UNIDEX: The Defi Liquidity Hub

Intro:

UNIDEX (www.unidex.exchange) came to be in October 2020, inspired by 2019 DeFi summer’s promise of a crypto-native financial system. This dream first started with bitcoin as a payment rail, but quickly evolved into programmable money, complete with crypto-backed stable coins and fully decentralized marketplaces.

Since then, the collapse of crypto’s centralized ecosystem, the US’s regulatory tirade on financial sovereignty, and faster / cheaper on-chain transactions have catalyzed the adoption of decentralized trading. The resulting rush of new DeFi users has brought with it the meteoric rise of DYDX, GMX, GNS, and PERP, amongst others.

Despite the most recent explosion of on-chain activity, early DEX adopters suffer from vulnerable DEX backstops and fragmented liquidity across protocols and chains — and with that simple thought, we present UNIDEX.

Unidex falls into what we at InternDAO consider to be the crypto sweet spot, meaning it’s a fundamentally focused project, with a dedicated technical team, and is progressing toward solving a real-world use case that improves the end-user experience and DeFi capital efficiency.

Sweet spot protocols have a tendency to under-communicate to those outside of their core community. Through conversations with the core development team, we’ve identified fundamental advancements that we felt are not currently captured in the documentation and are worth considering.

Summary:

At first glance it will appear that Unidex is working to solve the fragmented liquidity problem that plagues the multi-chain DeFi world. The protocol aggregates decentralized spot markets and will soon be aggregating decentralized perpetual markets across chains — providing users with a single crypto-native place to chart and trade DeFi products. However, the Unidex vision is larger than just that, and if successful, will become the liquidity hub for all Defi builders to develop on top of.

Once the protocol’s Optimism app-chain is launched, it will offer the decentralized world an omnichain Defi liquidity primitive. New Defi protocols will no longer need to launch across chains or source LP’s for themselves, instead they can plug into the Unidex appchain to solve all their liquidity needs. Moreover, users will no longer need to switch amongst chains, instead they’ll be able to use Unidex’s account abstraction implementation to submit transactions that the protocol will then auto-route across the entirety of web3.

V3 Overview:

In March of this year (2023), the team rolled out V3 swaps (aggregated omnichain AMM swaps) and are now aiming for a late March / early April beta release of their V3 omnichain perpetual swaps. The V3 multi-phase upgrade, once complete, will deliver:

(1) An updated swap aggregator design:

• “Orders are filled in batch short-term auctions from any source removing the possibility of traders missing out on a deal they could have gotten better with a requote. Trades are constantly being quoted in small intervals and filled with cross orders (CoW orders), an existing meta-aggregation strategy, and community-built routing sources. This makes the aggregator open to future integrations as protocols can essentially add their DEX into the aggregator given they only need to fill the conditions of filling the user’s order with the requested tokens.”

• In practice, user’s can place an order on Arbitrum and be filled on Optimism and can choose to use the gasless trading method so that their order never hits an AMM directly.

(2) The launch of a perpetual swap aggregator:

• Using account abstraction, users can buy or sell from a single wallet, logged in to a single chain, and have their order filled across multiple DEXs from multiple chains. The position routing and liquidity sourcing is abstracted away from the user and they’re simply presented with a single position to manage.

• “Orders will be filled in the order of UniDex LPs first > other Perp DEXs > Cross chain orders to other Perp DEXs…the leverage terminal is changing into a derivatives terminal that aggregates orders both multi-chain & cross-chain.”

• Upon launch, the new derivatives terminal will aggregate liquidity from:

  • Arbitrum: Gains, GMX, Mux, Cap, MYC, UniDex, HandleFi

  • Optimism: UniDex, Pika, Kwenta, opx, Perpetual protocol v2, Mux, MMY

  • Polygon: Gains, Metavault, Unidex

  • Fantom: MPX, MMY, Mux, Unidex

  • Binance Smart Chain: LVL, UniDex

  • Avalanche: GMX, Unidex

(3) A dedicated Optimism app chain which will serve native LP’s and help to drive liquidity to perpetual markets, while creating a new Defi liquidity primitive for all other developers to plug into:

• The current testnet is slated to be launched at either the end of this month or in early April.

