iZUMi Finance Research Report: Liquidity as a Service, Maximizing Returns

Original Author: Web3CN

Original Source: web3中文

1. Project Introduction

iZUMi Finance is a liquidity optimization protocol built on the Ethereum network, part of the Uniswap V3 ecosystem, providing blockchain projects with "programmable liquidity as a service" based on Uniswap V3.

By continuously expanding its multi-chain ecosystem, iZUMi Finance will ultimately support cross-chain liquidity trading mechanisms, bringing systematic liquidity services to the multi-chain ecosystem and becoming a one-stop liquidity as a service (LaaS) platform with ultra-high capital efficiency in the DeFi industry.

2. Project Vision

After the launch of Uniswap V3, its ability to provide liquidity within a certain price range sparked much discussion. The essence of this solution is to offer more options to improve capital efficiency and LP returns. However, in practice, ordinary users are unable to make high-frequency adjustments based on market conditions or face high adjustment costs, leading to long-term liquidity being outside the price fluctuation range and resulting in losses.

iZUMi Finance aims to solve this problem. On one hand, users can entrust their funds to be managed for maximum returns; on the other hand, project teams can use this protocol to enhance the price stability of their tokens and reduce volatility caused by large single-coin transactions.

In Japanese, iZUMi means "spring." As a multi-chain DeFi protocol, iZUMi Finance believes that every token should achieve better on-chain liquidity in an efficient and sustainable manner. By creating a one-stop liquidity as a service, it aims to provide extreme on-chain liquidity for every partner, like a spring, continuously flowing and ever-renewing.

3. Features and Advantages

iZUMi's model addresses the issues of liquidity for stablecoins and pegged assets within Uniswap V3's range, as well as the low returns for liquidity providers, while maximizing the reduction of impermanent loss and improving capital utilization efficiency. iZUMi approaches the professionalism of CEXs, with its core advantages mainly comprising the following two points:

(1) Higher Efficiency of Discrete Liquidity Assets

iZUMi has upgraded the Uniswap algorithm, combining it with an innovative Discretized Liquidity AMM (DL-AMM) to improve the concentrated liquidity model first deployed by Uniswap V3. It is the first DEX in the industry based on AMM, fully on-chain, and supporting LOB trading.

DL-AMM deploys liquidity at each price change and reduces slippage when swapping tokens. DL-AMM segments these price ranges into small and narrow slices, bringing these price ranges close to 0. DL-AMM further enhances capital efficiency by providing liquidity within each required price range. Traders on iZiSwap will benefit from higher capital efficiency, zero slippage, and lower trading fees, ensuring liquidity at any desired price range.

(2) Allows Limit Orders

iZiSwap uses the original DL-AMM discrete liquidity AMM model, allowing liquidity to be deployed at each fixed price point. Unlike custodial limit order services, which essentially act as price monitoring programs that help users trade using Swap (market price function) when prices trigger, they cannot assess the success rate of trades or the stability of trading prices.

User limit orders will be treated as adding liquidity at a certain price change, allowing users to trade at a fixed price as limit orders. The limit order feature is free for users, with no fees required.

4. Development History

• 2021.10.08 iZUMi announced the successful completion of a $600,000 first round of financing.
• 2021.12.09 iZUMi completed a $3.5 million Series A financing.
• 2021.12.20 iZUMi announced the listing of its IZI token on Bybit.
• 2021.12.21 iZUMi launched the Uniswap V3 liquidity mining platform LiquidBox.
• 2021.12.22 DeFi derivatives platform DeSyn Protocol reached a technical and business partnership with iZUMi Finance.
• 2022.01.17 iZUMi deployed on Polygon to support Uniswap V3 liquidity mining.
• 2022.02.18 iZUMi announced the launch of its decentralized autonomous organization (DAO) and adopted a veNFT-based quadratic voting mechanism for governance.
• 2022.03.21 iZUMi launched veiZi, which can be used for voting, staking, and mining acceleration in three application scenarios. At the same time, iZUMi announced its formal cooperation with the NFT project HOURAI.
• 2022.03.26 Celer Network's cross-chain payment network cBridge announced support for iZUMi Finance.
• 2022.03.29 iZUMi launched on Arbitrum.
• 2022.05.07 iZiSwap launched on BNB Chain.
• 2022.05.10 iZUMi became part of the Arbitrum Odyssey event.
• 2022.05.20 iZUMi announced the completion of a $30 million Series B financing.
• 2022.07.08 iZUMi successfully redeemed its two bonds issued through Solv Protocol.
• 2022.07.18 iZUMi launched The Ultra Evolution mining reward event.
• 2022.09.13 NEAR ecosystem DeFi platform Ref Finance collaborated with iZUMi Finance and Arctic to release Ref V2 version.
• 2022.12.17 iZUMi launched the decentralized order book exchange iZiSwap Pro.
• 2023.04.16 iZiSwap Pro launched on zkSync Era mainnet.
• 2023.04.21 iZUMi announced the completion of $22 million in financing.

