Why is AERO still being dragged down by additional issuance after all fees are passed to holders?

By DhruTech

Translated by AididiaoJP, Foresight News

Aerodrome is the largest decentralized exchange on Base by trading volume. It merged with Velodrome on October 21, 2026, with effects taking place at midnight on the 22nd. Thereafter, it will operate under the Aero brand across seven chains. Previously, it had led Base in trading volume for 22 consecutive months.

It adopts a ve(3,3) model: continuously minting new AERO tokens, which are directed to pools based on voter decisions from lockers, and then distributing the trading fees from those voted pools back to voters. The protocol itself retains almost no fees.

The problem lies here as well. Is a token worth holding on a protocol that gives away almost all earned fees and relies on continuous emissions to buy liquidity?

First, the Bottom Line: Generous Distribution, Not Profitability

The proportion of fees Aero distributes to holders exceeds that of any major DEX. Over the past twelve months, it distributed 70.6% of fees to locker-voters, compared to Uniswap’s 6.3%. The remaining 29.4% went to liquidity providers, with Aero retaining none.

On a fee-base basis, Aero is roughly one-ninth the size of Uniswap, yet the absolute amount distributed to holders is higher: over the past twelve months, AERO holders received $86.9 million, while Uniswap holders got $58.8 million.

However, high distribution does not equate to profitability. In the four cycles leading up to October 15, for every $1 of new AERO minted, locker-voters received only $0.52 in trading fees and bribes during the same period; the remaining ~$0.48 was effectively diluted out of circulation. Across 21 full months, only 2 months achieved 「recovered ≥ minted」, and those 2 relied solely on one-time upfront listing bribes from projects, not recurring trading fees.

The old system was consistently net-minting. Over the past twelve months, the value of newly minted AERO exceeded what holders received in fees and bribes by approximately $19.6 million. However, this gap was narrowed by large pool bribes in 2026: counting bribes as holder income effectively masked the inflation. Removing bribes and annualizing at October’s pace, the shortfall sits between $80 million and $105 million.

The merger aims to close this gap. Under the old system, weekly voting and time-based emissions meant printing proceeded regardless of revenue growth. The new system shifts to continuous allocation, denominating rewards in USD and capping each pool’s rewards at a maximum of 1.2x its predicted revenue.

Reversing the 1.2x ratio means for every $1 of AERO issued, pools generate only $0.83, meaning holders recover roughly $0.83. This is a marked improvement over the old system’s 0.52, but still below breakeven. In other words, the new mechanism doesn’t aim for protocol neutrality; instead, it hardcodes a design where $0.20 is subsidized for every $1 of revenue.

Merger Day One: Clean Position Handover, Liquidity Lagging Behind

Day-one data shows a mixed picture: half encouraging, half requiring observation.

Within 24 hours, 81.6% of veAERO locked weight completed conversion, but only 10.9% of positions migrated. 6,654 sAERO positions were allocated, whereas the last week of the old system saw 8,595 positions cast votes.

Meanwhile, TVL came in 8.4% below pro forma expectations; day-one trading volume reached only 55% of the pre-merger baseline, and old pools experienced a 37% outflow within a single day.

The report concludes that position data resembles a clean handover, while liquidity metrics look more like 「still transitioning」 rather than a systemic failure. But this is only day one.

The real question to answer is whether the revenue-capped reward structure can transform a distribution historically propped up by dilution into one sustained by actual user-generated revenue.

It Doesn't Sell Trading Fees; It Sells Emission Rights

Aerodrome does not profit by charging traders. Traditional AMMs take a cut from each swap, and Uniswap retains roughly 6% of fees for the token while passing the rest to LPs. Aerodrome keeps nothing.

All pool trading fees go directly to holders who lock and vote to support that specific pool. The protocol takes no treasury share.

What it truly sells is the right to direct its own token emissions. New AERO is minted each cycle and allocated to pools based on locker votes. Projects seeking deep liquidity can either run their own liquidity mining programs using their native tokens, or pay Aero voters to redirect existing emissions into their pools. The latter is typically cheaper, and this arbitrage opportunity constitutes Aero’s core business.

Thus, Aero’s fee rate isn’t a pricing power indicator, since it doesn’t charge them. Emissions aren’t a cuttable marketing expense, because they are the product itself. AERO represents not a claim on protocol profits, but rather a claim on 「the fees from pools selected by holders」.

King of Base Volume, Fee Share Riding Rollercoaster

Aerodrome currently holds a 53.6% trading volume share on Base, compared to Uniswap’s 27.1%. Its lead in volume has never been questioned; what changes is its fee share.