• The appchain will be using EIP 1559’s gas burning mechanism, turning UNIDX into a deflationary coin with no future emissions, however user’s can also decide to use ETH or stable coins for gas as account abstraction is supported.

• While anyone can build on top of the app-chain, the Unidex team will be providing an orderbook DEX, it’s leverage/derivatives platform, an options trading protocol, a swap aggregator, and potentially a lending protocol.

• The team will also be onboarding partner protocols, but no other details were provided to us.

(4) Updated token fee structure and token holder benefits:

The protocol has taken a beautifully simple approach to tokenomics, but has a history that you must learn about to understand the project’s marketcap.

• 20MM tokens were created during the token’s initial launch, however 16MM were burned in November 2020, leaving the total supply of 4MM.

• Included in the burn was the team’s token allocation. They have instead opt’d to take a split of fees. We consider this to be an atypical approach, however, there is potentially strong alignment due to the teams’ financial outcome resting entirely on their protocol’s adoption.

• The inflation rate of the token is 0 and all tokens are held by users, with the exception of the 833,333 tokens owned by the protocol, which are currently providing liquidity on Uniswap on Ethereum. Once Uniswap supports concentrated LP’ing on Arbitrum, a portion of the liquidity will be moved there.

UNIDX holders also receive a portion of protocol fees (currently capturing .17% of total perpetual swap volume). Token holder rewards are directly dropped (weekly) into holders’ wallets, without the need to stake. By default, the protocol will airdrop your portion of fees in USDC on Optimism. However, you may opt to receive your rewards in UNIDX, ETH, Frax, or a number of other supported tokens on your preferred chain. The protocol currently purchases UNIDX back from the open market (amongst other places when available) to distribute UNIDX rewards to users.

Once V3 roles out, the perpetual swap fee model will be updated to 45% of protocol revenue to LPs, 40% to token holders, and 15% to the team.

Growth opportunities:

• V3 will also introduce the ability for Unidex to capture positive slippage from token swaps, introducing an additional revenue stream that is then split 50/50 between token holders and the team.

• Volume routing rewards from newly onboarded protocols also creates an additional revenue stream for the protocol. Uniswap’s most recent integration with Defillama Swap is expected to handle 75% - 90% of the project’s volume.

• Currently, only a small portion of DEX volume is routed through aggregators, estimated at around 10% to 20% (Source). In addition, most of the spot volume is being done on CEXs. Therefore, we can expect that on-chain volume will grow over time. Based on the volumes currently being routed through aggregators, we can lay out the following scenarios:

Unidex also is expected to grow within the derivatives market, initially through omnichain perpertual swap aggregation, and later through a native appchain. Currently, there is roughly $2.5b in daily decentralized perpetual swap volume (Source). By analyzing the amount of volume that Unidex is capable of capturing from the current perp landscape, we can envision the following potential scenarios:

Conclusion:

The combination of an Optimism appchain and multiple Defi applications on top does more than just address the current fragmentation of onchcain liquidity, it provides the foundation for a new Defi liquidity primitive, open to all developers.

By creating one place for omnichain liquidity, Unidex attracts both developers and users to their network. Defi applications that integrate with Unidex offer a better user experience and better order execution, which in turn brings more volume to Unidex, which in turn deepens Unidex’s native liquidity. This flywheel, driven by a better experience for developers, users, and LP’s has the potential to create a massive moat.

Moreover, crypto has long discussed the idea of a chain agnostic application that abstracts away the complexities of a multi-chain world, and less than a decade later, that reality has arrived.

Sitting at an approximate $30MM FDV (at the time of writing), Unidex’s valuation is a complete head scratcher. Based on the scenarios presented above, we can estimate that Unidex holders will receive between $0.35 to $4.50 per token per year, for the more bearish/neutral outlooks, and upwards of $16.50 or more per token per year for the more bullish outlooks — all of this being real yield. Combined with a deflationary token model, this reminds us of the early days of Defi summer where the now called “defi bluechips” were just starting to be understood.

