Introduction

Solidly has emerged as one of the most discussed and controversial innovations within Decentralized Finance (DeFi).

This novel design was born out of the need to address inefficiencies in liquidity and incentives in Decentralized Exchange (DEX) models at the time, such as Curve and Uniswap.

Solidly combined automated market makers (AMMs) with innovative tokenomics to align incentives between token holders and liquidity providers (LPs). Rather than prioritizing Total Value Locked (TVL), this design emphasized fees generated by the platform.

This report introduces Solidly, examining its foundational principles, core components, and the challenges it encountered. A subsequent analysis explores the model’s successes, failures, and resurgence through refined implementations.

Projects such as Solidly V2, Ramses, Velodrome, and Hermes are examined in the evolving landscape, highlighting how new developments have changed their designs. 

These include but are not limited to, the role of Layer 2 (L2s), omnichain protocols, intents, improved governance structures, and tokenomics.

Setting the Stage

During DeFi summer, we witnessed the emergence of the first DEXs pioneering the AMM model, such as Bancor, Uniswap, and Sushiswap. 

These early iterations prioritized liquidity over fees, aiming to minimize slippage and inefficiencies by ensuring ample liquidity in pools.

Many relied on liquidity mining to attract liquidity, offering native tokens as rewards. However, this approach presented significant challenges:

1. Mercenary Liquidity: Liquidity migrated to the highest rewards, lacking long-term commitment.

2. Impermanent Loss (IL): LPs often incurred losses, discouraging sustained participation.

3. Inflationary Pressure: Excessive token minting led to inflation, diluting LPs and creating downward price pressure, with most rewards being farmed and dumped.

Recognizing these issues, Curve introduced a novel tokenomics framework emphasizing liquidity and protocol fees. Users could lock CRV tokens into veCRV (vote escrow CRV) for durations ranging from one week to four years, with rewards proportionate to the lock period. A four-year lock yielded a 4:1 veCRV-to-CRV ratio.

This locking mechanism aligned user incentives with the protocol, ensuring they had “skin in the game” in its long-term success. 

Additionally, veCRV holders enjoyed several benefits:

• Fee Sharing: 50% of Curve’s fees and 80% of crvUSD interest were distributed to veCRV holders.

• Boosted Rewards: Enhanced CRV rewards for LPs holding veCRV.

• Governance Rights: Users can vote on-chain and use gauges to decide how future emissions will be allocated (e.g., how much CRV each pool will receive).

However, Curve’s model had shortcomings of its own. Emissions were allocated to pools with the highest liquidity, disregarding trading volume and fee generation. High CRV emissions and inflation also diluted rewards for smaller LPs, exacerbating the system's inefficiencies.

The situation became more complex with the advent of Convex, which acquired a significant share of Curve’s voting power. This led to “bribes,” where protocols incentivized veCRV holders to vote for specific pools by offering higher rewards in their native tokens, ensuring they received the most emissions.

This raised another problem: ensuring the community participants' interests are aligned. OlympusDAO attempted to address incentive misalignments through its (3,3) staking model based on game theory. This approach encouraged users to stake (earning +3), bond (+1), or sell (-1), with staking as the optimal choice.

Under this model, Olympus managed to have over 87% of its OHM supply staked, with the price of OHM far above its treasury backing. However, it failed due to mass sell-offs, triggering a domino effect.

All these solutions shared a similar bias: optimizing for liquidity and TVL without adequately stimulating volumes and fee generation within the pools.

Enter Solidly: a new AMM Design

Unlike traditional AMMs that emphasized TVL, Solidly prioritized fees as a more reliable indicator of success, as they ultimately represent what users are willing to pay to utilize the platform.

In fact, by only relying on TVL as a measure of success, pools might remain largely inactive and generate insignificant fees for the protocol despite the depth of liquidity deposited.

Many associate the Solidly model with Andre Cronje, one of the most influential developers of the time, who was behind projects such as Yearn Finance and Keep3r Network.

His endorsement of Solidly contributed to establishing the credibility and reputation of this new design mechanism. 