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

This divergence is precisely the result of the ve(3,3) design. Aero attracts liquidity via emissions, concentrating it in correlated asset pairs and stablecoins, generating massive volume with thin fees ranging from 1 to 5 basis points. Uniswap’s volume on Base skews more toward volatile assets and long-tail pairs.

Over the past 22 months, Uniswap earned 2.7 times more fees per dollar of volume than Aero: 25.5 bps versus 9.5 bps, with monthly ratios fluctuating between 1.7x and 5.0x. Aero moves larger volumes with thinner margins.

The 70% Pass-Through Rate Isn't Generosity; It's Effective Subsidization

Aero distributes roughly 70% of fees to holders, versus Uniswap’s ~8%. At first glance, this seems to show Aero being more generous, but it actually reveals two distinct dynamics.

When LPs stake positions into gauges (incentive allocators), they receive newly minted AERO but forfeit trading fees. If they don’t stake, they retain 95% to 100% of trading fees but miss out on emissions. Most LPs opt for the subsidy.

Therefore, the 70% 「fee pass-through rate」 does not indicate how much the protocol deducts from fees for holders; rather, it shows how much of the fee base chose to 「trade fees for emissions」.

If the USD value of emissions drops, staking becomes unprofitable, LPs will unstake, and both the pass-through rate and holder income will decline in tandem.

Aero’s fee base is essentially a concentrated liquidity business layered with a voting-lock allocation wrapper. Slipstream contributes roughly $5.7 million/month in voter fees, while the two V1 pool types combined yield about $1.2 million/month. Fee performance mirrors Uniswap V3, hinging on how tightly liquidity is deployed and how much volume trades through active ranges.

Compared to Uniswap, These Are Separate Ledgers

Over the past twelve months, Aero distributed 70.6% of fees to lockers, while Aero + Velodrome combined accounted for 71.8%; Uniswap stands at 6.3%.

But Uniswap isn’t 「hoarding money」. The majority of its fees go to capital-providing LPs, representing a different allocation between suppliers and token holders. Since the two tokens claim different segments of the business, directly comparing price-to-fee multiples is meaningless.

The real difference lies in which ledger carries the liquidity cost. Uniswap pays LPs from fees, allocating roughly $0.92 of every $1 to LPs; Aero pays LPs with newly minted AERO, allowing nearly all fees to flow to holders. Liquidity costs have shifted from the P&L statement to the supply sheet.

In short: UNI holders own a small claim on a large business, protected from dilution; AERO holders hold an almost total claim on a much smaller business, but must accept dilution to fund liquidity acquisition.

The Core Post-Merger: The 1.2x Revenue Cap

Post-merger, AERO converts at 1:1, and VELO at 0.044. Aerodrome holders receive 94.5% of the new supply, while Velodrome gets 5.5%. The team set this ratio based on last year’s revenue comparison of $260 million against $15 million.

veAERO and veVELO convert to sAERO, with lock periods rolling into the next week. Permanent locks become four-year staking with no early exit. The upgrade is irreversible, and unclaimed rewards expire.

There are two mechanical changes.

First, weekly voting is eliminated in favor of 「predictive allocation」. Lockers can adjust emission votes at any time, with a 47-to-48-hour cooldown per position. The goal is to have allocators forecast which pools will generate trading fees, rather than extrapolating from last week’s results.

Second, rewards are denominated in USD and capped against revenue. Gauges are replaced by the AER Engine, which determines how much AERO each pool receives and when it mints. The system forecasts each pool’s revenue, including swap fees, MEV fees, and liquidity payments, then caps the reward value at 1.2x predicted revenue, recalculating roughly every 48 hours. A pool forecasting $100k in revenue would max out at $120k in equivalent AERO; anything beyond that threshold won't be minted.

The 1.2x figure is a long-term target, not a contractual parameter. Pre-merger, the old system hovered around 1.9x, with a trailing average of ~2.1x. At 2.1x, for every $1 of AERO created, holders recovered roughly 47 cents.

If it truly reaches 1.2x, holders will recover ~$0.83 for every $1 of additional issuance. This is a structural improvement, yet clearly below breakeven: the protocol is designed to permanently subsidize roughly 20% of revenue, not to eliminate subsidies.

This is AERO’s most critical metric, and also its least discussed. It transforms the open question of 「whether Aerodrome will stop printing more than it pays out」 into a clear, falsifiable numerical target.

Why Growth Cannot Automatically Fill the Gap

Under the old system, emissions ran on a fixed schedule, meaning revenue growth genuinely improved coverage ratios. The AER Engine changes this dynamic.

Since the reward cap is set at 1.2x each pool’s predicted revenue, emissions expand in sync with revenue rather than independently. Double the fees, and emissions roughly double, keeping the coverage ratio stuck near the designed 0.83.

