Dialogue with Injective Labs Founder Eric Chen: The Dependence of High-Quality Applications on Underlying Public Chains is Weakening

Interviewee: Eric Chen

Interviewer: flowie, Chain Catcher

In the ongoing bear market of the cryptocurrency space and the cooling of DeFi, the Layer1 protocol focused on DeFi development, Injective, recently completed a $40 million financing round led by Jump Crypto.

Founded in 2018 and incubated by Binance Labs, Injective is an independent Layer1 protocol built on the Cosmos SDK framework, enabling developers to build DeFi and Web3 applications with lower barriers to entry. Injective provides users with out-of-the-box order book and derivatives modules necessary for creating DeFi applications, and enables the application of smart contracts with native compatibility to Ethereum and Cosmos IBC, achieving instant transaction settlement.

Since its mainnet launch last year, Injective has processed nearly 100 million on-chain transactions, with dApps built on Injective including Helix, Frontrunner, Dexterium, Wavely, INJDojo, among others, accumulating a total transaction volume exceeding $7 billion.

The DeFi derivatives platform built on Injective is one of the most promising markets in DeFi, but its scale is still in a very early stage, with most of the market dominated by centralized exchanges like Binance and FTX. In this context, how will Layer1 protocols like Injective break through? What opportunities for overtaking exist?

Recently, Chain Catcher interviewed Eric Chen, co-founder and CEO of Injective Labs, to discuss the existing issues in the DeFi market and the future development landscape in depth. Here is the full conversation:

Chain Catcher: I heard you were exposed to cryptocurrency in middle school; can you share your story of how you got into crypto?

Eric Chen: When I was around eleven or twelve, I discovered that I could mine Bitcoin using a graphics card while making some extra money; at that time, it was only a couple of hundred dollars. Initially, I just observed discussions and research online, finding it very novel. Later, I tried mining, but it didn't go well; I only mined one or two in a year and sold them early.

In the late high school and early college years, I frequently came into contact with startup teams in the blockchain space, such as some early Ethereum teams. They often discussed cryptocurrency blockchain technology and trends, and as I got more involved, I began to think about the direction of blockchain technology.

Later, I studied finance at New York University, and through deeper exposure to existing financial products, I found that these products had limitations in various aspects. Given my interest in computers from a young age, I started to minor in computer science and cryptography, realizing that this was where my true interest lay—using technology to innovate products. I became immersed in the lab, often conducting cryptographic research, and I quickly got hands-on experience, eventually publishing research papers.

During my internship in college, I worked at a fund, leveraging my research background to engage in quantitative trading, and I was quite skilled in this area, later working full-time in quantitative trading at the fund. During this time, I met Albert Chon, who was also interested in blockchain; he studied computer science at Stanford and later worked at Amazon and Open Zeppelin, being one of the creators of the ERC-1178 standard. Together, we conducted research on VDF (Verifiable Delay Function), which eventually evolved into the startup project Injective.

Chain Catcher: After working as a quantitative trader for half a year, what prompted you to decide to start the Injective project? What pain points exist in the cryptocurrency trading market?

Eric Chen: During my time as a trader, I encountered many frustrations. First, even the VIP experience at centralized exchanges was quite poor; many centralized exchanges at that time were not top-tier, and we often faced server failures due to significant market volatility, making trading impossible.

Second, while blockchain emphasizes decentralization, centralized exchanges had turned the community-owned infrastructure into a centralized form. Without much regulation, exchanges would engage in unfair practices to attract users for their own benefit.

Moreover, there weren't many mature decentralized solutions on the market. Even if a few existed, many layers of the trading platform remained centralized; for example, almost every limit order book DEX has centralized components that require traders to comply with centralized organizational will. However, we believed there was an opportunity to make all components decentralized.

Starting from these issues, combined with our ongoing cryptographic research, we believed we could create a series of decentralized, stable, self-driven solutions.

Chain Catcher: Compared to other decentralized derivatives protocols, what differentiating positioning or strategies do you have?

Eric Chen: First, our positioning is to be a Layer1, providing DeFi infrastructure. Under this premise, we offer developers a pluggable module based on the Cosmos SDK to build DeFi and Web3 applications.

We have now evolved into a relatively complete infrastructure with many developer modules, serving as a fast and stable on-chain order book that is also multi-chain compatible, allowing cross-chain interactions. As a foundational infrastructure for derivatives trading, it can support developers in creating more protocols.

