May 7, 2021
Why Injective Protocol (INJ) Is an Incredible Investment Opportunity. Mainnet Launching Q2. Potential for Enormous Buy Back and Burn of INJ Each Month.
In this article I will outline why I believe INJ could be an incredible investment with insane amounts of INJ being bought and burnt each month.. There is a TLDR at the bottom of this article. There is also a follow up article to this going into more detail about the INJ burn mechanism: Why Injective Protocol INJ Has the Potential to Be Bigger Than BNB. A Closer Look at the Buy Back and Burn Mechanism.
First, I will quickly outline the multiple use cases for the INJ token:
- Staking: Used to secure the blockchain through Proof of Stake sybil resistance. Staking earns an APY of 5%
- Protocol Governance: The INJ token can be used to govern various components of Injective’s chain including the futures protocol, exchange parameters, and protocol upgrades via a DAO structure
- Collateral Backing for Derivatives: INJ will be utilized as an alternative to stablecoins as margin and collateral for Injective’s derivatives markets. In some futures markets, INJ can also be used for collateral backing or insurance pool staking where stakers can earn interest on their locked tokens
- Exchange Participation Incentives: The foundation plans to incorporate a liquidity mining scheme and distribute a fixed number of INJ tokens daily weighted by the liquidity each network participant provides
- Exchange Fee Value Capture: After the relayer reward distribution, the exchange fee will undergo an on-chain buy-back-and-burn event to accrue value for INJ
Whilst governance tokens alone have seen crazy high valuations of $22 Billion with UNI for example (which ironically due to the ridiculously high number of UNI required to pass a proposal means it’s barely used), It’s the last point that in particular that I want to spend most of the article talking about and just how much of an impact that could have on the future price of INJ.
Transaction Fees
Whilst there are zero gas fees with using the Injective chain, there are transaction fees for trading based of the amount of volume traded, similar to other exchanges such as Binance. These are:
0.1% Maker Fees
0.2% Taker Fees
If someone buys $1000 Bitcoin then they would pay $2 in fees, if they buy $1,000,000 in Bitcoin, they pay $200 in fees and so on.
Incentives to provide liquidity and On-Chain Referral System
To encourage users to provide liquidity for the platform, Make orders will receive a net positive fee rebate as a % of the fee using INJ.
Nodes and validators of the Injective sidechain also have the capability to act as relayers who can cater to traders in their desired ways (e.g. a relayer can provide an improved interface/API catering to a specialized group of traders). As an incentive mechanism for relayers to provide the best experience for traders, relayers who originate orders into the shared orderbook are rewarded. The node that first discovers a make order (by relaying to the shared orderbook) will receive a ratio of the exchange fee of each make order discovered by them. This ratio will initially start out as 40% of the trading fees and can be changed through governance.
This is a potentially enormous referral program which has worked so well for Binance’s exponential growth early on. People can host nodes and earn 40% of the exchange fees they route. In addition, individuals can refer other users to Injective’s DEX which would make them eligible to earn 40% of trading fees. As you will see later in this article that 40% could be an enormous amount of money.
Buy Back and Burn of INJ
The remaining 60% of transaction fees will undergo an on-chain buy-back-and-burn event to accrue potentially enormous value for INJ. Exchange fees collected from all trading pairs are aggregated over a set period of time and sold in batch to market makers who bid with INJ tokens, all proceeds from the auction will be burnt creating deflationary pressures on the supply of INJ. Below we will look at what that could mean for INJ.
The current landscape
Uniswap and other DEX’s
Automated Market Makers such as Uniswap have seen incredible traction. They offer an easy decentralised way to trade crypto assets, with the security of the underlying blockchain and no KYC or restrictions on which countries can participate. They are easy to create, and decisions can be decided through governance (although UNI is a particularly bad example of this due to the ridiculous amount of tokens required to pass a vote).
However, Uniswap is plagued by slow performance, high fees and front running (where bots will pay a higher gas fee to get their order in front of yours to buy the asset you were going to purchase, only to sell it to you immediately after at a higher price for a profit. This is becoming an increasingly large problem with $132 million being extracted in the last 30 days on Ethereum alone). They are also capital inefficient (although v3 goes some way towards improving that it also brings in issues around fungibility of LP tokens).
The move to Layer 2 solutions like Optimism may solve the high fees issue, at the expense of reduced composability with the rest of the ecosystem and being more complicated moving between the various layer 2 solutions on Ethereum. Front Running is still an issue, and with Optimism they actually have a MEV Auction where they auction the slot to front run you.. How Fair.
How Much Would Get Burned Based off DEX Volumes
Uniswap, one of the largest DEX’s had volume of over $51.2 billion in April alone, with Pancakeswap doing even more with $57.65 Billion and a total DEX volume of $163.89 Billion. UNI doesn’t capture any value from the volume that is traded on the exchange though and is only used as a governance token. Whilst anyone can easily create new pairs to be traded, it’s still limited to spot volume, and assets on that blockchain.
