Velodrome Finance: Rewards Distribution Automation

Executive Summary

Velodrome Finance, one of the largest automated market makers (AMMs) on Optimism, needed to automate critical protocol operations that were becoming unsustainable as the platform scaled. Manual processes that worked with dozens of liquidity pools couldn't keep pace with growth toward hundreds of pools - threatening both operational reliability and user trust.

Hack.bg designed and implemented a comprehensive automation system using Chainlink's decentralized oracle network. The solution eliminated manual intervention entirely, reduced operational costs through intelligent batching, and created a foundation that scales automatically with protocol growth.

Key Outcomes:

• Zero manual interventions required for weekly reward distributions
• 400+ active gauges processed automatically within the required time window
• Self-sustaining system that scales without human oversight
• Decentralized execution eliminates single points of failure

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The Challenge

As Velodrome Finance scaled to become one of the largest AMMs on Optimism, the protocol faced two distinct but equally critical automation challenges that threatened operational sustainability.

Challenge 1: Weekly Reward Distributions

Every week, Velodrome must distribute rewards to all liquidity providers. This isn't just a technical operation - it's the core promise the protocol makes to its users. Miss the distribution window, and liquidity providers lose confidence; make errors, and funds could be at risk.

The Business Problem:

• Distributions must complete within a narrow two-hour window (one hour before and after the weekly epoch flip at midnight Wednesday-Thursday)
• Every active liquidity pool must receive its distribution within this window
• As the protocol grew from 50 to 400+ pools, manual execution became impossible
• The team was forced to maintain 24/7 operational readiness for a weekly two-hour window

The Technical Complexity:

• Single-transaction approaches hit blockchain gas limits
• The protocol tracks 600+ total pools, but only ~400 are active - naively processing all pools wastes significant resources
• Timing precision required constant monitoring and immediate response

Challenge 2: Automated Compounding (Relay System)

Velodrome's Relay system automatically compounds rewards for token holders, converting earned fees back into locked voting power. This "set and forget" feature is a key value proposition for users who want passive participation.

Two Relay Types:

• Compounder: Converts claimed rewards into VELO tokens and locks them for depositors
• Converter: Converts claimed rewards into USDC (used by the Velodrome Foundation)

Why the Existing System Hit a Wall:

The original relay automation tried to do everything at once - claim rewards, swap tokens, and compound - in a single execution. As the protocol grew, this monolithic approach exceeded the resource limits of automation infrastructure:

• If one step failed, everything failed
• Memory and compute constraints made large-scale processing impossible
• Debugging issues required understanding the entire flow, not isolated components

The architecture needed a fundamental rethink.

"The Hack.bg team brought much-needed expertise and clarity to a complex integration. They were thoughtful and adaptable as needs evolved, navigating a shifting technical landscape with smart workarounds and proactive solutions."

• Velodrome Contributors, Velodrome Finance

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Our Approach

We designed a modular automation architecture that would eliminate manual intervention while maintaining the decentralization principles core to Velodrome's identity.

Why Chainlink Automation?

Approach	Pros	Cons	Verdict
Centralized keeper bots	Simple, low cost	Single point of failure, trust assumptions	Rejected
Third-party automation services	Quick to implement	Vendor lock-in, ongoing costs, centralization	Rejected
Custom validator set	Maximum control	High complexity, bootstrap challenges	Rejected
Chainlink Automation	Decentralized, battle-tested, cost-efficient at scale	Integration complexity	Selected

Chainlink's Decentralized Oracle Network (DON) provided the trustlessness Velodrome required, with proven reliability across billions in secured value. Users can verify that distributions happen through decentralized infrastructure - not because they trust a single operator.

Key Design Principles

1. Event-Driven, Not Polling: The system reacts to actual blockchain events (new pools created, pools removed) rather than constantly checking for changes. This reduces costs and ensures immediate response.

2. Modular Pipeline for Relays: Instead of one complex process, we broke relay operations into independent steps that trigger each other. Each step can fail and retry without affecting others.

3. Smart Resource Allocation: Only active pools are processed, not the full registry. Work is split across multiple parallel executions to stay within resource limits.

4. Self-Sustaining Economics: The system monitors its own funding and automatically tops up when needed, ensuring automation never stops due to depleted balances.

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The Solution

We built a comprehensive automation system with three main components: Emissions (reward distribution), Prices (token pricing), and Utility infrastructure (self-maintenance).