How did Solidly tackle these AMM challenges? 

Solidly introduced the concept of “healthy TVL”—liquidity actively traded and contributing to fee generation. By combining the vote escrow (ve) token model with the (3,3) staking mechanism, Solidly voters are incentivized to promote high-volume, high-fee pools.

Key features of Solidly’s design include:

• Fee Distribution: Protocol fees were directed to ve token voters, while LPs received emissions rewards.

• Flywheel Incentives: A feedback loop where high-fee pools attracted votes, increasing emissions, which deepened liquidity and generated further fees.

In this way, Solidly AMMs are not incentivizing idle liquidity but ensuring they attract it in the most active and profitable protocol pools.

This design addressed several challenges faced by AMMs: 

1. Difficulty in bootstrapping liquidity

2. Aligning fees and incentives

3. Reducing reliance on unsustainable liquidity mining

The next section introduces the first iteration of the Solidly design, highlighting its main features and shortcomings. We then discuss the new iterations and how they plan to solve these challenges and ensure the model's sustainability in the long term.

Solidly V1

The most famous implementation of Solidly (V1) was launched on Fantom in February 2022. 

The native token of Solidly was SOLID, combining:

• A vote escrow mechanism inspired by Curve

• A (3,3) staking mechanism derived from OlympusDAO

SOLID token holders could lock their tokens to receive veSOLID, gaining proportional boosts based on lock duration. veSOLID holders benefited from:

• Fees received from pools that have been the most voted (paid in native pool assets)

• SOLID emissions

• Voting rights on AMM pools receiving emissions

• Boosted LP rewards 

A new voting cycle would start each week, during which the pools that generated the most significant fees received the most SOLID emissions, deepening their liquidity.

This represented a significant shift from the liquidity mining model, incentivizing LPs at the expense of unsustainable tokenomics and selling pressure on the reward token.

By rewarding pool votes with trading fees, Solidly would, based on the fees generated, contribute to direct liquidity where it was most needed.

Furthermore, token emissions would be adjusted based on token supply, making the approach more flexible and pragmatic according to specific market conditions. 

With its model, Solidly introduced a significant role of incentives and game theory, where:

• Anyone can create their Liquidity Pools and compete for votes

• ve lockers vote on the most convenient pools, giving them the most emissions

• Trading volume and fees increase, incentivizing users to lock their tokens, leading to a win-win situation (3,3)

Solidly distributed 20% of the fees to veSOLID lockers and claimed to offer lockers 100% dilution protection at the maximum lock period (e.g., if a user owned 0.5% of the protocol, he would still own the same percentage in the future).

This is because the weekly SOLID missions depended on the % of SOLID locked. Hypothetically, there would be no emissions if all SOLID tokens were locked.

This way, Solidly self-optimized its emissions to maximize the capital-efficient acquisition of healthy TVL.

All ve positions on Solidly were tokenized as NFTs (ERC-721) and thus transferable. 

Despite its rapid adoption, the initial implementation fell short of expectations with the protocol facing significant unfixable hurdles due to the immutable nature of the codebase. Cronje's subsequent departure from the project and the void left in leadership and vision was the final nail in the coffin.

Challenges Faced During Initial Adoption

1. Sustainability Issues: The system's reliance on bribes and extremely high emissions raised concerns about its long-term sustainability and viability. 

Eventually, this led to a Death Spiral: Lower bribes mean fewer incentives for users to lock tokens, which reduces the token price. This leads to lower APR for LPs, leading to LP withdrawals and a drop in TVL. In turn, this leads to lower emission values for projects to compete on, leading to lower bribes, and so on.

As we can observe from the image above, Solidly emissions were highly skewed toward early entrants but not enough for latecomers due to its rapidly decaying emission schedule.

2. Complexity: The intricate mechanics of ve(3,3) and emissions discouraged participation from less experienced users.

3. Security Flaws: the protocol was released with several security bugs and vulnerabilities 

These included:

• DDoS attacks on the bribes and gauges

• Possible 51% attacks on Solidly

• Double spending bribe claim attack using veNFTs

You can refer to more attack vectors here.

