Reviewing the Cosmos ecosystem Injective: Trading infrastructure built for DeFi

Original Title: "Injective: An Interoperable Exchange Infrastructure Protocol for DeFi Markets"
Original Author: Hasan Furkan Gk, Messari Hub

Last year, the crypto industry witnessed a rapid expansion of decentralized markets. Every team joined the competition with their vision of building differentiated trading platforms, competing across various aspects including infrastructure, covered asset classes and products, as well as user experience. Even seemingly similar designs, such as liquidity management, order clearing mechanisms, and governance schemes, have inherent differences.

Injective is one such case, with its mainnet launched in November 2021. The Injective protocol provides a fully decentralized order book trading infrastructure for accessing cross-chain spot and derivatives markets with zero Gas fees, thanks to its unique technical architecture.

Specifically, Injective is an application-specific blockchain built using the Cosmos SDK, designed to serve as an interoperable decentralized trading infrastructure layer. This architecture differs from DEXs running on Ethereum, Binance Smart Chain, or other Layer-1s, as the protocol offers trading services on its own execution layer and allows third parties to build trading platforms on Injective without permission.

All trading platforms built on Injective share the same order book, maximizing capital efficiency. The rapid block times and instant finality granted by the underlying Tendermint Core enable the protocol to handle a large volume of trading demands simultaneously while maintaining on-chain security.

Comprehensive Trading Experience

Before the mainnet launch, Injective experimented with various products. In addition to the existing 11 perpetual contracts and spot markets, the platform also launched products for traditional asset markets such as synthetic stocks, oil, natural gas, gold, and forex futures during the Solstice testnet period. The community hopes to reintroduce some of these markets in 2022 and introduce supplementary products with an order book model.

Options, synthetic assets, prediction market DApps, or any other tools that can leverage Injective's matching mechanism can be built on its chain. As the chain aspires to be a complete toolbox for decentralized finance markets, it can also integrate many other relevant financial products, such as lending services and trading guilds, to enhance the financial service attributes of its protocol.

In addition to its vision for decentralization, the permissionless market creation is also a fundamental design choice of its operation. This is why, on the Injective chain, community members can build novel financial products, launch funding pools for existing products, and open new markets for trading without centralized oversight.

New market proposals still require governance approval to go live on the front end—however, the protocol also allows users to quickly launch a market by paying a certain fee, which has recently been reduced from 1000 INJ to 100 INJ, making the process faster and more independent.

The permissionless state of market creation and considerations for the protocol's solvency have prompted Injective to adopt an independent risk coverage model for each market. Since Injective does not want the risk of one market to spill over into others, it requires that each new derivatives trading pair establish an insurance fund before being allowed to start trading.

This way, even in cases of extreme market volatility, the funds in the insurance fund will be prepared to address potential losses. Once the underwriters establish the insurance fund pool, users can contribute their collateral tokens to the fund pool and profit from liquidation proceeds.

To prevent front-running and enhance user experience, the protocol employs Frequent Batch Auctions (FBA) as its order clearing mechanism. In FBA, all orders submitted to the mempool are executed at the end of each block (with an average block time of about 1 second) and will only be published on the order book after the bidding process is completed.

By implementing a delay to obscure information, it enhances the trading experience for traders and allows market makers to provide deeper liquidity with smaller spreads without worrying about high-frequency traders disrupting market-making activities.

Liquidity and attention are the most valuable resources in the crypto industry. After the mainnet launch, Injective introduced an incentive program called Astro, aimed at increasing liquidity on the order book and attracting traders to the platform. The program will distribute 10 million INJ tokens (approximately $120 million at launch).

Of this, 70% is allocated to users as trading rewards, and 30% is allocated to liquidity providers under the professional market maker (DMM) program. The Astro incentive program is an ongoing initiative, and the protocol is also focusing on recruiting more market makers this year to establish healthier order depth for traders.

Since the launch of the Injective protocol's Canonical Chain mainnet, the protocol has accumulated a trading volume of over $3 billion in just two months, with most of the trading volume coming from the derivatives market. The TVL peaked at $130 million. However, recent market trends have impacted the protocol, similar to other DeFi platforms, pushing the TVL down to $42 million. As of February 7, the protocol's TVL stands at $110 million.

Zero Gas Fee Trading

Due to its technical design, the operation of the chain resembles an engine. It provides core functionalities but requires other supplementary components to grant users access. Currently, applications on the Injective Chain handle transactions by acting as an information bridge between users and nodes.

Although the Injective Chain is built using the Cosmos SDK, it utilizes custom Ethereum accounts and wallets generated by its applications to parse EIP-712 type data. Users submit their interaction requests to access DApps (relay front end) by sending cryptographically signed messages.

These messages are then broadcasted by trading DApps to a full Injective Chain node, where they are unpacked and added to the mempool. The node checks the transactions and includes them in a block while prioritizing transaction execution based on their category importance—liquidation and cancellation requests take precedence.

The unique transaction processing method of the Injective Chain is highly beneficial for user experience, as users interact with trading DApps without the burden of Gas fees. Since the trading platform broadcasts signed messages to Injective Chain nodes instead of traders, all costs associated with interacting with the chain are borne by the trading DApps, and traders do not pay any Gas fees.

