAERO positions were allocated, compared to 8,595 positions that voted in the final week of the old system.

On the other hand, TVL was 8.4% below the expected range, first-day trading volume reached only 55% of the pre-merger baseline, and the old pools experienced a 37% outflow within one day.

The report's view is that the position data resembled a clean handover, while the liquidity data looked more like "still in progress" rather than a mechanism failure. But this is only day one.

The real question to answer is: Can an income-linked reward cap transform a distribution sustained long-term by dilution into one supported by customer revenue?

Aerodrome does not generate revenue by charging traders. Traditional AMMs take a cut from each swap—Uniswap, for example, retains about 6% of the fee for the token, with the rest going to LPs. Aerodrome retains nothing.

All trading fees from the pool are distributed to holders who have locked their tokens and voted to support the pool. The protocol does not take a treasury share.

What it truly sells is the right to direct its own token emissions. In each cycle, newly minted AERO is distributed to pools based on voter preferences. Projects seeking deep liquidity can perform their own liquidity mining by paying with their own tokens, or they can pay AERO voters to redirect existing emissions to their pool. The latter is typically cheaper, and this arbitrage is Aero’s business model.

Therefore, Aero's fee is not a pricing power metric because it is not collected; emissions are not a reducible marketing expense because they are the product. AERO is not a claim on protocol profits, but rather a claim on the fees from the pools selected by holders.

Aerodrome's share of trading volume on Base is currently 53.6%, while Uniswap holds 27.1%. The lead in trading volume has never been in question—what has changed is the fee share.

In February 2026, Aero’s share of Base DEX fees dropped to 17.2%, while Uniswap reached 70.4%; by the first 20 days of October, Aero recovered to 48.3%, with Uniswap at 46.1%.

This divergence is precisely the design outcome of ve(3,3). Aero attracts liquidity through emissions, concentrating it on relevant asset and stablecoin pairs with high volume and thin spreads—just 1 to 5 basis points can generate massive trading volume. Uniswap’s volume on Base leans more toward volatile and long-tail assets.

Over the past 22 months, Uniswap earned 2.7 times more fee per dollar of volume than Aero: 25.5 basis points versus 9.5 basis points, with monthly ratios ranging from 1.7x to 5.0x. Aero moves larger volumes with thinner margins.

Aero allocates about 70% of fees to holders, while Uniswap allocates about 8%. This comparison may make Aero seem more generous, but it’s actually comparing two different things.

LPs who stake their positions in a gauge receive newly minted AERO but forgo trading fees; those who don’t stake retain 95% to 100% of trading fees but receive no emissions. Most LPs choose to subsidize.

So the 70% "fee penetration rate" does not refer to the percentage of fees the protocol distributes to holders, but rather the proportion of fee bases that chose to exchange fees for emissions.

If the dollar value of emissions decreases, staking becomes unprofitable, and LPs will unstake, causing both the penetration rate and holder income to decline.

Aero's fee base is essentially a concentrated liquidity business with an additional layer of vote delegation allocation. Slipstream contributes approximately $5.7 million per month in voter fees, while the two V1 pool types combined contribute about $1.2 million per month. Fee performance, like Uniswap V3, depends on how tightly liquidity is deployed and how much trading volume passes through active price ranges.

Over the past twelve months, Aero distributed 70.6% of fees to stakers, while Aero + Velodrome together distributed 71.8%; Uniswap distributed 6.3%.

But Uniswap is not “hiding money.” Most of its fees go to LPs who provide capital, reflecting a different allocation between providers and token holders. The two tokens represent different business segments, so directly comparing their prices to fee multiples is meaningless.

The real difference lies in where the liquidity cost is recorded. Uniswap pays LPs with fees, allocating about 92 cents of every dollar to LPs; Aero pays LPs with newly minted AERO tokens, allowing nearly all fees to go to holders. The cost of liquidity shifts from the expense sheet to the supply schedule.

UNI holders own a small claim to a large business without dilution; AERO holders own nearly the entire claim to a much smaller business, but face dilution to buy liquidity.

After the merger, AERO will be exchanged at a 1:1 ratio, and VELO at a ratio of 0.044. Aerodrome holders will receive 94.5% of the new supply, while Velodrome holders will receive 5.5%. This allocation is based on the teams' prior-year revenues of $260 million and $15 million, respectively.

veAERO and veVELO are converted to sAERO, with the lock-up period extended to next week; permanent lock-ups become four-year staking with no early withdrawal. The upgrade is irreversible, and unclaimed rewards are forfeited.

There are two changes in the mechanism.

First, weekly voting has been removed and replaced with "predictive allocation." Stakers can adjust their emission votes at any time, with each position having a cooldown period of approximately 47 to 48 hours. The goal is to encourage allocators to predict which pools will generate trading fees, rather than extrapolating from last week’s results.

Second, rewards are denominated in USD and capped relative to revenue. The gauge has been replaced by the AER Engine, which determines how much AERO each pool receives and when it is minted. The system forecasts each pool’s revenue—including swap fees, MEV fees, and liquidity payments—and sets the reward cap at 1.2 times the projected revenue, recalculated approximately every 48 hours. For example, a pool projected to earn $100,000 can receive up to $120,000 worth of AERO; any amount exceeding this cap is not minted.

1.2x is a long-term target, not a contractual parameter. The old system prior to the merger was approximately 1.9x, and on a rolling basis, about 2.1x. At a 2.1x ratio, holders recover approximately 47 cents for every $1 of AERO created.