Links:

https://mirror.xyz/unidexexchange.eth/6NpP9tgiLa2GydV42ZtDJblb-47r45CDd83RMgK0F0o

<https://coinmarketcap.com/currencies/unidex/ https://linktr.ee/unidexexchange>

UniDex overview | Token Terminal

Dive into UniDex's key fundamental metrics and uncover trends to make better investing and operational decisions.

https://tokenterminal.com

https://dune.com/shogun/unidex-exchange-analytics

https://mirror.xyz/unidexexchange.eth/

https://snapshot.org/#/unidexapp.eth

As they say, “don’t fight the Fed,” so we’re seeking to figure out what the Fed can and can’t do.

Generally speaking, the Fed operates on a dual mandate of (1) maintaining low unemployment, and (2) targeting an inflation rate which averages 2%. With a significant portion of Covid-related job losses being regained over the past 18 months, the Fed (and correspondingly, the market) has turned its attention to the persisting ~7% inflation rate. The simple analysis/conclusion would be that the Fed needs to raise the fed funds rate to match the inflation rate (as it has been done historically).

Nevertheless, as we explore below, we believe that:

(a) the Fed would not be able to raise rates anywhere near that level even if it desired; and

(b) the current CPI inflation numbers being printed do not accurately measure monetary-policy related inflation and therefore the Fed won’t even be required (or desire) to raise significantly to combat it.

Taper Tantrum Round 3

The Fed has been talking about rate hikes and tapering the Fed balance sheet for several months and has been squarely focused on March 2022 for its first (likely 25bp) rate hike. Leading into the Fed meeting and press conference, many began to speculate that the Fed would hike early (in the January meeting) and/or greater (50 bps).

In fact, the market began to price a greater than 50% chance that the Fed will produce 5 hikes to 1.25%-1.5% in 2022. It’s important to note that this potential hike schedule is fairly significant in isolation but is essentially a non-serious response to a currently-tracking 7% inflation rate. So while the Fed is blustering and speaking hawkish publicly, they’re still essentially telling the market that they don’t take inflation seriously.

Nevertheless, the market which has been addicted to the drug of easy-money policies over the past decade, threw a ‘taper tantrum’ in response to these increasingly expected and priced-in rate hikes and faster balance sheet taper. The S&P 500 and Nasdaq drew down 12.5% and 17%, respectively, peak-to-trough in January.

This year-open sell-off was accompanied by historic levels of bearish positioning by equities investors. Record volumes of puts were bought against indexes and ETFs and bearish sentiment was in the 98th percentile over the past 3.5 decades.

It’s clear from positioning that the market is attempting to price in aggressive interest rates for the foreseeable future and a tapering of the balance sheet — leading to a bearish outcome for equities. As we’ll discuss in the following section, we don’t think the Fed is in a position to effectuate either the plan they’re threatening nor the exaggerated version the market is hedging against.

The Fed is Between a Rock and a Hard Place

As mentioned, the Fed has a dual mandate of (a) maintaining low unemployment and (b) targeting inflation averaging 2% per year. Heading into the Covid crisis, the Fed had enjoyed a decade of sub-2% inflation with minimal inflationary worries even after the introduction of QE1. In 2020, they were suddenly faced with an economic and political shock — the massive unemployment caused by Covid shutdowns. The decision to provide significant liquidity into the market was an easy one because it aided in pushing directionally in the benefit of both mandates.

Nevertheless, the Fed is met with several non-stated directives as well, which recently included (a) de-leveraging the public and private markets (a bit more on this below) and (b) maintaining the Dollar’s global reserve currency status. Unrelated, but worth mentioning, is that recently the Fed is discussing racial justice issues and ESG (environmental, social and governance) issues as driving forces behind its policy and decision making processes as well.

While Covid provided the backdrop for the Fed’s extreme actions, they were in a position that required them to maintain low interest rates simply to prevent the federal government’s budget from exploding. The federal government’s debt to GDP ratio reached 128% in the past year. Any scenario where debt-to-GDP is over 100% becomes increasingly precarious for an economy which is growing at a rate lower than the interest rate on its public debt (this is particularly true for a nation who runs perpetual deficits at the federal level).

