Injective — Why we need Decentralised Exchanges now more than ever

Published in

Coinmonks

9 min readFeb 22, 2022

Before I begin, please allow me to introduce myself, I am a loyal Injective community member whose sole purpose in writing these articles is to help educate my existing #nINJa bros and new members to the Injective community. So, although I do want everyone to understand the advantages of decentralised exchanges, I am not a legal or financial advisor! Please do your own research!

This article will be discussing why we are in need of Decentralised Exchanges and how they have made an insane amount of progress compared to a year ago.

Centralised Exchanges (CEX)

CEXs are currently the go-to platform for traders due to possessing the lion’s share of liquidity. They have plenty of markets to trade accross and offer great incentives such as referral programmes.

Modern CEXs use Continuous Double Auction (CDA) which processes orders as soon as they reach the exchange. Each order is then immediately filled on the opposite side or placed into the orderbook awaiting a matching order to fill it.

Using CDA to process orders places great importance on speed where markets with high volatility allow for arbitrage opportunities. High Frequent Traders (HFTs) utilise technology such as microwave towers (see image below) and FPGAs to possess connection speeds of nanoseconds (one billionth of a second). This gives them the edge over market makers who have to invest heavily in turn to keep up with HFTs. This means MMs have to increase their trading fees to allow for their investment in technology which goes on to impact retail traders. You can read more on how CDA works at https://blog.injectiveprotocol.com/injective-exchange-upgrade-a-novel-order-matching-mechanism/.

https://arstechnica.com/information-technology/2016/11/private-microwave-networks-financial-hft/

Centralised Exchanges also act as a custodian over your assets through the control of your private keys. The cliché saying, “Not your Keys, Not your wallet”, means any crypto coin/token you own on a centralised exchange isn’t actually yours. To add fuel to the fire, the recent incident involving the Canadian government freezing crypto assets and personal bank accounts of individuals who donated to a local gofundme campaign led by the Freedom Convoy who were protesting to end Covid-19 lockdowns show how insecure your funds actually are in centralised exchanges as our local ‘deities’ can at any time force CEXs to freeze accounts.

https://www.youtube.com/watch?v=_4I9Rz_g6pU

Jesse Powell, CEO of Kraken exchange responded to a tweet stating:

https://twitter.com/jespow/status/1494462097161220104

Now, if the CEO of a popular exchange admits that they can’t do much if the government come knocking then it’s time to look to an alternative solution which provides us the opportunity to trade assets which are under our complete control.

So, what is this solution I speak of? Decentralised Exchanges (DEX).

Decentralised Exchanges (DEX)

A DEX is a cryptocurrency exchange which operates in a decentralized manner without any form of central authority. DEXs do not require a third party to store your funds, enabling you to retain control of your private keys at all times.

The biggest issue with Decentralised exchanges during its earlier days were that they were not as liquid in comparison to their centralised counterparts. However; CZ, CEO of Binance recently tweeted:

https://twitter.com/cz_binance/status/1494544602400890883

This shows how much DEXs have progressed in order to close the gap and at the current rate of adoption, the gap will only get smaller. It also shows how surprisingly bullish CEX owners are over the adoption of DEXs.

Initially, the need for market makers and slow blockchain speeds made it difficult to create an orderbook model until Uniswap pioneered the decentralised exchange industry through its use of an Automated Market Maker (AMM) model. Though a very easy and efficient way of trading, ‘Front Running’ (a similar concept to that of HFTs in centralised exchanges) has been a major issue due to the slow performance of the Ethereum blockchain as pending transactions are visible in the network giving front running predators the opportunity to execute their trades before a pending transaction is processed by paying a higher gas fee and then selling at profit after the same pending transaction has been processed. On top of this, anyone can create a pool, which makes it more susceptable to rug pulls. It’s also extremely expensive to process transactions as gas fees have soared over the last year with Uniswap swap gas fees ranging between $100–$400

Fortunately, blockchain technology has rapidly improved since the introduction of Uniswap and the availability of higher TPS; cheaper gas fees allows for the possibility of creating an orderbook model DEX and with so many available to trade on, you need look no further than the Binance incubated project, Injective.

Injective

Injective is a custom interoperable layer one protocol for building powerful exchange, DeFi, derivatives & Web3 applications. Injective was created using the Cosmos SDK and is able to achieve instant transaction finality while sustaining lightning fast speeds. There are no gas fees when trading through any of the Injective relayer’s front end (more on this below)

Fully Decentralised Layer-1 Blockchain

Injective uses Frequent Batch Auctioning (FBA)which eliminates the predatory front-running I mentioned above while enabling the provisioning of deeper liquidity at tighter spreads by market makers. If you want to learn more about FBA, see here: https://blog.injectiveprotocol.com/injective-exchange-upgrade-a-novel-order-matching-mechanism/.

