Hard-forking Traditional Finance — Injective Protocol Fundamental Analysis

Trading on the blockchain presents several advantages over traditional stock trading in the realm of traditional finance that include the following principles that we have all come to understand in our investment journey:

Accessibility and Inclusivity:

Traditional finance often imposes barriers to entry, requiring significant capital and limiting access to financial markets. In contrast, blockchain-based trading platforms are typically open to anyone with an internet connection, fostering inclusivity and allowing a broader range of individuals to participate in the financial markets.

Decentralization and Transparency:

Blockchain operates on a decentralized ledger, ensuring transparency and reducing the risk of fraud or manipulation. Traditional finance relies on centralized entities, such as banks and clearinghouses, introducing a higher level of opacity and potential for conflicts of interest.

Reduced Intermediaries and Lower Costs:

Traditional stock trading involves various intermediaries, including brokers, clearinghouses, and depositories, each charging fees for their services. Blockchain-based trading platforms eliminate or significantly reduce the need for many of these intermediaries, resulting in lower transaction costs for traders.

Real-time Settlement:

In traditional finance, settling trades can take days, leading to delayed access to funds and increased counterparty risk. Blockchain transactions settle in real-time or within a short timeframe, allowing traders quicker access to their assets and reducing the risk associated with prolonged settlement periods.

Tokenization of Assets:

Blockchain facilitates tokenizing a wide range of assets, including real estate, commodities, and other traditionally illiquid assets. This enables fractional ownership and opens up investment opportunities that may be challenging to access through traditional financial instruments.

24/7 Market Access:

Traditional stock markets have specific trading hours, limiting when investors can buy or sell assets. Blockchain-based markets operate 24/7, providing continuous access to trading opportunities and accommodating global participants in different time zones.

Immutable Smart Contracts:

Smart contracts on the blockchain are self-executing contracts with the terms of the agreement directly written into code. Once deployed, they are immutable and tamper-resistant, reducing the risk of contractual disputes or changes without the consent of all involved parties.

Global Reach and Cross-Border Transactions:

Blockchain transcends geographical boundaries, enabling seamless cross-border transactions without intermediaries like currency exchanges. This global reach enhances liquidity and expands the scope of investment opportunities for traders.

In summary, blockchain-based trading offers a more inclusive, transparent, and efficient alternative to traditional finance. The elimination of intermediaries, real-time settlement, and the ability to tokenize various assets contribute to the growing appeal of blockchain in the financial markets.

However, many challenges remain for the blockchain to replace traditional financial instruments. While the team and investors at CCI have long had their eye on Injective protocol since seed sales in 2021, it has finally broken out of the pack and emerged as a prime contender in the DeFi and Layer-1 narrative.

This fundamental analysis will briefly touch on what Injective protocol is, what sets it apart from the numerous competitors in the DEX and L1 narratives, explore hidden and arguably more durable narratives, and the implications of Injective Protocol as a potential vehicle to onboard institutional liquidity into the Web3 world. It should be noted that while the current FA is adequate in explaining the importance of DEX at a high level, the accumulation of knowledge from previous FA’s is pivotal in obtaining an advanced understanding of Injective Protocol.

This fundamental analysis was published January 2024, and is part of a weekly paid newsletter from the Crypto Consulting Institute as such trade insights are likely outdated. Crypto Consulting Institute provides exclusive market insights, actionable trade signals, and monthly fundamental analyses. For more information on receiving FAs as they are released, visit: https://www.cryptoconsultinginstitute.com/newsletter

Your TLDR summary, D.I.S.R.U.P.T. key takeaways.

One of a kind in a sea of plenty

First, let us begin with what Injective Protocol is.

On the surface, Injective Protocol aims to be a public utility for decentralized finance with decentralized order book modules and smart contracts deployed on the network that can interoperate with Ethereum, Cosmos, and recently Solana-based rollup virtual machine environments.

