Injective Protocol
https://injectiveprotocol.com/
The IСO Drops team are investors in Injective Protocol. Even though we did not accept a single edit of the report’s content and did not try to distort the facts (only minor edits to the structure of sentences), it is worth noting that to some extent we are affiliated with the project.
A while back, the ICO Drops team decided that creating project reports wasn’t fun anymore. Are there fewer projects? Are they less attractive? Or maybe we have become less interested in them? I will answer no to all three questions at once. In fact, we actually had an uptrend in which projects in DeFi and WEB3 were being adopted faster. Also, we were more active than ever. The market changed; we no longer have an urgent need to create the reports for every project out there. Firstly, such reports began to be made by much larger players (powerful team and resources). In conditions of redundancy of information, it does not carry any additional alpha. Secondly, hardly anyone will argue about the need to read the report to make an investment decision. You are either reading code or reading market sentiment. And no, this is not about the crypto market. The stock market is now also not subject to fundamental analysis.
If you are still here, then I would like to answer your next question. “So why am I reading this?” You are reading this because sometimes we come across projects with an in-depth research base that is interesting to analyze.
Injective Protocol as Cosmos Hub
Before we get started, let’s quickly note:
Injective Protocol is a blockchain built with the Cosmos SDK.
Injective DEX Protocol — a set of financial smart contracts.
Injective Protocol is a sidechain built on the Cosmos SDK that is EVM compliant and will in the future allow interaction with Ethereum through the Peg Zone, thereby creating the ability to move liquidity in the Injective Protocol <> Ethereum. At its core, Injective is not 100% Layer 2, as the security guarantees by the validators of their network.
We can compare it to xDai, Skale Network, Matic, i.e. Ethereum developers can build dapps outside of the Ethereum mainnet. However, the current primary use case of Injective Protocol is derivatives trading.
The team is focused on the implementation of a “decentralized Bitmex”. According to the latest news (civil and criminal lawsuit against Bitmex, the arrest of Okex CEO) it is a rather urgent problem.
The Injective DEX Protocol is a set of smart contracts written in Solidity, which are a fork of 0x V3 contracts for matching the spot and derivatives markets. The coordinators of all transactions (a matching mechanism) are the Injective Protocol stackers. Also, to protect traders from the potential of front-running, which currently poses a threat to the security of Ethereum, VDF (Verifiable Delay function) is used. As we know, part of the matching logic happens off-chain (as in 0x), so the Injective orderbook and matching can be called partially decentralized and does not require trust.
Injective DEX is an implementation of perpetual swaps with an order-book model. Funding mechanism and assets collateralization allow creating any financial contracts. An essential part of the functioning of any decentralized derivatives exchange is the correct pricing and funding rate, which in turn affect the safety and reliability of the trading. For example, derivatives exchanges on Ethereum 1.0 have several problems due to scalability limitations. But since Injective is a separate sidechain, this problem is less relevant.Blockchains on Tendermint can provide speeds of up to 1000 transactions per second. The team plans to announce soon who will act as the external oracle. These solutions can be Band, Chainlink and DIA.
Maintaining liquidity is one of the main problems of the exchanges operating the perpetual swap model, which unlike AMM counterparts, does not happen automatically. It is primarily affected by the maximum leverage that the exchange can provide, such as incentive mechanisms and types of collateral. The optimal balance in these components will also ensure the security of the protocol.
Token design
- Since the Injective Protocol is a Proof of Stake protocol, the INJ token stimulates the nodes to behave correctly, ensuring the security of the protocol due to the inflation mechanism. Validators are rewarded only through inflation, they have a stable incentive to behave correctly, unlike other protocols whose reward tends to be zero (bitcoin). This design seems to be more sustainable at the moment.
- In addition to staking, validators will be stimulated by receiving 40% of the commission from the total exchange commission (0.1% / 0.2%), thereby the INJ token will provide them with cash flow.
- INJ designed to provide governance, which also allows the token to capture value in proportion to the evolution of the protocol.
- As we noted earlier, one of the main tasks of perpetual swap exchanges is to stimulate liquidity by attracting professional market makers. The token rebase mechanism (liquidation mining) at the initial stage will allow makers to earn money in addition to trading with the spread, thereby creating liquidity on the exchange.
- The accumulated commission (60% of all commissions) will be sold at the auction, the means of payment for which is the INJ token. Collected INJs will be burned (similar to Maker Auction).
- Also, INJ can act as collateral when trading on a derivative exchange.
We can see a broad range of token utility, which aims to create a net positive impact on token value once Injective hits a certain liquidity level. Once again, we note that Injective DEX is a set of smart contracts. That is, anyone can write a specific interface to interact with them.
As you can see, we did not focus on cross-chain interaction with Ethereum, because for derivative exchanges this is not a significant factor. After all, any derivative asset can be created using a perpetual swap, even with those circulating on the different blockchains. However, they may be less liquid and therefore, more susceptible to liquidation.
Token metrics
I highly recommend that you read the Binance report for comprehensive information. We want to focus on the valuation of the project. This is the only missing detail in the Binance report although this is probably the only way to understand at what price you are buying. Injective has a Total Token Supply of 100,000,000 INJ.
Injective has a significantly lower valuation (f.d. market cap) of the final round compared to market stats.
Competitors
dYdX and Synthetix are currently the largest players in the decentralized derivatives market.
The Synthetix model differs significantly from the Injective model, as it is built on a common debt system.
dYdX is the most suitable example for comparison. At the moment, exchange offers maximum leverage of x10, and USDC, ETH acts as collateral. The dYdX oracle is MakerDao. However, dYdX is severely limited due to the speed of Ethereum and currently considering the option of switching to L2 / sidechains.
From all this, we can conclude that even though dYdx is leading in the market, it’s system is not perfect and well balanced between security and liquidity.
As we know, Injective plans to use USDT and other assets as collateral to attract significant liquidity. They plan to introduce big leverage, which will also have a positive impact on liquidity. Functioning on its own sidechain will allow the exchange to scale further improving user experience and securing the DEX in case of liquidations.
Summary
DeFi sector continues to attract the best minds and attention of financial institutions as well as institutional investors. There is a widespread belief that DeFi projects have no value proposition, only speculation. However, as we can see, speculative interest primarily creates liquidity in the market, improving its efficiency in general. Injective is also bootstrapping initial liquidity with on-chain referral incentives and by working with some of the largest market makers globally.
Injective hit our radar back in January 2019, when the DeFi industry wasn’t nearly as popular. The architecture of Injective protocol makes it possible to solve urgent problems faced by existing solutions. For example, Synthetix only starting to test Layer 2 solutions, dYdX is also considering interoperability. In contrast, Injective Protocol enters the market with its ready-made solution:
- A sidechain that will allow scaling operations, thereby increasing liquidity and ensuring the security of the exchange
- VDF cryptographic primitive that offers to solve the frontend problem
Together with the above, I would like to add that the project also has a relatively low valuation, which gives a significant upside for growth. It also shows that the team is entirely rational in its valuation since often many DeFi projects that do not have finished products value themselves much more expensive.
The report was prepared in collaboration with Nikita
Useful Links
- White Paper
https://docsend.com/view/zdj4n2d - Docs
https://docs.injectiveprotocol.com - Blog
https://medium.com/injective-labs - Binance Research
https://research.binance.com/en/projects/injective-protocol - Coingecko
https://www.coingecko.com/en/defi - Dune Analytics
https://www.duneanalytics.com/