This allows users to trade even without INJ in their accounts. Additionally, Injective has allocated a $100,000 reward pool to cover the Gas costs for users when they first transfer funds from Ethereum, making it even more user-friendly.

Complete decentralization is the top priority for the Injective community. This is why the consensus mechanism, backend infrastructure, governance, and trading DApps are all focused on decentralization. While most protocols target front-end decentralization, users are most familiar with the decentralization of the backend and governance. Some protocols have not utilized alternative front ends to interact with the protocol, contributing to the centralization of the front end.

As a Layer-1 protocol built for decentralized finance, Injective allows anyone to build customized trading DApps on top of the protocol, creating multiple portals for users. Each trading portal collects 40% of the trading fees introduced by its front end as a reward for processing trades. The Injective ecosystem welcomes more nodes to act in this intermediary-like role.

Currently, five trading DApps have been established on the Injective Chain: Picasso Exchange, MarsX, Unlimited Exchange, Lunatics Exchange, and Injective Pro provided by the core team of Injective Labs.

All these trading platforms connect to the same market through a shared order book, but they offer users different levels and forms of access. For example, compared to Injective Pro, the Picasso trading platform provides a Swap trading mechanism for its spot market, with a UI similar to AMM DEX.

MarsX allows users to access two of the perpetual contract markets, while other trading platforms display all launched contract markets. Trading platforms built on Injective have different front-end access points, each offering specialized value products to enhance user experience and tailor products for users in different regions.

In addition to placing orders through the DApps front end, traders can also choose to interact with the chain via API. Providing smooth API services for traders is equally important for the protocol, as it is the most convenient way for large participants to interact with the chain, designed for market makers and institutions.

The growth of API trading activity actually enhances the degree of decentralization, as these API users effectively become independent broadcasters of blocks. Since they use APIs instead of broadcasting their trades through trading DApp front ends, API traders need to pay a minimal amount of Gas fees.

At the same time, a benefit is that they only need to pay 60% of the trading fees (eliminating the 40% trading fee charged by the front end), making API trading a more profitable option for high-frequency traders.

Core Interoperability of Injective

The Injective protocol aims to bring liquidity from multiple chains through cross-chain capabilities, allowing traders to communicate with other IBC-enabled chains via its IBC, as well as interoperate with the Ethereum mainnet through the Injective cross-chain bridge.

This connectivity enables the platform to accumulate liquidity through seamless two-way communication and supports cross-chain trading of tokens originating from different ecosystems. The chain has already allowed transfers between Terra, Cosmos Hub, and the Ethereum network, and with the anticipated introduction of EVM compatibility this year, Injective is striving for further development and construction of a user ecosystem on its execution layer.

INJ Token Economic Model

The native token INJ was initially released in ERC-20 format and later migrated to its own chain. INJ is a multi-purpose token, functioning like the bolts in the most critical areas of a complex engine:

1. The security of the chain depends on INJ: Since Injective's Tendermint consensus is based on delegated proof of stake (dPoS), block producers need to stake INJ to validate blocks and earn INJ as a contribution reward. Currently, the minimum amount required to become a validator is 1 INJ.

2. Governance of the trading platform is governance of the chain: INJ holders can vote on improvements to the trading platform, parameter changes, new feature implementations, as well as chain updates and inflation reward mechanisms.

Since maintaining the security and governance efficiency of the chain is crucial, the Injective Protocol incentivizes staking by offering trading fee discounts. Through the Injective VIP program, the more INJ staked, the greater the trading fee discount.

3. Auctioning for trading fees: After allocating 40% of the trading fees to the DApps that introduced the trade, the remaining 60% of trading fee revenue will be auctioned for destruction. The protocol conducts auctions weekly, where participants bid INJ for the trading fees of that week. The final winning bidder can receive a basket of tokens and arbitrage profits, with the INJ they paid being burned.

The maximum supply of INJ was initially set at 100 million tokens. However, since block rewards are compensated by minting new tokens, this number faces inflationary pressure, turning it into a soft cap and an anchor for the desired supply.

Theoretically, the total supply of INJ can exceed the anchor value. However, the weekly destruction creates a deflationary effect, partially offsetting the increase in supply due to token minting.

More precisely, a 5% annual inflation rate on 13 million staked INJ translates to 650,000 new INJ minted in a year, while the total destruction amount in just eight weeks is 204,000, resulting in a net destruction of approximately 1,326,000 INJ per year, accounting for 1.325% of the total supply.

Future Plans

With solid and outstanding execution, Injective can further expand its influence with the support of its community, increase the adoption rate of the Cosmos ecosystem, and promote the continuous growth of decentralized trading platforms. The introduction of new products such as insurance DApps and trading guilds in the future can further enhance user experience, making Injective a more comprehensive toolbox for decentralized finance.

One might argue that as a blockchain based on proprietary applications, it may not be easy to acquire the liquidity and native tools of currently popular Layer-1s, but with its cross-chain bridge to Ethereum and IBC support, as well as the upcoming EVM compatibility, the Injective Protocol can overcome this obstacle.

If Injective becomes a hotspot for decentralized chain development, the protocol could potentially become a recognized infrastructure for cross-chain trading services and power future decentralized markets.