Emissions Automation

A key insight drove the architecture: the protocol tracks 600+ total pools, but only ~400 are active and require distribution. Standard automation tools couldn't achieve the throughput needed, so we built a custom cost-optimized batching system.

GaugeUpkeepManager - The Orchestrator

This contract maintains awareness of which pools are active and manages the automation lifecycle:

• Smart Tracking: Maintains a curated list of only pools that need distribution, avoiding wasted resources on inactive pools
• Automatic Updates: Listens for blockchain events when pools are created, removed, or reactivated - no manual registry updates needed
• Dynamic Scaling: Automatically adds more automation capacity when pool count exceeds thresholds

GaugeUpkeep - The Executor

Custom contract that performs the actual reward distributions:

• Parallel Processing: Multiple executors handle different pool ranges simultaneously (e.g., pools 1-100, 101-200)
• Optimized Batching: Processes 5 pools per transaction by default, tuned for gas efficiency
• Automatic Capacity: New executors are registered only when needed, minimizing fixed costs

Price Automation

Keeps token pricing data fresh for protocol operations:

• Automatic Registration: When tokens are whitelisted for trading, price automation begins automatically
• Interval Updates: Ensures prices stay current without manual intervention

Utility Infrastructure

UpkeepBalanceMonitor - Self-Sustaining Operations

Ensures the entire automation system remains funded:

• Monitors balances across all active automation contracts
• Triggers automatic top-ups when balances fall below thresholds
• Prevents automation failures due to depleted funds

Relay Architecture (Modular Pipeline)

For the Relay system, we transformed the monolithic architecture into an event-driven pipeline:

┌─────────────────────────────────────────────────────────┐
│                    Weekly Epoch Trigger                 │
└─────────────────────┬───────────────────────────────────┘
                      │
        ┌─────────────┴─────────────┐
        ▼                           ▼
┌───────────────┐           ┌───────────────┐
│ Claim Rewards │           │ Claim Rebases │
└───────┬───────┘           └───────────────┘
        │
        ▼
┌───────────────┐
│ Swap Rewards  │
│ (VELO/USDC)   │
└───────┬───────┘
        │
        ▼ (Compounders only)
┌───────────────┐
│ Lock/Compound │
│    veVELO     │
└───────────────┘

Benefits of This Architecture:

• Each step can fail and retry independently - no cascading failures
• Resource requirements distributed across multiple executions
• Easy to add new relay types or modify individual steps
• Issues can be debugged in isolation

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Results

Business Impact

Outcome	Before	After
Weekly operational burden	24/7 readiness for 2-hour window	Zero manual intervention
Distribution reliability	Risk of missed distributions	100% automated, on-time
Scalability	~50 pools practical limit	400+ pools and growing
Team focus	Diverted to operations	Free for protocol development

Technical Performance

Live testing validated the cost-optimized design:

Metric	Result
100 pools distributed	~2 minutes total
Batch size	5 pools per execution
Dynamic scaling	Pools added/removed mid-distribution handled correctly
Capacity management	Automatic when thresholds exceeded

Cost Optimization

Metric	Before	After
Pools processed	600+ (including inactive)	~400 (active only)
Processing approach	Sequential, single executor	Parallel, multiple executors
Resource waste	Significant (inactive pools)	Eliminated
Capacity scaling	Manual	Automatic

Relay System Transformation

Metric	Before	After
Architecture	Monolithic (all-or-nothing)	Modular pipeline
Failure handling	Cascade failures	Isolated to single step
Debugging	Complex, full-flow analysis	Simple, step-by-step
Extensibility	Difficult	Easy to add new relay types

Strategic Outcomes

• Trustless Operations: Protocol functions execute via Chainlink's decentralized network - users don't need to trust a single operator
• Future-Proof Foundation: Architecture supports continued growth without redesign
• Self-Sustaining System: Balance monitoring ensures continuous operation without oversight
• Enhanced Protocol Trust: Users can verify that distributions happen consistently and predictably

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Open Source

The complete implementation is available at github.com/velodrome-finance/automations, demonstrating production-grade Chainlink Automation patterns for the DeFi ecosystem.

Related Repository: github.com/velodrome-finance/relay

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Technologies Used

Solidity Hardhat Chainlink Automation Chainlink Log Triggers TypeScript Optimism Ethers.js