Debt to GDP Ratio

The federal government’s total debt level stands just above $30T today. In 2021, the federal government spent $562.4 billion on interest payments on federal debt compared to $4.05 trillion it received in total revenue (and ran an approximately $2T deficit in aggregate, adding over 7% to the total debt). The average interest rate on the federal government’s outstanding debt is currently approximately 1.5%. With inflation currently tracking at greater than 7% per annum, any significant raise of interest rates would lead to interest payments alone ballooning and requiring a large portion of the federal government’s revenues.

This scenario would either lead to a downward spiral of increased taxes and austerity measures - effectively crushing the economy and guaranteeing significant unemployment - or the Fed’s continued subsidization of interest rates in an effort to financialize significant portions of the debt on it’s balance sheet while allowing the economy to run hot in nominal terms with a view to deleveraging the federal government’s “balance sheet.” The net effect of the latter course of action is significant devaluing of the Dollar (which as mentioned, also runs counter to another of the Fed’s unstated mandates). This is precisely why the Fed is engaged in a complex tango with the domestic market as well as central banks of foreign jurisdictions - where monetary easing (and debasement) of foreign currencies gives the Fed additional leeway to continue their deleveraging process domestically.

After 2020, which saw a significant devaluing of the USD versus a basket of foreign currencies, 2021 saw it recover most of its losses. We believe that, from a forex perspective, the Fed has achieved the leeway it requires before continuing its easing process (although this is only one factor amongst many - and specifically inflation, which must be “controlled,” before it can truly ease once again).

Not all Inflation is Created Equally

Last Thursday, February 10th, saw the release of CPI data which was higher than expected for the 9th out of the last 10 months - driving the bulk of the actual (and political) pressure on the Fed to act against the measured inflation with faster and larger rate hikes and balance sheet tapering.

Nevertheless, when observing the aggregate CPI number, it is important to identify and analyze each of the composite items in the basket as increases in each category are not driven by the same forces.

Interestingly, the entire above-average contingent is comprised of (1) heavy manufacturing (cars, appliances and furniture), (2) travel-related categories, and (3) fuel and energy. We can likely attribute increases in manufacturing related products to Covid-related disruptions to factory production. For example, because fewer new cars are being built and delivered, the cost of used cars is being driven up dramatically. Similarly, travel-related categories are likely seeing an influx of demand due to pent-up (and shorter term) desire to travel after widespread lockdowns. Lastly, fuel and energy are likely being driven up due to a combination of Green policies globally (impacting supply of oil and gas based fuels) and various geo-political factors (e.g. Russia, Venezuela, and Iran). Interestingly, it’s difficult to peg the bulk of these price increases (especially vis a vis the remainder of the basket) on monetary policy.

Direction of CPI data matters a lot. As humans, we have an enormous tendency to extrapolate direction which can be seen from how markets reacted to last week’s print. Today the rate of change in inflation is up, a trajectory it has been on for a while. This leads to assumptions that the trend could continue higher and that high, sticky inflation could be here to stay. The trend has increased market volatility for assets which are central bank sensitive. If inflation data has in fact peaked, and given the all to real human tendency to extrapolate rates of change, we could be looking at a very different inflation debate just a month or two down the line - and it seems that simple math supports the proposition that CPI prints will fall off dramatically in that time frame strictly due to having a higher year-ago base to measure from. This could provide some real relief and potential dovish, upside shocks to assets most sensitive to the macro outlook.

Macro-economists’ opinions around the Fed’s next step are the most polarized they’ve ever been. Outside of the great financial criss of 2008 and the early 2020 response to the Covid pandemic, the current predicament the Fed is in is one of the most interesting in history. We eagerly await the Fed’s decisions in March to observe how it is interpreted by the markets and how it impacts the lives of ordinary people.

Conclusion

The most recent CPI print of 7.5% led to a a significant increase in bets that the Fed will hike by 50bps+ at March’s meeting, with the market initially pricing in a ∼90% probability of 50-75bps hike following the print. Interestingly, the market is beginning to pull off that knee jerk reaction, with odds settling at ∼60% as of publication.

It seems the market is beginning to digest deeper research into the reality behind the the headline CPI number and realizing that it is not as drastic as it appears. Further, the narrative is beginning to spread that the market’s reflexive expectation of ever expedient and increased rate hikes are not possible. As the market begins to become more rational to this fact - especially with clear Fed messaging in and an only 25bp March increase, should it come - we believe that risk assets (including crypto) will begin to perform well.