5. Team Background

The iZUMi team members are relatively mysterious. Currently, the official Team shows only one Co-founder, Jimmy Yin. Jimmy Yin may be related to YIN Finance, a partner that announced the "joint liquidity mining plan" with iZUMi Finance at the beginning of 2022.

Recently, Jimmy Yin participated in the Web3 Festival series event "Infra and Applications Onboarding the Next Billion Users" in Hong Kong, sharing the latest developments of iZUMi.

Additionally, during an AMA held by MEXC exchange on December 23, 2021, a co-founder of iZUMi named Dima Sharenk participated in the event.

6. Financing Information

On October 8, 2021, iZUMi Finance raised $600,000 in financing, with investors including Tess Ventures, Puzzle Ventures, Everest Ventures Group, LucidBlue Ventures, Youbi Capital, Nothing Research, WolfEdge, Adaptive Lab, and ICG.

In November 2021, iZUMi Finance's financing amount reached $2.1 million, led by Mirana Ventures, with participation from Everest Ventures Group, Youbi Capital, LucidBlue Ventures, Puzzle Ventures, WolfEdge, ICG, Adaptive Lab, Nothing Research, and Tess Ventures.

On December 9, 2021, iZUMi Finance secured another $3.5 million in Series A financing, bringing its total financing to $5.6 million. Series A investors included Mirana Ventures, IOSG, Cadenza, Fenbushi Capital, EVG, Hashkey, GSR, CyberX, Bixin, Kronos, Dorahacks, Gate Labs, MEXC, and individual investors from Nansen, Perp, Chainlink, and Babel.

On May 20, 2022, iZUMi Finance announced the completion of $30 million in financing, including institutional investors such as Ivy Venture, Cobo, and Mirana, with over $10 million coming from convertible bond financing (Bond Vouchers) in collaboration with Solv Protocol.

On April 21, 2023, iZUMi Finance announced the completion of a new round of financing of $22 million, supported by funds and individual investors such as Unicode Digital, NextGen Digital Venture, Bella Protocol, and Incuba Alpha, raising $22 million worth of ETH, stETH, USDC, USDT, etc.

7. Development Achievements

(1) veiZi

The veNFT within the iZUMi system is also known as veiZi, launched on March 21, 2022. To discuss the origin of veNFT, one must mention veToken, a concept first proposed by Curve. "ve" stands for "voter escrowed," which works by locking CRV tokens and converting them into veCRV, which has governance capabilities within the protocol. Holders of veCRV enjoy governance rights within the Curve protocol, fees generated within Curve, and higher yields during liquidity mining. However, veCRV cannot be transferred or traded.

The introduction of veToken aims to bind protocol participants with the long-term interests of the protocol, allowing them to make decisions that align with their own and the protocol's long-term interests, while the locked tokens also help reduce the pace of token inflation, promoting the price growth of the token in the secondary market.

In the DeFi ecosystem, veiZi will mainly be used in three application scenarios: voting, staking, and mining acceleration.

(2) iZiSwap Pro

iZiSwap Pro is an AMM-driven order book DEX that pursues high capital efficiency, launched on December 17, 2022, allowing users to trade with zero slippage.

iZiSwap Pro introduces an order book-style user interface and interaction experience, featuring unified accounts, no gas fees, low trading costs, and censorship resistance. More importantly, iZiSwap Pro operates in a non-custodial mode, with data being transparent and verifiable on-chain.

Compared to other AMM DEXs, iZiSwap Pro has no trading slippage and is immune to "sandwich attacks." Users can trade their tokens at precise prices using limit orders and enjoy the same trading interface and user experience as order book exchanges.

(3) Community

Twitter Followers: 100,000+

Discord: Approximately 65,000

TG: 17,387

8. Economic Model

The iZi token is a utility token based on Ethereum ERC-20 on the iZUMi platform, with a total supply of 2 billion, used for incentive pool setup and other tool usage.

iZi is a utility token on the platform that can be used to pay cross-chain transaction fees, set up incentive pools, and use the v3 toolbox.