The Revival of the Solidly Model

In December 2022, Solidly was relaunched through a token burn by a separate team (on Ethereum) to address initial bugs and security concerns (V2) and was later iterated on again by the same team to integrate concentrated liquidity (V3).

At the time of the V2 launch, many other forks were concurrently attempting to fix the broken V1 codebase. Some of those that have stood the test of time will be investigated below.

Through these forks, Solidly’s design has continued to be adapted with new and refined implementations, taking advantage of new developments in the space that improve its design.

Before implementing its own additional flavors, each fork adopted the fundamentals of the Solidly model:

• Fees are the priority and drive all other operations and metrics

• Fees are distributed to token holders

• Emissions and bribes are distributed to LPs

• Liquidity pool pairs are either volatile (Uniswap V2) or stable (Cronje’s adapted stableswap curve)

As each fork evolved, new features have been added - these include:

• Concentrated liquidity implementations for more efficient swaps

• Deployment of Layer 2 solutions and their role in improving transaction throughput and reducing gas fees

• Improved governance structures and tokenomics

• Omnichain technology (such as LayerZero) allows cross-chain votes and bribes

This section examines notable iterations of the Solidly design, including Velodrome, Ramses, and Hermes, comparing their unique adaptations and performance metrics.

Velodrome

Velodrome is an Optimism-based DEX trying to address the shortcomings of the Solidly model and democratize it, making it beneficial for smaller stakeholders and more sustainable in the long term. It became Optimism's biggest DEX, unifying many DeFi primitives into a single, streamlined experience.

Velodrome refined Solidly’s model by:

• Reducing Token Emissions: Prioritizing long-term incentives for both LPs and veToken holders.

• Centralizing Pool Whitelisting: Prioritizing only high-fee, high-volume pools and avoiding whale manipulation.

• Increasing Fees: To encourage liquidity in profitable pools.

• Removing LP Boosts: Simplifying and streamlining participation for new LPs, promoting equitable rewards.

• Integrating Bribes: Unlike Solidly, which relied on external platforms for bribe modules, Velodrome integrated its bribe mechanism. This design allows for more straightforward short-term liquidity acquisition and enhances user engagement. 

However, in low-volume settings, the Velodrome model (with standard vAMM sAMM pools) fails to support liquidity with fees alone, leading to less optimal conditions for trade execution.

This is solved by introducing Velodrome Slipstream, which supports concentrated liquidity pools to improve the capital efficiency of stable and less volatile assets with consistent volumes (e.g., OP, WETH, wstETH, etc).

Using on-chain data from the last epoch, we can observe the impact of Slipstream: Six of the ten biggest pools by TVL adopt the concentrated liquidity model. These metrics underscore Velodrome’s success in balancing TVL across major pools while sustaining high trading volumes and fee generation.

These changes have renewed Velodrome's success, making it one of the most sustainable and long-lived examples of a Solidly Based DEX.

Velodrome employed several strategies to ensure the long-term sustainability of the Solidly model:

• Initial token distribution targeted active contributors within the Optimism and broader DeFi ecosystem.

• Bribe eligibility required a minimum three-year lock, fostering commitment.

• Adjusted emission rates with a 1% decay per epoch to maintain accessibility for new participants.

Compared to Solidly, Velodrome adjusted the emission rate (with 1% decay per epoch) to allow others to join post-launch and still benefit. 

Velodrome performance metrics:

• Epoch 136

• $127m in TVL

• $21b in cumulative volume

• $20m in swap fees

• $43m in bribes distributed

Velodrome volume and swap fees are also at an all-time high.

By focusing on long-term over short-term incentives, Velodrome has also incentivized its users to lock over 55% of the total VELO supply in ve token, with an average lock of 3.65 years.

The platform’s 50% dilution protection further ensures fair reward allocation between LPs and veToken holders.

Velodrome is expanding beyond Optimism and positioning itself as a liquidity and volume hub within the Superchain ecosystem. The protocol is already live on Mode, Build on Bitcoin and Lisk.

As part of this process, the Aerodrome protocol launched on Base as a Velodrome fork.