Enjoy!

Interview 1: Aravind Menon from Alameda on Markets

• Recording: https://www.youtube.com/watch?v=VlJ7Za8dGcI

• Written Notes: https://twitter.com/InternDAO/status/1490704989076918279

Our Mission is to have fun, share alpha, and build the decentralized future with friends.

Special thanks to contributors: @matt_chain @cryptokaiguy @jonnyfiat @DanOBrienPoker @AviFelman

Synapse: Evolution From Cross-chain Bridge To “Roadway” Layer Zero

Summary of Report:

• Synapse Chain is in production

• Cross-chain liquidity will be hosted on its own layer 0 chain, drastically increasing capital efficiency and increasing robustness via decentralization

• Developers and users can seamlessly interact with assets regardless of their native chain, reducing friction across crypto’s multi-chain ecosystem and allowing for projects like cross-chain yield aggregation and deeper, more efficient lending markets

• We believe Synapse creates real value by solving cross-chain liquidity issues and will be able to capture value for token holders, and is one of the few products in crypto widely used and love. With the introduction of an L0, the $500m valuation seems underpriced.

Introduction:

One must have a basic understanding of Synapse before appreciating the significance of this report. At InternDAO, we want to focus on real alpha and not explanatory fluff, the type of information that gives significant edge in markets. So, if you’re not familiar with the purpose of Synapse protocol, we recommend first consulting the following resources or reviewing our summary table below:

• Documentation

• Discord

• Coingecko Page

• 

  NDG

  @NickDGarcia

  

  The L1-L2 wars have been a dominant theme in crypto.
  
  Unifying these thriving ecosystems via bridges is a logical follow-up.
  
  @SynapseProtocol ️is at the forefront offering sub 3-minute cross-chain swaps across 10 chains and counting.
  
  on ️

  

  155

  11:07 AM • Dec 2, 2021

Stats:

• Ticker: $SYN

• C-Cap / Supply : $510m // 175.8m

• F-Cap / Supply : $726m // 250m

• Inflation: ~$2.2m (763,500 SYN) per week

• Project Summary: Synapse is a fast bridge between EVM compatible chains, utilizing MPC/TSS and incentivized AMM pools to allow for quick, decentralized movement between chains. They have a native nUSD token that is the base asset for most pools, and is what ends up being swapped to deliver liquidity across chain.

• Token Value: Governance & Revenue Sharing. Every bridge transfer has an associated fee that goes back to the protocol. In the future this will be used as revenue for token holders, but currently it goes to the treasury.

Report Background

There were two important events that made this report possible (1) @AureliusBTC applied to, and was accepted into, InternDAO and (2) the DAO was in the midst of compiling a comprehensive internal guide to layer 1’s and bridges. During our internal research it was clear that Synapse protocol (Aurelius’ creation) had become one of the leading bridges in crypto.

The protocol was built by a lean and talented team and has attracted steady growing volumes and a thriving community due to their ability to ship fast and ship well. Synapse was consistently integrating new chains, adding each as market fundamentals and narratives pivoted based on the needs of their users. It was clear that they were in sync with the market and understood how their product plugged into the space.

Additionally we watched the team and community elegantly steer themselves away from their previous identity as Nerve Protocol, securing a future for Synapse that awarded those who planned to back the project for the long haul. Their ability to pivot and refocus on a new, and needed product is a rare skill to find. It was these attributes that intrigued the DAO.

We approached Aurelius about writing a public Synapse report and the resulting interview blew us out of the water. The team had a lot planned, yet almost none of it had been communicated effectively yet.

So here we are, writing a report about why we’re bullish on the bridge and exploring the even larger vision that is being built.

The Multi-chain Vision

To understand the significance of Synapse, one has to understand that the future will be multi-chain.

As late as mid 2020, the thesis that there would be “one chain to rule them all” was widely accepted and discussed in the cryptocurrency world. Fast forward to today, and rarely do you hear that argument anymore. By now, most opinions have changed due to the rise of alternative smart contracting platforms and the following boom cycle that drew in tremendous liquidity from investors, speculators, builders, and users.