Before going into how Injective Protocol improves on this, let’s first calculate the effect of burning INJ based off those volumes. For simplicity let’s just say it’s 0.15% flat fee (even though it’s 0.2% for takers). For the volume of Uniswap the fees would be:
0.15% x $51.2 Billion which is $76.8 Million. 60% of those are used to buy and burn INJ which would be just over $46 million in one month. 40% are used as referral rewards ($30.7 million in one month)
- $46 Million to buy and burn INJ every month
- $30.7 Million in referral rewards every month
And that’s just based off last month’s figures the spot volume on DEXs will continue to exponentially increase. But the market is still far bigger elsewhere..
$3.84 Trillion Spot Volume, $3.88 Trillion Derivatives Volume in April
Centralised Exchanges such as Binance
The market is far larger than a few DEXs doing spot trading though, including centralised exchanges there was $3.84 trillion in spot volume and $3.88 Trillion derivatives volume in April according to CryptoCompare. Binance has at times being doing $100 Billion a day on derivatives alone.
Centralised Exchanges such as Binance provide a high performance, capital efficient experience with the use of an orderbook. It enables the trade of assets from various blockchains and not limited to just spot volume like with AMMs but with the enormous market of crypto derivatives as well. BNB has shown how buying and burning BNB based off 20% of Binance’s PROFITS has led to extraordinarily price appreciation and is currently valued at $101 Billion market cap.
Centralised Exchanges have their disadvantages though, they are naturally centralised and less secure / more susceptible to attacks than the decentralised counterparts. They have high regulatory requirements banning certain countries from participating as well as strict KYC policies. The assets that they can list are also restricted by regulatory compliance (Binance recently getting in trouble with their proposed stock listings). Projects that want to get listed have to pay large fees, have limited trading pairs and completely at the mercy of the exchange as to whether they ultimately get listed or not.
How Much Would Get Burned Based off CEX Volume
Again, before going into how Injective Protocol improves on this, let’s first calculate the effect of burning INJ based off those volumes. According to CryptoCompare Binance did $1 Trillion Spot volume in April as well as $1.65 Trillion in derivatives volume, for a combined figure of $2.65 Trillion for April.
0.15% x $2.65 Trillion which is just under $4 Billion. 60% of those are used to buy and burn INJ which would be just under $2.4 Billion in one month. 40% are used as referral rewards ($1.6 Billion in one month)
- $2.4 Billion to buy and burn INJ every month
- $1.6 Billion in referral rewards every month
And again the volume continues to increase each month. You can clearly see how buying and burning that amount of INJ each month is massively going to reduce the supply and lead to exponential price appreciation. Rather than CZ benefiting from 80% of the profits, all of the revenue goes towards burning INJ or towards incentives to grow the platform even further, creating positive feedback loops. But the market is still far bigger elsewhere..
Injective Protocol — Combing the Best Features of DEX and CEX and Then Going Even Further with Unrestricted Access to Markets Worth Quadrillions of Dollars
Injective Protocol is a fully decentralised, front-running resistant, layer-2 exchange protocol that unlocks the full potential of decentralized derivatives and borderless DeFi. It enables fully decentralized trading without any restrictions or KYC, allowing individuals to easily trade on any market of their choosing, whether it be spot, margin trading, derivatives, and futures, NFT’s, commodities, equities and more.
Injective Protocol is backed by a prominent group of stakeholders including Pantera Capital, one of the most renowned venture capital firms in the world, the leading cryptocurrency exchange, Binance and billionaire entrepreneur Mark Cuban.
The Injective Chain is a high performance blockchain with 1 second finality, layer-2 EVM execution environment and based off Tendermint. It has zero gas fees, offers centralised exchange performance and usability but fully decentralised and community owned. The use of an orderbook makes it more capital efficient with tighter spreads and deeper liquidity which benefits all market participants.
In contrast to the walled garden approaches of other layer-2 solutions, the novel architecture of the Injective Chain also enjoys the best of both worlds by obtaining scalability without sacrificing smart contract composability. By natively supporting inter-chain composability through Cosmos-IBC as well as bidirectional Injective/Ethereum ERC-20 transfer, Injective has an Ethereum bridge secured by the Injective Chain consensus without sacrificing the flexibility of integrating with other Layer-1 protocols. Injective have partnered with all of the major layer 1 platforms to enable cross platform trade such as enabling DeFi Users on Ethereum to easily access the unique market exposure Avalanche and Polkadot applications may offer or enabling the world’s first cross-chain yield farming derivative.
Centralised exchanges such as Binance, Coinbase, Bitmex and the like offer the orderbook style fast execution which Injective can provide, but centralized exchanges act as gatekeepers to the crypto industry and wield an undue amount of control over their users, restricting who is allowed to trade, what they can trade, and under what terms due to having to comply with regulatory requirements.
Injective with a simple user interface that enables the creation of complex derivative markets in seconds. By reducing the friction that exists to create avenues for individuals to exchange risk, we seek to make our global financial system more free, fair and efficient.