If you recall the Cosmos Fundamental Analysis you will likely have an advantage in understanding the deeper technical nuances of Injective Protocol since it was deployed with the Cosmos SDK, and from the Solana FA where we discussed Rust as a coding language. Injective effectively enables assets from three runtime environments that are constructed with three different coding languages to flow freely between the other. For more information on bridges, and the different types of bridges, refer to the LayerZero and Cosmos FA.

On a technical level, it can be broken down into four basic components: a Decentralized Orderbook, a Trade Execution Co-ordinator, a Bi-directional token bridge, and an EVM execution environment.

Injective Protocol’s orderbook is referred to as ‘0x-based orderbook enabling sidechain order relay with on-chain settlement’. Nodes on the Injective chain host censorship-resistant order books. In English, this effectively means you can execute a transaction through the Injective order books settled on the target chain.

Trade Execution Co-ordinator is an important function that is responsible for preventing front-running. On the Ethereum blockchain, MEV (miner extracted value) pool frontrunning is when a miner recognizes a pending order on the blockchain and instead processes a later order prior in order to have the initial order boost the value of their trade. In traditional finance, brokers and market participants (insiders) get their orders in before the rest of the market can catch up. Injective use a Verifiable Delay Function (VDF) to add a delay to ensure later orders are not placed ahead of prior orders through frequent batch order matching.

Injective Protocol operates as a Cosmos peg-zone in between blockchains when bridging. In practice, peg zones are account-based blockchains that bridge zones (such as Injective) within Cosmos to external networks like Bitcoin and Ethereum. Notably, Injective also facilitates the transfer of diverse data, unlocking innovative cross-chain execution and fostering smart contract interoperability features with compatible virtual machines.

Finally, in the EVM execution environment, Injective has utilized a modular implementation of the Ethereum Virtual Machine that is on top of the Cosmos SDK, giving developers the ability to build Ethereum DApps and deploy in a stable runtime environment (lower gas fees, EVM capability), similarly, Cascade was released as a Solana SVM rollup.

To tie together all the above mechanics under the hood, Injective Exchange Client is an intuitive and user-friendly front end that is open source, allowing other projects to integrate the front end onto their DApps. Moreover, hundreds of dApps have integrated into the Injective chain, with many other nuanced financial instruments under development.

The exchange infrastructure is designed for interoperability and can employ smart contracts on Injective. It offers modular building blocks that DeFi applications can use to construct more sophisticated, advanced applications. Additionally, Injective’s exchange infrastructure possesses unique interoperability with other IBC-enabled blockchains and even interfaces seamlessly with smart contracts on Ethereum. This unique capability positions Injective as a robust cross-chain liquidity hub, catering to a diverse range of multi-chain applications.

It is worth noting that Injective APIs act as a decentralized data layer for the protocol. Each Injective API node dynamically indexes data from the Injective blockchain in real time. These nodes offer high-performance, low-latency APIs that seamlessly cater to various use cases. These include, but are not limited to:

• Hosting user interfaces for applications like exchanges
• Facilitating programmatic trading and high-frequency market-making
• Supporting various decentralized applications (dApps), analytics interfaces, block explorers, and more

In addition to their data layer function, Injective API nodes have the optional capability to provide a transaction relay service. This service allows applications to enable users to submit transactions with zero-gas fees, thanks to Injective’s fee delegation mechanism. This functionality enhances user experience by reducing transaction costs and promoting wider adoption of decentralized applications built on the Injective protocol.

$INJ Tokenomics (As of 09.01.2024)

Market cap: $3,684,445,683

Circulating Supply: 84,255,555

Total Supply: 100,000,000

All time high: $44.57

All time low: $0.67

$INJ use cases:

• Protocol governance (Injective DAO), $INJ gives voting and proposal rights to DAO members.
• Fee Value Capture: Burns excess fees after relayer nodes are paid for transactions. Injective’s burn auctions stand out for their distinctive nature, as they involve auctioning 60% of the fees gathered from decentralized applications (dApps) every week through a buyback and burn process. This mechanism results in a significant reduction in the INJ token supply over time. 40% of fees generated by users on dApps built on Injective go directly towards incentivizing new developers building on Injective.
• Collateral: $INJ can be locked up in derivative contracts to ensure margins are met.
• Exchange Participation Incentives
• Proof of stake security: Injective Protocol uses the Tendermint consensus on Cosmos, $INJ is staked to receive $INJ from block rewards.
• Staking: Rewards for validator and delegator staking. Inflation (new tokens minted into supply) commenced at 7% at Genesis with a gradual decrease over time to 2% that are offset by 60% of validator fees that are token burn auctions.

