A Brief Analysis of the Technical Features and Economic Model of Injective Protocol (INJ)

This article is an original piece by Chain Catcher, authored by Loners Liu.

The huge price fluctuations in cryptocurrencies attract speculators, and the built-in leverage mechanism of futures contracts amplifies the volatility, drawing many traders to prefer trading futures products due to the wealth effect.

With the rise of DeFi last year, the momentum of decentralized trading is not only evident in the spot market but has also seen applications like dYdX, Injective, and Hegic emerging in the derivatives space. As of January 19, dYdX has supported a total of 11 trading pairs, with a total locked value (TVL) of approximately $15.9 million. Meanwhile, the decentralized derivatives protocol Injective Protocol, which launched today on Huobi, has seen its token surge by over 50%.

According to reports, Injective Protocol's CEO Eric Chen graduated from New York University's computer science department. During his university years, he developed an interest in cryptographic technology and met Albert Chon, who also shared an interest in blockchain. Albert later became the co-founder and CTO of Injective Protocol; he studied computer science under Dan Boneh at Stanford University and held key positions at Amazon and Open Zeppelin, being one of the creators of the ERC-1178 standard.

As like-minded friends, they conducted research on VDF (Verifiable Delay Function), which eventually evolved into Injective Protocol. On December 23 of last year, Coinbase Custody began supporting the deposit and withdrawal of INJ. Recent news indicates that Injective Protocol has also successfully been selected for the third phase of the Chicago DeFi Alliance's accelerator growth track.

As one of the eight projects incubated in the first phase by Binance Labs, the project received early investment from the Binance Labs incubator and completed a private fundraising round in July last year, with specific amounts undisclosed. This round of investment included institutions such as Pantera Capital, QCP Soteria, Axia8 Ventures, OK Strategic Cooperation Investment Institution K42, and Jin Ke Capital, with individual investments from Compound's strategic head Calvin Liu, Findora CEO Charles Lu, and former DRW partner Josh Felker. According to data from Feixiaohao, the current price of INJ has increased by more than 100 times compared to its seed round price, making it a beacon of domestic success.

The DeFi space has birthed numerous decentralized trading protocols centered around order book processing, but Injective stands out as the only derivatives DEX that implements layer 2, and it has developed its own public chain, Injective Chain, based on the Cosmos and Ethereum networks to address on-chain trading efficiency issues.

By utilizing Verifiable Delay Functions (VDF) to execute fair transaction ordering consensus, it addresses fairness issues in transactions and the problem of high miner fees being prioritized in Ethereum transactions through enforced time delays. Additionally, leveraging Cosmos IBC allows Injective DEX to support cross-chain trading; on the other hand, it aims to dominate the decentralized derivatives space by developing the Injective Derivatives Protocol, enabling users to freely create and trade derivatives markets.

Injective Protocol evaluates the listing requirements for a derivative based on design philosophy, market demand, risk controllability, data resources, and even creativity, and considers whether collaborating market makers can provide sufficient liquidity. In the future, it will gradually shift towards community governance, such as voting to select the issuance/listing of trading markets.

In terms of liquidity, Injective Protocol draws from the successful cases of centralized trading platforms, initially adopting a Make Order Rebate model, where placing orders incurs no fees and users can receive tokens allocated from the foundation. Moreover, due to a special node mechanism, decentralized referral incentives (Referral Bonus) are also allowed.

Unlike the vast majority of centralized platforms, Injective's revenue will return 100% to holders, with the entire process conducted on-chain, allowing for transparency and oversight by all users. Most centralized exchanges typically use 20% to 30% of their profits for buybacks and burns; for example, Huobi uses 20% of its spot and contract income to buy back and burn HT, OKEx chooses to burn 70% of unissued OKB at once, but only 30% of the trading fees are used for continued buybacks and burns of OKB, while Binance allocates 20% of its platform profits for buybacks and burns of BNB.

In reality, due to the opacity of fees, users can only be informed of trading volumes and burn amounts, but cannot act as supervisors to ensure exchanges fulfill their commitments.

Of course, Injective Protocol has also made many attempts at innovation; it has already launched Tesla stock derivatives trading on its Solstice Pro testnet (with the contract expiration date set for March 26, 2021) and currently supports Twitter stock derivatives trading, with plans to add more stock derivatives on Injective in the coming weeks.

Regarding future changes in the derivatives market, industry insiders believe that compared to other concepts in the crypto space, the DeFi sector is undoubtedly one of the applications with the highest demand and real needs, especially with DEXs like Uniswap performing well. "During this period, some DEXs have turned their attention to the derivatives market, but currently, their position in the DeFi ecosystem appears weak. According to Coingecko data, the trading volume of dYdX's BTC perpetual contracts is less than $1 million, accounting for a very small share of the entire derivatives market and still in the early exploratory stage."