Users can stake iZi to obtain governance tokens veiZi, which are non-transferable and non-tradable. Their main functions include: initiating proposals and governance voting, receiving Uniswap V3 liquidity mining rewards, and obtaining a share of ecosystem profits.

The functions of veiZi are as follows:

① Voting: DAO governance and Quadratic voting will be used to determine key issues. The iZi emission amount for each cycle will be determined and allocated based on veiZi voting rights. Owners of veiZi can delegate their voting rights to another address.

② Staking: 50% of the platform's revenue will be used to repurchase iZi, distributed monthly to veiZi holders based on voting rights. In the first 4 years, 40 million iZi will be distributed annually as staking rewards to veiZi holders.

③ Boosting: After staking NFTs, veiZi will be used to increase the LiquidBox pool APR to 2.5 times. The boosting mechanism will take the smaller of two values to calculate your income weight. The first value is simply the vliquidity amount calculated from the UniV3 LP NFTs staked by users on the iZUMi platform.

According to the official website, iZUMi Finance currently has three products: LiquidBox, iZiSwap, and iZUMi Bond.

(1) Liquidity Mining ------ LiquidBox

The iZUMi team first proposed and implemented the liquidity mining scheme "LiquidBox" based on Uniswap V3 NFT LP tokens. Unlike traditional V2 interchangeable LP tokens that are directly staked for mining, LiquidBox allows the protocol to explicitly set the value range of the incentive LP tokens when designing the liquidity mining incentive scheme.

Moreover, after users stake V3 LP tokens into the iZUMi protocol, LiquidBox will automatically determine whether the value range of the LP tokens is within the liquidity incentive value range set by the project team. If it is within the range, LiquidBox will issue liquidity mining token rewards to liquidity providers based on the incentive scheme.

The project team can establish trading pairs and liquidity pools based on Uniswap V3, attracting liquidity more effectively through limited range rewards and different rewards for different price ranges.

The liquidity model provided by iZUMi Finance includes:

Model 1: "Concentrated Liquidity Mining Model," where stablecoin and pegged asset reward price ranges are fixed.

LiquidBox can allocate liquidity mining incentive tokens within a specific price range, such as [0.95,1.05], to maintain the price stability of stablecoins or pegged assets. Each block within the price range (0.95p,1.05p) receives 10 tokens from stablecoin and pegged asset issuers. iZUMi evaluates the total effective liquidity within the (0.95p,1.05p) price range and linearly allocates incentives based on the proportion held by each LP. These incentives will attract liquidity to this price range, achieving minimal slippage.

Model 2: Full-price non-stablecoin "One-sided Non-Impermanent Loss Mining Model"

iZUMi LiquidBox allows liquidity mining incentive tokens within the current price range to compensate for impermanent loss caused by price changes over the corresponding time interval.

Similar to the traditional xy=k model, LP will also place half the value of USDC and half the value of the project token into iZUMi LiquidBox, enabling one-click liquidity mining.

However, to avoid the "Pool 2 dilemma" caused by the traditional xy=k model (where LP places all USDC as potential buy orders and project tokens as potential sell orders in the liquidity pool, leading to LP selling their project tokens passively when prices rise, incurring impermanent loss and increasing the project's passive selling pressure, preventing price increases, resulting in a "lose-lose" situation), iZUMi LiquidBox innovates the "one-sided non-impermanent loss" model based on Uniswap V3. It places LP's USDC into (Pa,Pc), just below the current price Pc, and stakes LP's project tokens for mining in the trading pool (i.e., above Pc as potential sellers), thus forming a "strong buy strong sell" model that is more conducive to price increases.

Model 3: "Dynamic Range" model incentivizing non-stablecoins to provide dynamic liquidity around the current price.

In iZUMi's Model 3 "Dynamic Range," users participate in liquidity mining by setting liquidity within the range of (0.25Pc, 4Pc) around the current price (Pc). The width of the price range can also be set by the project team, for example, set to (0.5Pc, 2Pc), which will also provide more concentrated liquidity. After users provide liquidity to the coin pair at the set price range through the iZUMi platform, the iZUMi smart contract automatically stakes the Uniswap V3 LP NFT into the liquidity mining program, allowing liquidity providers to automatically participate in mining and start receiving liquidity mining rewards from iZUMi and the corresponding project.

