TL;DR: 1) There are widely known and inherent privacy gaps on public blockchains. 2) Secret Network is a privacy first L1 with the intent to remedy this. 3) Shade Protocol aims to launch a suite of applications on Secret under the $SHD governance token umbrella. 4) Silk stablecoin is Shade’s inseparable counterpart, with a burn mechanism inspired by the deadly Luna-UST pairing.
Freshly airdropped last week is the Shade Protocol: “an array of connected privacy-preserving DeFi applications built on Secret Network.” Cosmos, Secret, and Terra stakers were accounted for in the airdrop based on a 36-day snapshot from 11/7/21-12/13/21.
To say this long-awaited advancement of the Secret Network is launching into a tailor-made environment is an understatement. With the escalation of monetary violence in Canada this month, citizens both in and out of crypto world have been reminded that their wealth is theirs only up until government cries terrorism. While the censorship-resistant nature of Bitcoin (with self-custody) brings safe haven from outright seizure or “freezing,” public blockchains like Bitcoin, Ethereum, or your favorite L1 can make for better financial surveillance tools than freedom money. When crypto flows, balances, and contract contents are all available to the world there is remains a significant gap between privacy in DeFi and analog finance. Shade Protocol in built upon closing this gap, with a vision that “without privacy, DeFi is incomplete.”
Today we’ll be taking a look under the hood of the team’s development so far and new capabilities they plan to bring to the Secret Network.
The $SHD Token
$SHD is a governance token built on the SNIP-20 standard of the Secret Network. If you’re unfamiliar with the Secret Network, Trusted Execution Environments (TEEs) and SNIP-20 privacy capabilities I recommend this overview on cardfarm’s Medium.
Any discussion of governance tokens is incomplete without coverage of their flaws shown in pioneering ETH DeFi 1.0 projects. The valueless governance token narrative has been spot on in DeFi since early 2021, evidenced no further than the DPI/ETH chart resembling your local electric vehicle SPAC (-78.7% 1Y returns). Unsustainable staking and farming emissions have slayed nearly all ETH DeFi tokens well under ATHs, with community members left with large losses against ETH and the burden of responsibly governing their favorite protocol. Sushi community members for example are “in it for the governance” not different than bagholders of a tanked NFT project are in it for the art.
Shade is attempting to positively shift some of these outcomes with a design alteration at the core of their vision: a complete DeFi suite under the singular $SHD token. Instead of $UNI or $SUSHI tokens for your traders and yield farmers, $AAVE for your borrowers, and further fragmentation, all primitives developed on Shade will be used and governed by its native token. Decisions surrounding treasury management, governance, and revenue sharing will be in the hands of $SHD stakers across the entire offering. This novel approach will be fascinating to monitor in development toward its goal of unifying apps thus far largely fragmented on ETH or your favorite alt L1.
Beyond the value capture, the UX improvements are also poised to be a notable effect of Shade’s unification of Secret Network DeFi. The team has harped on the importance of hosting the entire DeFi suite in one portal. This should be a significant advancement in UX, particularly for beginners. Users will enter a Microsoft Office of sorts for their DeFi needs, instead of operating on Apple Pages for documents, Google Sheets for data, and PowerPoint for presentations.
It’s likely that power users will stray to other apps as there the consistent need to get on the cutting edge of product rollouts tends to outpace established project adaptation. However, if Shade succeeds in becoming “the everything store” they will become the central hub of Secret Network.
Silk Stablecoin
Analysis of the Shade token is incomplete without diving into the Silk stablecoin. Stylized after Luna’s UST algorithmic stablecoin burn mechanism, Silk is the first official primitive on protocol and vital to $SHD’s value capture.
Silk has 2 core characteristics making it unique amongst the stablecoin landscape
Silk’s construction on the SNIP-20 standard makes it privacy preserving just like SCRT and SHD. User’s Silk holdings will be encrypted with a viewing key and fully private as long as held within the Secret ecosystem.
Silk will be launched at $1 value but not pegged to USD. It will instead track a basket of global currencies (including crypto) and commodities under the discretion of Shade DAO.
Silk’s privacy maintains the potential use cases of Secret, while its composition attempts to create a far better store of value than USD-pegged counterparts. To go full Imaginooor for a couple sentences - imagine getting your centralized USDT or USDC frozen by Tether or Circle, a far more imaginable possibility following the events with the Freedom Convoy up north. Now imagine having your decentralized but USD-pegged UST or DAI melting in your hands due to 7% inflation. Silk aims to remove both scenarios, making a clear case for adoption.
Having teased the Luna-UST tokenomics dynamics plenty, lets get into it. The burn mechanism is not a one way road like Luna → UST, but a much more wild intersection that no urban planner would approve:
sSCRT → SHD or Silk
SHD <-> Silk can be minted for each other
Ultimately: sATOM → Silk & sLUNA → Silk will be enabled
There are many roads to minting Silk through the multiple burnable tokens. Naturally this results in less potent deflationary pressure than Luna. The minting process and peg process as diagrammed by the Shade team is below.
Tokenomics
Total SHD Supply: 10,000,000
Airdropped: 14.5%, 20% on 2/22/22, remainder 80% upon launch of Shade staking
Community: 51.86% overall
Shade’s tokenomics are built with the significant road ahead in mind. Beyond the obvious hype of the airdrop and relatively small 7.75% private raise, 23.25% is allotted for Grants and the Development Fund. This large share must be used strategically to build out the initial Shade & Silk functionality, along with development of the entire suite of primitives. The ambitious vision of the team is in the hands of this allotment, its allocation decisions will loom large over the project’s future much more than apps who launched tokens with already working products like Uniswap.
The final piece of tokenomics - staking and LP rewards - takes a page from another leading project in Osmosis.
1/3 of the total 27.36% of total supply will be rewarded to users in year 1, followed by 1/3 decay annually. Early users will be rewarded handsomely if Shade succeeds, with stakers enjoying the fairly dynamic governance responsibilities. Importantly and disappointing for Shade holders, Osmosis’ 70% rewards allocation dwarfs the 27.36% in play with Shade.
Conclusion
Shade Protocol has an impressively large vision, opening up an enormous range for its future contingent on both internal and external development. Internally, Silk must achieve adoption followed by the primitives in development. No small feat when coordinating an unpegged stablecoin and entire DeFi slate under one roof. Heading into Q2 plans for the testnet, audit, and mainnet launch should the simplest part. Externally, the flourishing Cosmos ecosystem stands to be an important supporting force via integration. However, the privacy goals can only be realized on Secret exclusively. The airdrop completely congested the chain, creating a sluggish process and raising questions surrounding scalability. The privacy use case is there, but the consistent use of it similar to other L1s is tens of millions of transactions away.
The design is impressive and trying new ideas are exciting to see, but given the leaps that must be made speculating buyers must have serious faith in the Shade team and Secret Network adoption to fulfill their goals.
Resources
Shade Protocol website and Medium
Whitepapers
Carter Woetzel media (Lead Researcher and Economist for the protocol)
Shade Protocol Overview, Citadel.One