Intotheblock stated that 96% of the supply is controlled by whales. However, it should be noted that 14.7M $INJ tokens, the single largest wallet, are assigned to the treasury. In addition, 47.5M $INJ is currently in staking and takes 28 days to unbond from validators.

Another run-of-the-mill DEX? — Discussion

Plainly, no.

For investors, it can be exhausting looking over DEXs. While they are immensely important and underpin the free-flowing exchange of assets on a blockchain, the market is heavily saturated and liquidity is fragmented.

Similarly, the layer-1 narrative has largely played out. The blockchains that survived the bear market are too far ahead of any overnight layer-1 to really make an impact on their market share at this point. As per usual, we will undoubtedly continue to see layer-1s and DEXs continue to play into the hype cycle.

Moreover, it is not particularly unique to launch an application-specific blockchain. Look toward Osmosis on the Cosmos Hub, or Loopring on Ethereum, they are not only a layer-1/layer-2 blockchain but solely host a DEX. It is often the case that assets need to be bridged through the native chain to reach an application-specific blockchain.

For the above reasons, it is interesting that investors consider Injective Protocol as a layer-1, a DEX, and a layer-1 that hosts a DEX. While hundreds of projects offer unique solutions in fragmented liquidity environments, the problem that has yet to be resolved is unifying liquidity and increasing scalability to handle demand and lower costs.

We propose the more poignant narrative with Injective is not just an interoperability buzzword, but liquidity being unified that can be accessed from multiple front-endpoints on multiple blockchains that utilize Injective’s decentralized order book model. Similarly, we have previously expressed enthusiasm toward LayerZero protocol for sophisticated cross-chain functions; Injective presents a modular component that can operate as an intuitive front-end that may prompt more complex cross-chain transactions to meet the needs of the end-user.

Earlier order-book DEXs from 2017 that very few would recall, such as EtherDelta, operated on an order-book model where users would supply liquidity to their account, send a proposal to an order book until a willing buyer would meet the other end of the trade. The experience was riddled with high gas fees, poor wallet experience, and poor user interface experience. Moreover, EtherDelta had limited liquidity, lack of incentives, and the product’s complexity did not align with the market’s collective intelligence at the time.

With the improvement of wallets and virtual machine environments, liquidity could flow more freely and was unlocked through the automated market maker (AMM) model. For more explanations on AMM models, please refer to Sushiswap FA.

While AMM models are imperfect, and there have been multiple iterations, such as Concentrated Liquidity Pools, the likes of Uniswap set the standard by incentivizing users with liquidity mining token rewards and trade fees to provide liquidity to meet both sides of a trade. As a result of this open-sourced model, we have seen forked AMM liquidity pools race to capture the lion’s share of liquidity in every virtual machine environment.

AMM DEXs like Sushiswap, Uniswap, TraderJoe, Pancakeswap, Quickswap, Osmosis, and Raydium had success in capturing liquidity in Ethereum, Avalanche, Binance Chain, Polygon, Cosmos, and Solana ecosystems, respectively. However, these DEX markets initially operated in isolation within their host blockchain, bringing DEX aggregators (I.e. 1INCH) that source the best price to execute a trade across multiple DEXs on the source chain, into the spotlight. In the LayerZero FA, Stargate was noted as the flagship DEX on multiple blockchains that source the best price across multiple DEXs across multiple blockchains. Decentralized exchanges are not likely to ever be truly scaleable without this function. Injective protocol has a real shot at resolving this problem by providing out-of-the-box solutions for projects on compatible networks to integrate their DApps readily into the Injective virtual environment to piggyback off Injectives cross-chain functions.

