Velodrome V2 Explained: What Changed and How it Improves Trading?

Velodrome V2 Explained: What Changed and How It Improves Trading?

Velodrome V2 is the next evolution of Velodrome’s decentralized exchange and liquidity protocol on Optimism. It represents a ground-up redesign that introduces concentrated liquidity, dynamic fees, modular pools, automated governance support (Relay), and emission upgrades, among other improvements. The shift from V1 to V2 is aimed at making the protocol more capital efficient, more adaptable, and more rider- and trader-friendly.

Let’s dive in.

1. Why Velodrome Needed Version 2?

Even though Velodrome V1 achieved strong adoption, it inherited limitations common to many early AMMs:

• Liquidity was spread uniformly across price ranges, causing inefficiencies and slippage
• Fee structure and emissions were static and less responsive to market conditions
• The protocol lacked flexibility to introduce new pool types or adjust rewards or governance behavior easily
• User experience and governance tools were somewhat rigid

To overcome these, Velodrome’s team reimagined the architecture, to enable future flexibility, better capital efficiency, and governance scalability. V2 is intended to combine the best innovations in DeFi (like concentrated liquidity from Uniswap V3) with Velodrome’s signature governance and emissions system.

2. Core Features Introduced in Velodrome V2

Here are the most important new features V2 brings:

Concentrated Liquidity (clAMM)

Instead of liquidity being spread across an entire price curve, LPs on V2 can concentrate their liquidity into tighter price ranges. This achieves:

• Greater capital efficiency: Liquidity is used more meaningfully where trades happen
• Lower slippage for traders: Because depth is denser in active ranges
• Higher yield potential: For LPs who correctly position their liquidity

Unlike classic AMMs where you must supply liquidity across full curves, V2 lets you pick the price band you believe trade volume will occur in.

Dynamic / Customizable Pool Fees

V2 allows pools to set customizable trading fees (up to some maximum, e.g. 1%) rather than fixed fees. The advantages:

• Pools can adjust fees based on volatility or token risk
• Projects incentivizing liquidity can share in fee income
• Traders benefit by getting better price/fee tradeoffs in pools suited to their use case

Modular / Upgradeable Pool Architecture

V2 brings in a pool factory registry and updatable factories for gauges and rewards. This means the protocol can:

• Add new pool types (e.g. multi-token pools, custom curves) in future
• Introduce new reward contracts, maintain or replace gauges as needed
• Evolve without needing to re-deploy the entire protocol

This modularity is key to future-proofing and maintaining decentralization.

Automated Voting Management (Relay)

V2 introduces a feature called Relay, a system that helps veVELO voters manage emissions automatically. With Relay:

• Users can delegate or automate their voting choices
• It can distribute votes optimally based on metrics
• It reduces the burden of manual weekly voting, especially for passive holders

Relay enhances governance usability and encourages participation from users who prefer “set it and forget it” mechanics.

Emission Upgrades and bribe / reward improvements

V2 tweaks how emissions and bribes are handled:

• Emission schedule and rate compatible with V1 but refined for new functions
• Rewards contracts are simplified and optimized to reduce gas cost
• Bribe mechanics and rewards contracts are more modular, making protocol-level incentives more flexible

These changes make the reward/distribution pipeline more efficient and responsive.

3. How These Changes Improve Trading Experience & Outcomes?

These new features don’t just look good on paper, they translate into real benefits for traders and liquidity providers:

Lower Slippage and Better Execution

Because liquidity is more concentrated, trades within the active price ranges see deeper pools and less price impact. Traders execute closer to ideal fills with smaller spreads.

More Efficient Use of Capital by LPs

Instead of needing vast amounts of capital to cover full curves, LPs can allocate funds where it matters most, increasing potential yield per capital unit.

Fee Flexibility for Pools

Pools with riskier or volatile tokens can set higher fees to compensate, whereas stable pools can retain low fees for competitive swaps. That allows pools to self-tune.

Better Reward Alignment

Through modular rewards and bribes, protocol teams can direct incentives to pools users care about, boosting adoption and trading volume in desirable pairs.

Enhanced Governance / Participation

Automated voting (Relay) lowers friction, meaning more veVELO holders can participate without spending manual effort, enhancing protocol decentralization and yield consistency.

Evolution Without Disruption

Thanks to modular factories, Velodrome app can introduce new curve types (like hybrid or stable curves), token wrappers, or other innovations without rewriting everything, meaning trading stays future-ready.

As a result, traders will see more choices, better fills, and improved liquidity over time.

4. Under-the-Hood: Architecture & Migration Design

Switching from V1 to V2 required careful architectural design to preserve continuity and minimize disruption. Key design considerations:

Parallel Operation & Migration Path

V1 and V2 coexist during the transition. Users can convert V1 VELO to V2 at a 1:1 rate using a dedicated converter pool. Locked positions (veNFTs) can also migrate, maintaining lock duration and yield potential.

SinkManager / Token Capture Mechanism

Velodrome introduced a “sink” mechanism to manage V1 token circulation. The SinkManager captures V1 tokens (converted or locked), aggregates them, and ensures emissions continue even during migration. This preserves the integrity of V1 token holders and emissions.