Arguably, Aerodrome is one of the most successful implementations of Solidly tokenomics, with:

• 1.7b in TVL

• $8b weekly volume

• $7.8m in fees distributed

• $10m revenue

• Over $250m of cumulative rewards distributed.  

Ramses Exchange

Ramses is an AMM exchange built on Arbitrum as a Solidly fork. It integrates the principles of Uniswap V3 with custom incentive mechanisms, a veToken governance model, and a user-friendly interface. 

Launching on Arbitrum, an L2 known for its composability and collaborative DeFi ecosystem, 

Similarly to Solidly v2, at inception, Ramses provided veNFTs to top protocols on Arbitrum allowing them to align their interests when managing their positions. 

It also aimed to align interests among stakeholders through novel functionalities:

• Addressing vulnerabilities of Solidly: Solidly's original design used a flawed data storage unit (UCI) to store user-specific contract data, which could be exploited to increase gas costs and lead to potential system failures. Ramses replaced the UCI with more robust accounting methods to enhance fault tolerance. 

• Concentrated Liquidity: Ramses takes inspiration from Uniswap V3 with the addition of a concentrated liquidity model, allowing LPs to allocate capital within specific price ranges where most trading activity occurs.

• Renewed Gauge and Bribe Mechanism: As mentioned above, gauges, as conceived by Solidly V2, were easily exploitable, leading to vanished rewards or issues with pools. Ramses enhanced the security and reliability of these mechanisms to ensure more equitable reward distribution.

• Dynamic Fees: Fees are adjusted based on market conditions to optimize returns for traders and LPs

• Dilution Protection: This mechanism, pioneered by OHM and Solidly V2, protects lockers from inflation. Ramses provides a 50% dilution protection, translating into a 50% rebase, gradually increasing 1% every epoch to a maximum of 75%. This dilution protection is an incentive for users to lock their tokens (veRAM and veNFTs)

Ramses employs veRAM tokens, represented as ERC-721 NFTs, which grant holders various benefits:

• Directing emissions to LP pairs through voting.

• Earning vote bribes and swap fees.

• Able to transfer/merge their NFTs

• Gaining dilution protection through rebates.

Voters earn fees in real time throughout the epoch.

How does Ramses integrate Solidly elements?

1. Swaps: two different liquidity pools are supported, each with its own swap curve.

   • Volatile (similar to Uni V2): where tokens are paired in equal weight (red color on chart)

   • Correlated: stable swap curve, more efficient compared to other DEXs, offering near zero slippage (green color on chart)

This difference means that when the token ratio in these pools is equal, the stable bonding curve changes slightly, while Uniswap changes constantly. This way, when pools are balanced, the stable pools allow bigger sizes to be traded with less price impact. The trade-off is that the price impact significantly increases for single-sided pools. 

2. Votes: veRAM NFTs allow holders to direct emissions to LP pairs by voting. Similar to Solidly V2, emissions are distributed based on the percentage of votes cast in each epoch.

Users can adjust their veRAM locks, merge NFTs, or create a new position within the vesting page. 

Ramses performance metrics. Since inception:

• Epoch 92

• $3.45m of TVL 

• $10.8m in daily trading volume

• 13k veRAM holders

Looking ahead to Ramses V3, additional features include: 

• Splitting veNFTs into smaller positions for increased flexibility.

• Permanent voting escrow locks to simplify management: users can burn RAM to lock indefinitely

• Active rebases requiring weekly voting for participation.

• Introduction of xRAM, a non-transferable representation of RAM designed to mitigate selling pressure while incentivizing healthy TVL.

Ramses developed xRAM to address the sustainability of tokenomics and emissions.

xRAM was meant to complement RAM, not replace it. It is a “non-transferrable” representation of 1 RAM. This was designed as an additional mechanism to mitigate the selling pressure. Ramses users had another way to lock their tokens, with options to convert them into either RAM or veRAM.

The protocol started distributing xRAM according to the health and contribution of specific pairs:

Core pairs would receive the majority of emissions in RAM. Instead, low-volume and low-fee pairs would receive a higher percentage of emissions in xRAM, at a ratio of  20% RAM to 80% xRAM for specific pairs.