This is important for decentralized financial instruments to utilize a viable and deep liquidity order book, whereby liquidity can be sourced from multiple blockchains to facilitate the other side of a trade. Injective’s use of APIs and Oracles could potentially host a dApp that relays a price sourced across multiple liquidity pools and is not restricted to the depth or spread of an isolated liquidity pool.

This is bullish regarding network effects as a product of sophisticated smart contract automation. Based on the depth of a particular liquidity pool at a particular time of execution, all AMMs that are accessible through the Injective Protocol stand to benefit from market activity that takes place on Injective. The market makers seek to secure the best value purchase to meet the other side of a trade. While Uniswap may have the best price one day of the week, activity there would likely drive price in a more favorable direction on a DEX on another blockchain, allowing exponential arbitrage opportunities to emerge

Moreover, this is bullish for institutional adoption. While undoubtedly, enterprises have their own designs for what regulations they desire or are required to implement for their protocol with respect to financial products and instruments they wish to utilize, they ultimately require unrestricted access to liquidity. There is nil benefit to enterprises picking a single blockchain and transacting within their own isolated liquidity pools. Enterprises can develop dApps that utilize Injective’s decentralized order book, Injective APIs, and Oracles to maintain cross-chain communications with the dApp on their source chain and route assets through aggregator products to find the best price to obtain liquidity.

From a user’s perspective, Injective protocol has a highly intuitive user interface for those who have already conquered the learning curve of being able to use Metamask or Phantom Wallet to execute a transaction on-chain. Injective mainnet is akin to an abstract account associated with an EVM, Cosmos, or Solana public address that does not have it’s own private keys, but piggybacks off the users wallet and network of choice to generate a unique Injective address. Again, as previously discussed in FAs such as $SUI, account abstraction will be a remarkably important development to simplify the user experience further going into the future.

Regarding dApp activity on the protocol level, many projects are looking toward creating derivatives and sophisticated automated smart contracts to utilize complex interchain functions such as automated smart contracts to manage assets in alignment with prescribed strategies (like a trading bot that is executed on-chain, as opposed to a command script that is limited by access to centralized exchange APIs).

On a fundamental level, Injective will likely be a frontrunner in the DEX and L1 narratives, but interoperability through DeFi infrastructure tooling (or an SDK) is a significantly more durable narrative with long-term potential that is less susceptible to speculative hype.

Moreover, the airdrop narrative is rumored to emerge on Injective protocol, and coupled with what are quite decent $INJ staking returns of around 15.99%, we may see further speculation on $INJ in the short term. User adoption has been a recent feather in Injective’s cap growing from 14k to 290k users. While developer activity is lagging with Injective ranked 88th, should we start to see developers migrate to Injective, then we may anticipate network effects from dApp activity to follow. It is not unlikely that we will see an uptick in developer activity given that Injective not only has serious venture backers but has been busy during the bear market forming partnerships with the top 10 blockchains/layer-2s and Oracle providers like Chainlink; the latter cannot be understated to support and amplify the potential use cases for Injective protocol.

To further support the fundamental bull case, the proposed Volan Mainnet Upgrade proposal to shift the development focus toward a Real World Asset (RWA) module will enhance the overall functionality of dApps that integrate and utilize this product, and push blockchain technology as a whole one step closer to fulfilling the promise of replacing antiquated legacy systems.

It should also be noted that Injective Protocol’s burn auction design is a quite unique method to provide backing for staking rewards and countering inflation mechanics. Overall, $INJ has solid tokenomics and fewer concerns around counterparty risks since 96.33% of vested tokens are already unlocked.

All that to the side, let’s look at the charts.