Immutable Protocol + Updatable Components

While the core protocol is immutable, V2 includes registries and factories designed to be upgradable. New gauge types, pool types, or reward contracts can be added under governance without fully re-deploying.

Backward Compatibility

V2 routers support V1 and V2 pools, ensuring legacy liquidity remains accessible. Bridges between V1 and V2 positions are built so users do not lose exposure.

Optimized Contracts

V2’s gauge, rewards, pool, and bribe contracts are rewritten and simplified to reduce gas costs, streamline reward delivery, and improve security.

This hybrid and modular architecture ensures that V2 improves trading and yield while protecting existing users and liquidity.

5. Comparison: Velodrome V1 vs Velodrome V2

This side-by-side view shows clearly how V2 upgrades nearly every aspect of the protocol for better performance, flexibility, and future evolution.

6. Real-World Use Cases: How V2 Makes a Difference

Let’s look at scenarios illustrating the advantages:

Use Case A: Stablecoin Pools

Stablecoin pairs (e.g. USDC/DAI) often trade tightly. With V2, concentrated liquidity lets LPs compress their provisioning into very tight ranges, getting maximum utilization and lower slippage for stable swaps.

Use Case B: Volatile Token Launch

A new token launching might begin with low liquidity. The team can create a custom fee pool and set higher fees to attract veVELO voting. LPs help direct quality liquidity where demand is expected, and V2 supports that customization.

Use Case C: Automated Yield Strategy

A user locks VELO, delegates with Relay, and votes automatically each epoch for pools that align with their holdings. They earn emissions and bribe income with minimal manual intervention.

Use Case D: Multi-token / exotic pools

When new token types emerge (e.g. perpetual derivatives, baskets), V2’s modular pool factory can support new curve types or multi-token liquidity setups, enabling more creative liquidity products.

In each case, V2 lets liquidity and trading adapt to real-world dynamics, offering lower slippage, more tailored yield, and deeper liquidity in focused ranges.

7. Tradeoffs, Risks & Considerations

While V2 is powerful, it’s not without caveats:

• Position risk: If price moves outside your concentrated range, your liquidity may become inactive.
• Complexity: Concentrated liquidity and modular pools demand deeper understanding from LPs.
• Migration risk: During transition, mis-migration or bugs can cause slippage or loss.
• Upgradable components: Modular factories are powerful but must be governed securely to avoid malicious upgrades.
• Governance centralization risk: Large veVELO holders could dominate votes if not balanced.
• Fee setting misalignment: Pool owners might set fees too high and reduce trade volume.

Understanding these tradeoffs ensures you can leverage V2’s benefits without surprises.

8. FAQs

What is “concentrated liquidity” and why does it matter?
Concentrated liquidity means LPs can allocate their capital to specific price ranges rather than across the entire possible curve. That intensifies depth where trades happen, reducing slippage and making your liquidity capital more efficient. It matters because even with less capital, you can earn comparable or better yield and traders get better execution.

How do customizable pool fees improve trading?
With customizable fees, pool creators can set appropriate rates based on risk or volatility. Stable pools can stay low-cost to attract volume, while riskier token pools can charge more to compensate for impermanent loss and volatility. That flexibility matches fees to context, benefiting both LPs and traders.

What is Relay in V2?
Relay is Velodrome V2’s automated voting management feature. It allows veVELO holders to delegate or automate how their votes are distributed across pools each epoch. Instead of manually voting weekly, users can rely on Relay to optimize vote placement, simplifying governance participation.

Can I use existing V1 liquidity in V2?
Yes. V2 ensures backward compatibility. V1 liquidity remains accessible, and there’s a converter pool for V1 VELO tokens to V2. Locked positions and veNFTs can migrate with retention of lock terms. This protects existing users during transition.

Does V2 reduce gas costs?
Yes. Many of V2’s contracts - rewards, gauges, pool logic - have been streamlined and optimized to reduce gas consumption. Voting rewards and bribes logic is also simplified to improve efficiency. Traders and LPs should see lower transaction overhead in many cases.

What risks come with modular pool architecture?
Modular pools allow new types, curves, and reward models. But that flexibility also introduces upgrade risk: pool factories or reward modules could be altered under governance. If controls are weak, malicious upgrades or vulnerabilities may emerge. Hence governance and audits must be robust.

How does V2 improve price execution for traders?
By concentrating liquidity in active ranges and enabling dynamic fees, V2 ensures deeper pools where trades happen, reducing slippage. Modular pools allow more tailored liquidity structures, so trades have more optimal routing. Overall, traders benefit from tighter spreads and better fills.

9. Final Thoughts

Velodrome V2 is more than just an upgrade, it’s a transformation. Every core component is enhanced: liquidity efficiency, governance, fee flexibility, modular growth, and automation. For traders, V2 means better execution, lower slippage, and more pool choices. For LPs, it means capital works harder. For governance, it means smarter voting and easier participation.

If you are already using Velodrome or planning to, V2 is the moment to re-evaluate your positions and strategies. Move from passive liquidity provision to being a governance participant, leveraging concentrated ranges, voting, and routing your capital where it earns most. Over time, Velodrome V2 can become your main trading and yield hub within the Optimism ecosystem.