There are generally two ways that the future can be assembled:

(1) Build out a system with a unified messaging standard. This is the approach of Cosmos IBC, Polkadot and Avalanche Subnets

(2) Have translators sit in the middle of different chains, interpreting and passing on messages. This is the most common approach, and is a generalized form of the type of work done by bridges.

Synapse uses the second approach, as do bridges like Multichain and Wormhole. Most cross-chain movement that occurs happens with these types of solutions, where translation happens via a third party that interprets messages across chains. The issue with (2) is that it’s technically hard and there are many competing ways to build out out the tech.

Synapse’s Progression & Vision

Synapse decided to tackle this difficult issue, and set out to be the leading bridge in crypto. Of course, they encountered some large problems.

First, the current “multi-chain AMM” model requires that liquidity live in siloed chain pairs, resulting in fragmented liquidity that is limited to single hops across chains. This meant that liquidity was not ecosystem-wide nor deep and that users suffered as a result.

Second, the majority of competing bridges were using unsustainable models that either subsidized or incentivized routing over their bridge. Paying users to bridge or covering their fees is not how to sustainably drive adoption.

As such, the Synapse team postulated a new approach, one that solved both the liquidity fragmentation and incentivization problems. In doing so, the team knew they could create value for the Synapse protocol at large.

The cross-chain liquidity routing layer 0 was born.

Cross-chain Liquidity Routing Layer 0

If you read through the Synapse documentation you’ll find an interesting snippet:

“Once the Synapse Chain reaches the Archean Phase, SYN will provide economic security for the chain by requiring validators to stake it in order to operate on the network. As the native token of the Synapse Chain, SYN may also be used to pay for transactions within the network as well as for bridging to other chains.”

Synapse will be implementing its own blockchain in order to improve the efficiency of the bridge.

By introducing a native chain into its plans, Synapse has given itself optionality. If it chooses to integrate with IBC or launch a Polkadot sidechain, then it can experiment with both forms of cross-chain messaging (1) and (2). As the first bridge with real usage to launch a native chain, Synapse will have a massive leg up on the competition. Synapse will not require siloed AMM pools on each chain, replacing them instead with natively hosted liquidity on its own layer 0 chain. In doing so, Synapse deepens its moat as the ecosystem’s cross-chain liquidity provider. The result is a fundamental building block, solving cross-chain liquidity for both developers and users, and drastically increasing capital efficiency while also opening up new cross-chain use cases.

By abstracting away problems associated with bridging and bootstrapping cross-chain liquidity, Synapse creates a single chain for developers and users to seamlessly and intelligently interact with assets regardless of where they primarily live. We reckon this is a major breakthrough for layer 1 aggregation - comparable to Cosmos IBC, but with a larger ecosystem at launch since it will be hooked up to every EVM chain.

Synapse Layer 0 Strategy and Ecosystem

Synapse’s stated goal is to attract an ecosystem of developers to build on top of its cross-chain liquidity. By natively solving the cross-chain liquidity problem, ecosystem developers can focus on  building out unique use cases such as cross-chain collateral, intelligent yield aggregation, and deeper, more efficient lending markets. Moreover, ecosystem developers can focus on building more elegant user experiences that allow users to seamlessly interact across layer 1’s while still keeping governance in a single place.

We believe that Synapse creates true value by solving the cross-chain liquidity problem and in doing so will be incentivized by native L1 dApps that wish to encourage Synapse to route through them. If this thesis plays out, then Synapse will either be able to subsidize its native emission schedule with emissions from other dApps or accrue additional value back to SYN holders beyond collected fees.

Lastly, if Synapse can truly establish a cross-chain liquidity moat then the future for nUSD becomes extremely bright and we wouldn’t be surprised to see a cross-chain collateral stable born out of the Layer 0.

After understanding the future of Synapse, its valuation at $500m starts to feel underpriced. At launch, it should have a comparable userbase to many different L1s that are routinely valued at 1b+ (some of which haven’t even launched yet!).

Suffice to say, we are quite bullish on the future of $SYN.

https://synapse.dorime.org/#get-/api/v1/analytics/volume/-chain-/filter/-token-/-direction-

Our mission is to have fun, share alpha, and build the decentralized future with friends