As we know, $INJ has performed spectacularly since Q1 2023 with a 702% gain from macro lows and straight-up defied expectations in Q4 2023 with a further 500% gain. On the higher time frames, we are likely to ask ourselves the question, just how much is left in the tank?

On higher time frames, we often evaluate the performance of “similar” assets, in this case, Uniswap sets the benchmark of a $22B market cap. Injective protocol maxed out market cap at $3.65B, which is 7x from here if one operates under the thesis that Injective will test Uniswaps all-time high market cap. This is not an entirely unrealistic prediction given on a fundamental level Injective has a lot more going for it than “just a DEX” or “just an L1” as noted above. In terms of a continuation on higher time frames, $INJ cannot lose $19.26 level without risking CHoCH (Change of Character).

On lower time frames, we do not want to see $INJ close the daily below yearly open at $35.77 as we can expect fear to drive downside to challenge the trendline. It is often challenging to forecast short term targets while $INJ is presented with a blue-sky scenario. As we know — Bear markets are for technical analysis, bull markets are for fundamental analysis; while most market participants have little doubt that we will enter the latter territory soon, until ETFs and BTC halving cycles has progressed it unclear precisely when we can call recent price action the preface to a bonafide bull market. Market events around the Bitcoin ETF and, soon thereafter, the CBOE Futures listings for BTC and ETH will likely take control of the market in the shorter term, with the latter foreshadowing downside as it has done historically in following the 2017 all-time high and early 2021 dump. If one were inclined to build a position in the bull market, now would be a great time to commence DCA buys at a given interval. Those looking to trade in the short term ideally would catch a bid on the yearly open with the view that a fib retracement drawn from there to all-time high sets a 0.618 fib target at $55.989 to take profit. Similarly, short-term traders may commence a DCA buy strategy with bids down to the yearly open and stop loss at the next local daily level with the view that we will see another leg up for $INJ.

In summary, Injective is a serious contender not only for mainstream or vanilla narratives such as DEXs, L1s, and Application Specific Chains; but also for cozying up to the narrative for DeFi infrastructure tools which is largely untapped and will undoubtedly have huge appeal for investors and enterprises to give access to levels of liquidity required to facilitate large scale transactions. There are a few missing components, or perhaps missed opportunities, that have yet to be pieced explicitly together as those who understand where the technology is situated in the broader cryptocurrency landscape imaginations begin to run wild on the potential cross-chain and cross-dApp use cases (i.e. a Layerzero X Injective partnership would be next level…). Still, ultimately the advent of Injective Protocol indeed brings the promise of decentralized finance replacing antiquated financial instruments one step closer to fruition, and will likely play a vital role for developers pursuing out-of-the-box use cases for years to come.

References

Binance Research, Injective (INJ), October 25th, 2022, https://www.binance.com/en/research/projects/injective

Coindesk, ‘Pantera, Jump Crypto Back $150M Injective Ecosystem Fund’, Jan 26th 2023, https://www.coindesk.com/business/2023/01/25/pantera-jump-crypto-back-150m-injective-ecosystem-fund/

Forbes, ‘Injective Labs Profile’, https://www.forbes.com/profile/injective-labs/?list=30under30-finance/&sh=2955b16b2cfb

Injective DAO, ‘Injective Improvement Proposal: 314’, https://hub.injective.network/proposal/314/

TokenUnlocks, https://token.unlocks.app/injective-protocol

Tracxn, ‘Injective Labs funding & investors’, December 29th 2023, https://tracxn.com/d/companies/injective-labs/__21WRu7sLxVmDKGu6a_ivreevgS3U-brPUfrA_1MD-b0/funding-and-investors

Youtube, Coinbureau, ‘Injective Protocol (INJ): The Next Generation DEX!!🚀’, 23rd October 2020, https://www.youtube.com/watch?v=jEU0rW2YELg

Youtube, InvestAnswers, ‘🚀📈 Buy or Bye? 🤔💸 $INJ Injective Protocol Potential 💎✨’, 19th October 2023, https://www.youtube.com/watch?v=IzUCLlJ9Pls