If it truly reaches 1.2 times, holders receive approximately $0.83 back for every $1 issued. This is a structural improvement, but it is clearly below break-even: the protocol is designed to permanently subsidize about 20% of revenue, not to stop subsidies.

This is the most important number for AERO—and the least discussed. It transforms the open question of “Will Aerodrome stop minting more than it pays out?” into a clear, measurable, and falsifiable target.

The old system operated on a fixed schedule, where revenue growth could genuinely improve coverage. The AER Engine changed that.

The reward cap is set at 1.2 times the predicted income of each pool; emissions expand in tandem with income rather than independently. When fees double, emissions roughly double as well, while coverage remains near the designed level of 0.83.

Therefore, growth alone cannot close the gap. Only three scenarios can: rewards go unclaimed, meaning no AERO is minted for unclaimed amounts; the DAO reduces the multiplier below 1.0; or revenue emerges that is not subject to the 1.2x cap.

Pay $1.20 in AERO to earn $1.00 in current revenue—only one logic holds: the liquidity purchased through this emission will remain and continue generating fees in subsequent cycles. You're betting that the liquidity bought with one week's emission will generate enough fees over many weeks to recoup the cost.

At market cap / annualized holder income, Aero is at 10.8x. Among 16 tokens with measurable distributions, the median is 25.1x. Among comparable tokens, only pump.fun is cheaper at 5.8x; Derive is the most expensive at 120x. At fully diluted valuation, it is 17.1x; based on distributions over the past twelve months, the market cap multiple is 8.9x and the FDV multiple is 18.1x.

Net gains for holders can be written as:

Net profit = Trading volume × Fee rate × Staking share + Bribery − AERO inflation amount × AERO price

Staking rates have remained near 70% for an extended period. Base trading volume is at historical highs, while bribes collapsed in previous years. The most sensitive valuation variables are fee rates and emission terms.

If the market only revalues AERO to the industry median, the current allocation implies an approximate $2.1 billion valuation, offering about 2.5x upside from current levels. This is the simplest bull case, requiring no operational improvements—only a market recognition that the discount is unjustified.

The discount exists due to dilution. A more realistic path is: the 1.2x cap actually delivers 0.83, the issuance rate declines toward 8%, and the negative carry issue narrows, bringing the multiple closer to industry peers.

The case for ETH is: fee capture per dollar of volume is moving closer to Uniswap; six new chains bring revenue that Base cannot provide; a significant portion of rewards remains unclaimed, resulting in an actual coverage rate exceeding 1.0; dilution is no longer structural, with the multiple being re-evaluated from 8.4x to 21.8x. Several of these factors can occur simultaneously, and based on the allocation metrics, the token is sufficiently undervalued that not all of them need to materialize.

The Bear Case is: the cap, by design, guarantees perpetual dilution; growth cannot be fixed because emissions expand in tandem with revenue; the Base fee pool continues to shrink; the bribery market is not returning; Aero itself has said that future voting participation may not be necessary, effectively removing the rationale for paying locked-up token holders. In this version, the 8.4x multiple is not a discount, but the accurate price of a token that is generously allocated yet diluted more rapidly.

The mechanism has not been tested, and the target is not a commitment. The gauge reward cap operated for only one day. Aero's own wording refers to it as a "long-term goal," with individual pool caps varying, and the foundation managing the upper bounds of gauges. A target adjustable by beneficiaries carries less enforceability than a mechanical rule. The report recommends applying a discount to the capture rate rather than treating 0.83 as a given.

Before the gap can be closed, this shortfall is real. At the current rate, Aero distributes $80 million to $105 million less per year than it issues. If the new system fails to close the gap, AERO distributions still effectively rely on diluting holders—so it should remain cheap.

Insufficient governance disclosure. The documentation states that the foundation manages fees, gauge upper bounds, and new deployments; however, the foundation’s page claims that sAERO holders govern. These statements conflict, and there is no disclosure regarding multisig or signatories.

Nearly half of Velodrome’s locked weight has not yet been migrated. 47.8% of veVELO remains unmigrated. The exchange rate is fixed at 0.044, and the economic outcome is determined, but the large portion of unmigrated positions still represents unresolved supply.

Liquidity may not fully return. Trading volume on day one was only 55% of the baseline, and TVL is 8.4% lower than the pre-launch benchmark. This could be a temporary transition or permanent loss.

The data quality is also questionable. On September 9, a one-day allocation of $7.94 million appeared without explanation, yet it was included in both the rolling twelve-month and year-to-date figures.

Business is also smaller than before. The Base fee share has increased from 17.2% to 48.3%, but the average monthly Base fees in 2026 are $9.5 million, compared to $19.3 million in 2025. In a shrinking pool, the value of the share is not as significant as it appears.

The key to AERO isn't how high the 70% fee pass-through rate is, but how much sustainable customer revenue each additional dollar issued ultimately generates.

The 1.2x revenue cap transforms the issue into a trackable metric: Is the ratio of actual rewards to pool revenue approaching 1.2x? What percentage of AERO remains unclaimed? Where are sAERO and remaining veVELO being migrated? Has the Base fee pool stabilized? Can bribery monthly revenue rebound from $800,000? Are Slipstream’s fees/volume improving? Is the emission rate declining toward 8%?

These metrics determine whether AERO is a "mispriced small business" or a "correctly priced permanent dilution."