In addition, LPs will also earn trading fee income from Uniswap V3, as the value range set by liquidity providers includes the current token price. The combination of these two income sources will significantly enhance the expected returns for liquidity providers. The earnings from liquidity mining participation will be calculated as a percentage of the total liquidity provided based on the thickness of their provided liquidity (v_liquidity), as follows:

Based on the above equation, we can conclude that compared to traditional full-range liquidity mining activities, the iZUMi Model 3 "Dynamic Range," if the price range is set to (0.5 Pc, 2Pc), will provide approximately three times the capital utilization efficiency. Moreover, based on the "dynamic range" model, users do not need to frequently adjust positions. During liquidity mining participation, even if there are significant unilateral price fluctuations that break through the corresponding value range (0.25Pc, 4Pc), as long as liquidity mining does not terminate, the Uniswap V3 LP NFT held by users will continue to generate liquidity mining rewards. Of course, liquidity providers can choose to redeem and provide liquidity again based on the latest prices, ensuring that they can continue to earn Uniswap V3 trading fees in addition to liquidity mining rewards.

(2) New Liquidity Algorithm Swap ------ iZiSwap

iZiSwap was initially launched on BNB Chain and is an innovative Discretized Liquidity AMM (DL-AMM) that provides efficient on-chain liquidity for Web3 assets, achieving over 5000 times the capital efficiency compared to traditional xy=k DEXs.

The DL-AMM algorithm adopts a new discrete concentrated liquidity algorithm, similar to the concentrated liquidity market-making characteristics of Uniswap V3, but allows liquidity to be precisely allocated at any fixed price rather than within a price range. This makes iZiSwap easier to manage in terms of liquidity and supports more trading methods, such as limit orders.

(3) Convertible Bonds ------ iZUMi Bond / iUSD

Bond Farming is the latest paradigm of on-chain financial derivatives innovation proposed by iZUMi Finance, based on the team's deep understanding of traditional finance and focused research on the DeFi industry. As an on-chain financing bond issued by iZUMi Finance, it combines the model of traditional financial companies issuing convertible bonds with the model of on-chain over-collateralized stablecoins.

Based on the unique token tools and over-collateralization mechanisms in the DeFi space, iZUMi has pioneered the first dollar-denominated convertible bond ------ iUSD (iZUMi Bond USD). Unlike the well-known concept of dollar stablecoins, it discards the systemic risks of algorithmic stablecoins, supporting the value of iUSD with transparent on-chain funds managed by smart contracts and multi-signature wallets as over-collateralization. iZUMi's convertible bonds issued through Solv Protocol allow investors to convert to iZi tokens at a specific price upon maturity, enabling investors to enjoy potential investment returns from the appreciation of iZi tokens.

9. Industry Analysis

Any centralized entity carries the risk of single-point failure. The asset transparency, security, and non-custodial nature provided by DEXs, combined with their open and composable characteristics, will prove their reliability as centralized institutions continue to rise and fall.

Currently, leading DEXs are focusing on enhancing traffic, including improving user experience on mobile and web platforms and achieving traffic exposure.

The introduction of concentrated liquidity in Uniswap V3 has made liquidity provision more complex and specialized. Recently, multiple ecosystems have seen a surge of DEXs designed around concentrated liquidity. Considering the unique on-chain environment (including transaction confirmation delays, MEV, fee mechanisms, slippage, etc.), as well as the mathematical calculations and characteristics that differ completely from AMM models and traditional Order Books, it is foreseeable that more market-making teams focusing on providing professional liquidity services in concentrated liquidity DEXs will emerge, and iZUMi Finance is one of them.

10. Opportunities and Risks

(1) Opportunities

Uniswap has gradually formed its own ecosystem, with numerous protocols related to Uniswap liquidity management. However, there are few projects like iZUMi Finance that start from Uniswap V3's range liquidity management and hope to form a larger ecosystem through cross-chain bridges and multi-chain DEXs in the future.

iZUMi Finance has already launched iZiSwap Pro, which, combined with the DL-AMM's compatibility with both AMM and limit orders, provides a user-friendly and cost-effective trading experience, achieving a decentralized exchange on-chain, which has significant market potential in the future.

(2) Risks

iZUMi's innovation is inspired by DeFi 2.0 protocols and expands the application of NFTs. Attracting significant funds in less than 90 days since its launch and completing multiple rounds of financing indicates that iZUMi has certain appeal and strength. However, data shows that about 50% of wallets incur losses after providing liquidity on Uniswap V3, and the DeFi space is rapidly evolving with intense competition. As iZUMi has been live for over a year, aside from financing news, there hasn't been anything particularly noteworthy. The project is still in its development stage, and its future remains to be seen.