Hermes Protocol

Hermes enables greater capital efficiency by leveraging Concentrated Liquidity using Uniswap V3, Unifying liquidity cross-chain, and bringing forward an enhanced burn-token model instead of the previous ve token model. 

Hermes went live as the first Solidly AMM in February 2022, before Andre Cronje launched Solidly on Fantom. Eventually, it fully migrated to Arbitrum as they launched their V2.

A single interface allows users to manage their liquidity, access yields, and cross-chain opportunities.

In their initial implementation, launched on the 12th of March 2022, Hermes introduced several refinements to Solidly’s mechanics, including:

1. Enhanced Security: Hermes prioritized addressing vulnerabilities identified in Solidly’s initial deployment. This included fortified smart contracts and streamlined processes to prevent exploits such as double-spending and bribe manipulation.

2. Liquidity Bootstrapping: To overcome the mercenary liquidity issues seen in earlier iterations, Hermes implemented a more equitable initial token distribution strategy to align incentives between LPs and the protocol.

3. Fee Distribution Optimization: The protocol optimized fee distribution mechanisms, ensuring that voters and LPs received rewards proportionate to their contributions without compromising long-term sustainability.

4. Improved Governance: Governance rights were extended to include more granular control over emissions, including a one-week vote lock to reduce users who were farming bribes across pools

5. Centralized whitelisting was used to prevent whales from creating pools, voting on them, and stealing all the rewards.

Before any other Solidly fork launched its V1, Hermes was already researching what the future of all Solidly forks would look like.  

This eventually evolved in their V2 implementation, where they went even further and:

• Focused on a ve(3,3) bridgeless omnichain architecture, with cross-chain votes and gauges

• Introduced permissionless pools and bribes

• Prioritized a modular architecture that allows any AMM or yield-bearing asset to plug into the system and be used as liquidity

• Added a yield market where users can buy and sell rights to future yields

• Launched a vote-escrow model

How does Hermes differ from previous Solidly implementations?

• Creation of a b(3,3) model, where users burn instead of locking their tokens. This allows single-time voting and the auto compounding of rebates with a set-and-forget model, 

• which does not require constant management.

• Tri-token model: improving composability and allowing users to position themselves differently concerning rewards.

• Democratization of Boost Mechanisms: With boosted rewards not affecting other LPs, smaller stakeholders can benefit from rewards without worrying about larger stakeholders ripping most of the rewards. 

• Improved the bribes-to-emissions-ratio and capital efficiency through active liquidity staking mechanisms 

• Anti Whale mechanisms: Introduced the Solidly model to concentrated liquidity with a minimum allowed width for staked LPs as a safeguard for gaming of rewards by sophisticated players.

By adopting an omnichain approach, Hermes solves the previous issues of early Solidly protocols:

1. Liquidity fragmentation: In its current form, Hermes can unify liquidity across different networks using LayerZero, leading to:

   • Deeper pools

   • Improved trade execution

   • More efficient capital deployment

   • Improved UX

   • Composability

It works by having a central unified liquidity pool. This way, users and protocols can take advantage of concentrated liquidity across multiple chains to:

• Earn yield

• Manage liquidity

• Swap assets

• Incentivize liquidity

2. Liquidity rental: Hermes leverages the deep liquidity of Uniswap V3 to create new cross-chain routes, making it easier for users to provide liquidity and earn cross-chain rewards. By building directly on Uniswap, Hermes users can leverage the established liquidity.

3. Interoperability: As demand grows for cross-chain liquidity rental and bribes, Hermes is positioned to handle most of this volume with a future-proof modular architecture that can encapsulate new and future innovations.

It’s also important to mention their “tri-token” model, with three different utility tokens that can be obtained by burning Hermes and have the purpose of catering to the specific needs of users: 

• bHermes Gauge: holders vote on gauges and receive 100% of the revenues. This ensures users allocate bHERMES to the gauges generating the most fees.