Currently, EVM has many unreasonable limitations, or some defects and bugs, but these are often masked by speculative reward strategies. In a bear market, people may become more aware of the need to focus on improving underlying infrastructure, as only this can allow DeFi developers to create sustainable and healthier applications.

Chain Catcher: Why do derivatives protocols need an independent blockchain network? What specific optimizations and settings have you made for this?

Eric Chen: Derivatives are sensitive to rapidly changing prices and have high requirements for execution and settlement functions, which means they have higher infrastructure demands. Therefore, executing on public chains with relatively high block limits can be quite challenging.

The optimizations of Injective mainly focus on several aspects: a fully decentralized open-source public chain with high security; fast, stable, zero gas fees; compatibility with Cosmos IBC for interoperability; fully customizable and optimized for DeFi (plug-and-play modules, including the first order book and derivatives modules within the Cosmos ecosystem); and MEV resistance provided by Injective's frequent batch auction consensus mechanism.

Chain Catcher: Ethereum Layer2 protocols are maturing; why do you think dYdX chose to leave Layer2? In your view, why are many derivatives protocols now choosing to build their application chains?

Eric Chen: The long development cycle of Ethereum is one aspect; currently, the Node Operator network is not fully decentralized yet. Moreover, compared to general-purpose public chains, application chains are more flexible. By utilizing Cosmos SDK modules, they can achieve smoother composability, while high-quality applications are becoming less dependent on underlying public chains.

Chain Catcher: What do you think about the upcoming dYdX v4 version entering Cosmos?

Eric Chen: We consider ourselves old members of Cosmos. Rather than viewing Cosmos as an ecosystem, we should see it as a network that allows our ecosystem to connect better with others.

On the Cosmos network, we can focus on the development of the DeFi ecosystem. We do not feel pressured by dYdX's transition and entry; in fact, it is very beneficial for us. dYdX's liquidity mining will encourage more institutions to integrate into the Cosmos ecosystem.

Although there is competition, the pace and direction of competition are somewhat different. Injective can be seen as a laboratory for DeFi developers, while dYdX may be creating a semi-decentralized derivatives trading platform. In the future, we will work together to compete with CeFi.

Chain Catcher: Although DeFi has grown rapidly in the past two years, we see that most trading in the derivatives market still occurs on centralized exchanges. What characteristics do users of decentralized versus centralized derivatives trading have? What does the future landscape look like for both?

Eric Chen: So far, the trading volume of CeFi derivatives is indeed greater than that of DeFi, but this is only temporary. You will notice a trend where recently, the liquidity in many core markets of Uniswap has surpassed that of many centralized exchanges.

Centralized exchanges are indeed fast and have high trading volumes, but that does not mean they have higher liquidity. The ultimate form of Injective may serve as a hub for underlying liquidity, where centralized exchanges will source liquidity from Injective and use it as a submission layer.

Under a decentralized composable architecture, some conversions, bridging, and its innovation cycle will always be much faster than centralized products. DeFi still has advantages in decentralization, trust, and security; in the future, users will still lean towards DeFi or other decentralized products.

Chain Catcher: Recently, the sanctions on Tornado Cash have sparked widespread discussions in the crypto community regarding censorship resistance. As a decentralized protocol, how does Injective view the debate between complete decentralization and regulation?

Eric Chen: It is understandable for some projects to implement certain censorship mechanisms at the front-end and application layers. As a development team, adhering to user responsibility and respecting rules should be principles we uphold. The existence of regulation is to ensure that while technological innovation occurs, principles are also maintained.

However, if as a foundational protocol, you have the power to prevent Tornado Cash users from using your protocol, it proves that you are not a truly decentralized platform; the protocol cannot genuinely shield these addresses from the start.

Chain Catcher: What do you think about the collapse of DeFi projects like Terra? What insights does it provide for you?

Eric Chen: I believe it will serve as a healthy correction for the entire industry, making everyone realize that one cannot expect to achieve real user growth through liquidity mining immediately.

For many DeFi developers or users, it is also a significant awakening moment; they will discover that mining or airdrops are not sustainable behaviors. This will change user behavior habits, leading them to gradually seek more sustainable platforms or protocols.

This presents a significant opportunity for us. Although we have set up trading mining, it is more of a defensive measure; mining rewards account for a relatively small proportion of our ecosystem. From the beginning, we have never been a team that heavily relies on mining rewards to expand our user base.