Therefore, growth alone cannot close the gap. Only three scenarios can: rewards go unclaimed, so unclaimed AERO simply isn't minted; the DAO lowers the multiple below 1.0; or revenue emerges outside the 1.2x constraint.

Paying $1.20 in AERO to buy $1.00 in current revenue only makes logical sense if: the liquidity purchased via emissions stays put and continues generating fees in subsequent cycles. The bet is that liquidity bought with a week's emissions will earn back fees over many future weeks.

Valuation, Bull Case & Bear Case

Based on Market Cap / Annualized Holder Income, Aero trades at 10.8x. Among 16 tokens with measurable distributions, the median is 25.1x. Of comparable names, only pump.fun is cheaper at 5.8x; Derive is the priciest at 120x. On a fully diluted basis, it's 17.1x; using trailing twelve-month distributions, the market cap multiple is 8.9x and the FDV multiple is 18.1x.

Holder net yield can be expressed as:

Net Yield = Volume × Fee Rate × Stake Share + Bribes − AERO Issuance × AERO Price

The stake share has long hovered around 70%. Base volume sits at historical highs, while bribes collapsed in previous years. The most sensitive variables for valuation are fee rates and emission terms.

If the market merely re-rates AERO to peer medians, current distributions imply an approximate $2.1 billion valuation, offering roughly 2.5x upside from current levels. This is the simplest bull case, requiring no operational improvements, just a market acknowledgment that the discount is unjustified.

The discount persists due to dilution. A more realistic path involves: the 1.2x cap actually delivering 0.83, issuance rates declining toward 8%, and negative carry pressures easing, bringing multiples in line with peers.

The bull case entails: fee capture per dollar of volume converging toward Uniswap's; six new chains generating revenue unavailable on Base; a significant portion of rewards going unclaimed, pushing actual coverage above 1.0; and dilution becoming non-structural, driving re-rating from 8.4x to 21.8x. Several of these can occur simultaneously, and based on distribution metrics, the token is cheap enough that not everything needs to happen.

The bear case posits: the cap inherently guarantees permanent dilution; growth cannot fix it since emissions scale with revenue; the Base fee pool continues shrinking; the bribe market fails to return; and Aero itself hints that voting participation may become unnecessary in the future, effectively removing the rationale for paying lockers. In this scenario, 8.4x isn't a discount, but the accurate price for a token characterized by 「generous distribution paired with faster dilution」.

Risk Checklist

The mechanism remains untested, and targets are not commitments. Gauge reward caps have only operated for one day. Aero’s own phrasing calls this a 「long-term goal」, individual pools can vary widely, and the foundation manages gauge cap boundaries. A target adjustable by beneficiaries lacks the rigor of mechanical rules. The report recommends discounting the capture rate rather than treating 0.83 as a given.

Until proven otherwise, this gap is concrete. At the current pace, Aero distributes $80 million to $105 million less annually than it issues. If the new system fails to narrow this gap, AERO’s distribution remains fundamentally paid for by diluting holders, meaning it should trade cheaply.

Governance disclosure is insufficient. Documentation states the foundation manages fee rates, gauge cap boundaries, and new deployments; yet the foundation page claims sAERO holders govern. These conflict, with no multisig or signer disclosures provided.

Nearly half of Velodrome's locked weight hasn't migrated yet. 47.8% of veVELO remains unconverted. While the exchange rate is fixed at 0.044 and economic outcomes are set, this large block of unmigrated positions remains pending supply overhang.

Liquidity may not fully return. Day-one volume hit only 55% of baseline, and TVL sat 8.4% below pro forma figures. This could be transitional or represent permanent attrition.

Data quality warrants scrutiny. A $7.94 million single-day distribution occurred on September 9 with unclear origins, yet it simultaneously appeared in both trailing twelve-month and year-to-date metrics.

The underlying business is also smaller than before. While Base fee share rebounded from 17.2% to 48.3%, average monthly Base fees dropped from $19.3 million in 2025 to $9.5 million in 2026. Fighting for share in a contracting pool yields less value than it initially appears.

Conclusion: Track What Each $1 of Issuance Buys Back

The crux of AERO isn't how high the 70% fee pass-through rate is, but how much sustainable user-driven revenue each $1 of issuance ultimately buys back.

The 1.2x revenue cap turns the issue into trackable metrics: whether the ratio of actual rewards to pool revenue approaches 1.2x; what percentage of AERO goes unclaimed; where sAERO and remaining veVELO migration stands; whether the Base fee pool stabilizes; if monthly bribe revenue rebounds from $800k; whether Slipstream's fee-to-volume ratio improves; and if issuance rates trend downward toward 8%.

These metrics will determine whether AERO represents a 「small business mispriced at a discount」 or a 「permanently diluted token accurately priced」.