Unrestricted Access to Markets Worth Quadrillions of Dollars
The barriers don’t just exist with DeFi and crytpo though, due to regulation, Chinese CeFi traders cannot access crypto markets easily, and US traders cannot easily gain exposure to Chinese equity markets. The UK has banned the trading of crypto derivatives completely and so on. With Injective’s global derivatives platform, anyone can gain exposure to any market regardless of the locality or limitations of the underlying asset, thereby creating a truly borderless financial system.
Despite its 6 trillion in volume in April the market is still comparatively small compared to more established markets which do that volume every day.. Whilst Centralised Exchanges aren’t able to provide exposure to those markets due to regulatory restrictions, Injective being fully decentralised can.
Whether it be the trading of commodities such as Oil, Gold, Silver and so on, a market worth tens of trillions, probably hundreds of trillions of dollars.
To the $115 Trillion Equities market where Injective enables zero gas fee trading with uninterrupted 24/7 access to global stocks such as Tesla, Airbnb, Google, and Amazon and more from anywhere in the world. Free from the high brokerage fees that plague traditional stock trading and without platforms such as Robinhood which can completely cease trading due to regulatory pressures.
Foreign currency exchange (also known as forex or FX) is the process of trading currencies for one another. Given the global reach of these markets, forex markets tend to be the largest and most liquid asset markets in the world. The worldwide 2021 forex market is worth $2,409,000,000,000,000 ($2.409 quadrillion) with $6.6 trillion on average every day is traded on foreign exchange markets.
Until now, forex trading was largely restricted to traditional markets and centralized exchanges. Injective is pioneering a true paradigm shift in this industry by giving back control of such assets to the masses. This will not only lead to a surge in traders who were previously unable to interact with such markets but also aid in democratizing the financial ecosystem as a whole.
The size of the above markets makes the crypto market tiny in comparison, but those too are hampered with strict regulations and inefficiencies. Injective provides a fully decentralised solution that’s easily available to everyone. With 0.2% of the volume being used as fees, of which 60% is used to buy and burn INJ every month and the other 40% is used for referrals, with access to markets worth quadrillions of dollars, the potential for price appreciation is enormous.
TLDR: Why Injective Protocol (INJ) Is an Incredible Investment Opportunity. Mainnet Launching Q2 and the Buy Back and Burn of INJ Worth 60% Of Trading Fees Begins.
Injective is a fully decentralised, front-running resistant, high performance, layer-2 exchange protocol that allows anyone can gain exposure to any market regardless of the locality or limitations of the underlying asset, thereby creating a truly borderless financial system.
Enabling markets not just in the $3 Trillion crypto spot and $3 Trillion derivatives market but markets that completely dwarf that in size worth quadrillions. Removing the barriers and fragmentation within the crypto space across blockchains with trustless bridges to all layer 1 platforms as well as in the traditional space allowing chinese traders access to US equities and vice versa. Regulation is going to continue to increase for centralised exchanges as hinted at recently, this is going to push even more of the volume towards fully decentralised, unrestricted platforms.
Trading is blockchains number one use by far currently, and exchanges such as Binance and Coinbase are making enormous amounts of money. Rather than a few individuals like CZ benefiting the most, Injective takes a different approach creating a completely decentralised platform, owned by the community and from which the entire community benefits, creating incredibly strong positive feedback loops.
People can earn 40% of trading fees just referring people to the Injective’s DEX, it’s not only retail people which will be spreading the word about to receive those referral rewards which proved so successful with Binance’s early growth, but Institutions are heavily involved as well, with backing from some of the largest institutional trading funds, billionaire entrepreneur Mark Cuban.
With listings on exchanges such as one of the largest and most reputable, highly regulated exchanges in the United States, Gemini I also wouldn’t be surprised to see a listing on Coinbase shortly as well (already listed on Coinbase Custody).
BNB is valued at over $100 billion dollars and that is with buy and burn based off 20% of profits, not only does INJ use a far higher percentage of 60% it is based on revenues / trading volume, rather than profits to buy back and burn INJ each month, a far larger amount. The other 40% is used as incentives to grow the platform even more, leading to higher revenues, more INJ burned, and even more incentives in a positive feedback loop. Market makers are rewarded with INJ for trading, which they too will benefit from the increase in price through the burn mechanism, combined with ease of use and unrestricted access to markets the potential for growth is incredible.
At a current market cap of just over $200 million with mainnet launching this quarter and then the buy back and burn of INJ begins with the potential to be burning many multiples of the entire current market cap every month, this is going to lead to enormous price appreciation. Add in 15% staking rewards and potential to earn 40% of trading fees as referrals, in my opinion this is an incredible investment opportunity.
There is also a follow up article to this going into more detail about the INJ burn mechanism: Why Injective Protocol INJ Has the Potential to Be Bigger Than BNB. A Closer Look at the Buy Back and Burn Mechanism.
Disclaimer: These are my opinions based on my research and is not financial advice.