Aperture previously conducted voting migrations for Arbitrum and Optimism on Terra, and ultimately decided to migrate to Injective to start a basis trading protocol. Of course, in the future, more dApps will migrate their applications to Injective.

Chain Catcher: In the ongoing bear market and the cooling of DeFi, what are the medium to long-term challenges for Injective? What strategies do you have to address them?

Eric Chen: Due to the overall macroeconomic downturn and the contraction of the crypto industry, there is indeed a significant negative impact on DeFi. We can see a downward trend in trading volume caused by market trends, with many capital deployments into the DeFi ecosystem declining, and some stablecoins being converted back to fiat. Additionally, the previous over-reliance on liquidity mining in DeFi products has triggered some major collapse events, further exacerbating the situation for the entire industry.

However, I believe opportunities arise in bear markets. When everyone is struggling, being the only project that can uncover opportunities and grow often promotes true innovation and development.

We are very confident in the growth of the DeFi ecosystem. During this brief downturn phase, it is also a good time for us to seize opportunities for rapid development. Our main challenge is how to capture this wave of opportunities, find more solutions that meet market demands, and achieve better user growth. We have also spent a lot of time and effort researching how to help developers better use Injective, including collaborating with some project parties to expand the ecosystem.

Moreover, during this downturn cycle, we also pay great attention to the completeness of product mechanism design. This mechanism cannot focus too much on short-term interests like previous DeFi products, which ultimately leads to all efforts going to waste and causes significant blows to users.

Chain Catcher: You have been quite active recently, first announcing the official launch of the CosmWasm mainnet, and then announcing a new round of financing. What new strategic plans do you have after the financing?

Eric Chen: We initiated the plan to introduce CosmWasm into Injective at the beginning of this year and attempted cross-chain CW20 standard tokens. Recently, in the latest upgrade of the Injective mainnet, we have completed support for the CosmWasm smart contract layer. This implementation of CosmWasm will allow developers to build diverse applications on Injective while still utilizing the existing core modules provided by Injective, such as using Injective's decentralized order book module to create applications like trading platforms, prediction markets, lending protocols, etc. Several different types of applications are already being developed on the Injective chain.

The implementation of CosmWasm on Injective is different from other existing CosmWasm smart contracts in the Cosmos ecosystem. Injective is one of the few blockchains that allows smart contracts to execute automatically in every block. Generally, smart contracts require external agents (like users) to call the contract and trigger the associated logic. The CosmWasm implementation on Injective allows smart contracts to be triggered autonomously in each block without external agents, further enabling developers to create truly decentralized and permissionless advanced applications.

We are currently collaborating with the cross-chain bridge Wormhole to integrate ten new blockchains into the Injective network, achieving interoperability through cross-chain bridging and becoming one of the networks with the most cross-chain connections.

This financing round introduced two significant institutions, Jump Crypto and Brevan Howard. As a major on-chain market maker, Jump will also provide Injective with better liquidity. In the future, we will collaborate with high-quality projects at the application layer, which will help Injective attract more users. Additionally, linking with smart contracts on Cosmos and integrating some DeFi protocols to enhance Injective's foundational chain functionality will also be a focus of our upcoming work. With the realization of more innovative technologies, Injective is actively developing its ecosystem to attract more developers to build on the platform and foster a more diverse ecosystem.

Chain Catcher: As a relative "crypto veteran," what advice do you have for new Chinese entrepreneurs entering the Web3 space?

Eric Chen: We have found that Chinese entrepreneurs do not have much advantage in fundraising from seed rounds to Series A compared to Western entrepreneurs. However, there are many Chinese entrepreneurs who stand at the peak of the industry after weathering storms.

At the same time, both capital and entrepreneurs in Europe and the U.S. indeed have a longer cycle than in China. For example, in China, you might see some short-sighted phenomena where one might give up 10 billion for 1 billion, while in Europe and the U.S., it is often the opposite.

Therefore, I think it is crucial to abandon the pursuit of short-term or mid-term benefits, or even what you consider long-term benefits.

As long as you are more passionate than others, more willing to innovate, and more motivated to persist in what you believe is right, even if you start in a disadvantaged position, after a few months or years, you will eventually find your advantages and discover a broader development space. We need to believe that opportunities will always be on your side.