  1. Direct emissions to gauges

  2. Vote on gauges to determine their % of emissions (amount of minted HERMES to give to a specific gauge)

  3. Earn fees generated by gauges

  4. Collect bribes for voting by protocols renting liquidity

• bHermes Boost: boosting returns on the LPs, capped at one boosted position per pool and a max boost of 2.5x, using a boosting formula pioneered by Curve but applied to concentrated liquidity. The particularity of this model is that each position benefits from a boost and is not affected by other positions, protecting smaller stakeholders from bigger whales with large amount of boost. 

• bHermes Votes: empowers holders to participate in governance and influence decision-making by voting on Hermes Improvement Proposals. This includes but is not limited to:

  1. When to add or remove gauges

  2. Add/Remove Partners from Ecosystem Partnership Program

  3. Adjusting the configuration of Gauges at the maximum concentration of liquidity allowed for staking

bHERMES vote holders can delegate to multiple trusted parties to vote on their behalf.

This comes in handy, given that 30% of weekly HERMES emissions are allocated to the DAO and can be allocated for development, marketing, partnerships, etc., giving bHERMES votes power in defining the protocol's future.

By design, the HERMES token is inflationary, and its emissions compensate LPs (according to the votes of holders of bHERMES gauges). However, thanks to its gauges, HERMES focuses on healthy TVL that creates revenue instead of idle locked value. The protocol only rewards LPs when their liquidity is deposited in used ranges.

Currently, Hermes V2 has a TVL of about $2.24m and a fully diluted valuation of $3.58m.

Hermes' roadmap involves creating Boosted Strategies with partners and using novel innovations, such as intents, to make the system faster, more versatile, and support more tokens.

With its emphasis on security, governance, and sustainable incentives, Hermes exemplifies how Solidly’s foundational principles can evolve to meet the demands of a modern DeFi ecosystem.

Future of the Sector and Conclusion

This report has introduced the Solidly design, highlighting its features and limitations. The emergence of new alternatives seeks to address the primary challenges of this model, including:

• Liquidity Fragmentation: The inefficient distribution of liquidity across pools and platforms.

• Unsustainable Tokenomics: High emissions and inflationary pressures.

• Focus on Liquidity Over Volume and Fees: A misaligned emphasis that undermines protocol profitability.

Emissions sustainability is a critical area for improvement in protocols such as Ramses, Velodrome, and Hermes. While the original Solidly model leveraged positive feedback loops through token locking, its implementation had significant shortcomings, leading to "down-only" tokenomics.

Each protocol has implemented additional features to address these issues. Whether adjusting the balance between emissions and bribes, slowing emissions to prevent oversupply, or introducing token burns to reduce circulating supply, these refinements are pivotal to ensuring the long-term sustainability of Solidly-inspired protocols.

What Lies Ahead for Solidly-based Models?

The evolution of Solidly AMMs is likely to align with broader industry trends, particularly the rise of interoperability. 

For once, the acceptance of Solidly DEX has been proven by several Tier 1 CEX listings. 

The next step is to ensure a seamless UX, which requires protocols to address liquidity fragmentation and facilitate seamless cross-chain interactions.

For example, some platforms explore intent-centric designs to enhance efficiency and accommodate a broader range of tokens. This shift is expected to materialize as early as Q1 2025, demonstrating the sector’s responsiveness to emerging technological narratives.

Additionally, chain-agnostic solutions are gaining prominence, enabling users to navigate yield opportunities across chains effortlessly. 

Future developments will likely incorporate support for a broader array of yield-bearing assets, including liquidity positions, lending, and borrowing opportunities. Such innovations will expand the utility of Solidly-based protocols and position them as comprehensive cross-chain yield aggregators. They will leverage a modular design and allow anyone to plug in and take advantage of the Solidly flywheel. 

These infrastructural advancements will optimize liquidity provision and yield strategy execution, abstracting the complexities of managing opportunities across multiple chains.

Brought to you by Francesco

Thanks for reading, please follow us on Twitter at @Castle_Labs and visit our Linktree to learn more about our services and get in touch.

Virtually yours,

The Castle