Market listings, upgrades and changes to the chain are completely decentralised through governance and with such a strong, active and honest community, we’ve seen outstanding contributions including the following:

Forbid wash trading on the Exchange leading to more rewards being available for organic traders
Agreemenet of restructuring the Astro Incentives to attract more traders
Increase taker rewards to encourage more maker orders to be taken from the book
Launch new markets (Spot and Perpetual)
Act as ‘Gatekeepers’ towards any threat of scamcoin listings

Tokenomics

Max supply: 100,000,000
Current Supply (at time of writing this article): 48,655,554
Token Utility: Pay gas fees for transactions, 100 $INJ to ‘Ninja List’ (instant launch of a market on the dex), big at auctions

The Injective tokenomics is truly a phenomenon. Every 7 days, 60% of the accumulated trading fees are auctioned off in return for INJ, in which the auction winner’s INJ tokens are burnt and removed from supply.

Current Burn Total: https://hub.injective.network/auction

This means, as volume increases, more value is accrued into the auction which in turn requires higher INJ bids from participants of the auction. Uniswap is currently performing at ~$1.5billion of trading volume per day. If Injective had this 24hr trading volume over 7 days at the current token price of $5 and assuming the average trading fee for each market is 0.15% (Maker + Taker):

(0.0015*1,500,000,000*0.6)/5 = 270,000 INJ Tokens Burnt per 7 days, 14,000,000 INJ tokens burnt per year, 14% of supply! (if the volume continues at this rate and price remains the same as well)

However, it’s important to note that the above calculations are only speculative as volume has not hit the highs I have mentioned, though this does not mean the exchange will never reach these liquidity levels as the incentives mentioned in the next section are currently in the pipeline.

Incentives to Improve Liquidity

Trading Guilds —Trading is a game of patience and skill which not everyone possesses thus, majority of investors prefer to HODL for the long term. However, trading guilds provide crypto investors the chance to grant access of their funds to trading guilds to execute trades on their behalf. This does not mean the trading guilds you grant access to will own your assets but, can perform trades on your behalf.

Injective’s reveal of Trading Guilds interface — https://twitter.com/InjectiveLabs/status/1492310636684062726

More markets — There are currently 6 perpetual markets on Injective which means there is so much space to grow! Many top liquid pairs are still to be listed and you can rest easy knowing they will be coming very soon.

More bridges — Injective shines like no other orderbook dex when it comes to interoperability as it will bring in more bridges in the future such as AVAX, BNB and DOT to name a few. At the moment you can bridge tokens through the Ethereum bridge and to multiple IBC bridged chains including Cosmoshub, Terra, Osmosis, Chihuahua and Juno (very soon).

Revolutionary adoption of AMM model into CLOB — This is still in R&D stage but it involves implementing an AMM model to provide liquidity for Injective’s orderbook model dex. I don’t know how it’s going to work but if executed successfully, then it will truly be revolutionary as you’d be able to provide liquidity pools for investors to deposit into whilst letting users trade from them very similarly to that of Uniswap.

Relayer Mechanism

One of the standout features of Injective is the relayer mechanism. This means that rather than having one direct UI to trade through like many popular DEXs, anyone can host the exchange through their own front end and share the orderbook for each market. This allows relayers to filter markets to their preference and benefit from the following advantages:

Where 60% of all fees are auctioned off, relayers receive 40% of the fees paid when users trade on their front-end
Host competitions/incentives using the 40% fees. The recently released https://injdojo.exchange/ were offering 40% trading fee refund upon release which was very popular amongst the Injective community as it perfectly ties in with the trade and earn rewards.
Filter available markets from their front-end to comply with local regulations as well as enable KYC for countries such as United States. This means the relayer can any make changes to their front end without requiring any on-chain changes.

https://twitter.com/InjectiveMemes/status/1494399893674336258

So, if we revisit what I mentioned earlier about CEXs being forced to freeze accounts due to governmental pressure, Injective will allow popular CEXs such as Binance; Kraken; and Coinbase the chance to build relayers on Injective themselves. Just imagine the token burn if any of these exchanges decided to do this and bring in even a small percentage of their CEX volumes!

And just to prove that institutional relayers are not just a myth, Huobi (an Asian based cryptocurrency exchange) recently announced that they will be building a dedicated relayer for Injective users.

https://twitter.com/InjectiveLabs/status/1493261134807379977

dAPPs

As the Injective chain is built specifically for DeFi applications, there are a number of different types of dAPPs you can build on top. Injective recently announced the successful process of the first CW20 token transfer recently using CosmWasm smart contracts.

The unique orderbook model makes it very attractive for dAPPs such as betting/gambling application to be built on top of the Injective chain. In fact, a sports betting dAPP is actually being built right now: https://www.getfrontrunner.com/.

Specific to sports betting (which is due to be worth a total of $140.26 billion in 2028, https://www.bloomberg.com/press-releases/2021-10-19/sports-betting-market-size-worth-140-26-billion-by-2028-grand-view-research-inc), Frontrunner allows users to place positions for or against teams/individualrs across a variety of sports including: