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Review of Cosmos Ecosystem Injective: Trading Infrastructure for DeFi

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Injective is an application-specific blockchain built using the Cosmos SDK, designed to be an interoperable infrastructure layer for decentralized exchanges.

Original title: "Injective: An Interoperable Exchange Infrastructure Protocol for DeFi Markets"

Original author: Hasan Furkan Gk, Messari Hub

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Last year, the crypto industry has witnessed a rapid expansion of the decentralized marketplace. Each team has joined the competition with its own vision of building a differentiated trading platform, including infrastructure, covered asset classes and products, and user experience. Even those superficially similar designs, such as liquidity management, order clearing mechanisms, and governance schemes, have inherent differences.

Injective is one such example, with its mainnet launch in November 2021. The Injective Protocol provides a fully decentralized order book trading infrastructure for accessing cross-chain spot and derivatives markets with zero gas fees, thanks to its unique technical architecture.

Specifically, Injective is an application-specific blockchain built using the Cosmos SDK, designed to be an interoperable Decentralized trading infrastructure layer. The architecture is different from DEXs running on Ethereum, Binance Smart Chain, or other Layer-1, because the protocol provides trading services on its own execution layer and allows third parties to build trading platforms on Injective without permission . All trading platforms built on Injective share the same order book to maximize capital utilization. The fast block times and instant finality granted by the underlying Tendermint Core enable the protocol to simultaneously handle a high volume of transaction demands while maintaining on-chain security.

Comprehensive trading experience

Injective is experimenting with various products before the mainnet launch. In addition to the existing 11 perpetual contracts and spot markets, the platform also launched products in traditional asset markets such as synthetic stocks, oil, natural gas, gold, and foreign exchange futures during the Solstice testnet. The community hopes to reintroduce some of these markets in 2022, with complementary products to the order book model.

Options, synthetic assets, prediction market DApps, or any other tool that can take advantage of the Injective matching mechanism can be used in its Build on-chain. Since the chain aspires to be a complete toolbox for the decentralized financial market, it can also access many other related financial products, such as lending services and trading guilds, to enhance the financial service attributes of its protocol.

In addition to the vision for decentralization, permissionless marketplace creation was a fundamental design choice for its operation. That's why on the Injective chain, community members can build novel financial products, start capital pools for existing products, and open new markets for trading without centralized institutional oversight. New market proposals still require governance approval to go live on the frontend - however, the protocol also allows users to quickly get a market live by paying a fee, which was recently reduced from 1000 INJ to 100 INJ, making the process faster and more independent .

The permissionless status of market creation and concerns about the solvency of the protocol led Injective to adopt separate Risk coverage model. Because Injective doesn't want the risk of one market to spread to other markets, it requires each new derivatives trading pair to establish an insurance fund before being allowed to start trading. In this way, even in the case of extreme market volatility, the funds in the insurance fund will be prepared to deal with potential losses. After the insurer sets up the insurance fund pool, users can use their mortgage tokens to invest in the fund pool and profit from the liquidation proceeds.

In order to prevent front-running and improve user experience, the protocol uses Frequent Batch Auctions as its order liquidation mechanism. In FBA, all orders submitted to the memory pool (Mempool) will be executed at the end of each block (the block time of each block is about 1 second), and will not be published on the order book until the bidding process is completed . Obscuring information by implementing a delay time enhances the trading experience for traders and allows market makers to offer deeper liquidity with tighter spreads without fear of high-frequency traders disrupting market-making activities.

Liquidity and attention are the most valuable resources in the encryption industry. Injective launched after the mainnet launch An incentive program called Astro aimed at increasing liquidity on the order book and attracting traders to the platform. The program will distribute 10 million INJ tokens (approx. USD 120 million equivalent at launch), 70% of which will be allocated to users as trading rewards and 30% will be allocated to liquidity providers under the Professional Market Maker (DMM) program . The Astro Incentive Program is an ongoing campaign, and the protocol this year is also focused on recruiting more market makers to build a healthier order depth for traders.

From Since the Injective protocol launched its Canonical Chain mainnet, in just two months, the cumulative transaction volume of the protocol has exceeded $3 billion, most of which came from the derivatives market. TVL peaked at $130 million at its peak. But recent market trends have taken their toll on the protocol, like other DeFi platforms, pushing TVL down to $42 million. As of February 7, the agreement had a TVL of $110 million.

Zero Gas Fee Transaction

Due to its Technically designed, the chain operates like an engine. It provides core functionality but requires other supplementary parts to be accessible to users. Currently, applications on the Injective Chain process transactions by acting as an information bridge between users and nodes.

Although the Injective Chain is built using the Cosmos SDK, it uses custom Ethereum accounts, and its applications Generated wallet to parse EIP-712 type data. Users submit their interaction requests to access DApps (relay frontends) by sending cryptographically signed messages. These messages are then broadcast by transactional DApps to a full Injective Chain node, where they are unpacked and added to the mempool. Nodes examine transactions and include them in a block, while ordering transaction execution according to their category importance—clearance and cancellation requests take precedence.

Injective Chain's unique transaction processing method is very conducive to user experience. Users can avoid the burden of Gas fees by interacting with transactional DApps. Since the trading platform broadcasts signed messages to Injective Chain nodes instead of traders, all fees related to chain interaction are paid by transactional DApps, and traders do not need to pay any gas fees. This allows users to trade without having INJ in their account. In addition, Injective also allocates a reward pool of $100,000 to cover the Gas cost when users transfer funds from Ethereum for the first time, making it more user-friendly.

Complete decentralization is a top priority for the Injective community. This is why consensus mechanisms, backend infrastructure, governance, and transactional DApps are all central to decentralization. While most protocols are targeting front-end decentralization, users are most familiar with back-end and governance decentralization. Some protocols do not use alternative front-ends to interact with the protocol, which in part contributes to the centralization of the front-end.

As a Layer-1 protocol built for decentralized finance, Injective allows anyone to build on top of the protocol Customized transactional DApps, creating multiple portals for users. Each trading portal receives 40% of the transaction fees introduced by its front end in return for processing transactions. The Injective ecosystem welcomes more nodes to play this role similar to a middleman.

Currently, five transactional DApps have been established on the Injective Chain: Picasso Exchange, MarsX, Unlimited Exchange, Lunatics Exchange, and Injective Pro by the Injective Labs core team.

All of these trading platforms connect to the same market by sharing the same order book, but they offer users different Degree and form of access. For example, compared to Injective Pro, the Picasso trading platform provides a Swap trading mechanism for its spot market, and its UI is similar to AMM DEX. MarsX chose to allow users access to two of the perpetual contracts markets, while other trading platforms display all live contract markets. The trading platform built based on Injective has different front-end access points, which provide specialized value products, thereby improving user experience and tailoring products for users in different regions.

In addition to placing orders through the DApps front-end, traders can also choose to interact with the chain through the API. It is also important for the protocol to provide traders with a smooth API service, which is the most convenient way for large players to interact with the chain, because it is built for market makers and institutions. The increase in API transaction activity actually increases decentralization, as these API consumers effectively become independent broadcasters of blocks. API traders are required to pay a very small amount of gas fees due to the use of APIs, rather than using transactional DApp front-ends to broadcast their transactions. But at the same time, an advantage is that they only need to pay 60% of the transaction fee (avoiding the 40% transaction fee charged by the front end), making API trading a more profitable option for high-frequency traders.

Injective's Core Interoperability

The Injective protocol is designed to introduce liquidity on other multiple chains through cross-chain, so this chain allows traders to communicate with other IBC-enabled chains through their IBC, and through The Injective cross-chain bridge communicates with the Ethereum mainnet.

This connectivity enables the platform to accumulate liquidity through seamless two-way communication and supports Cross-chain transactions of ecological tokens. The chain already allows transfers to and from the Terra, Cosmos Hub, and Ethereum networks, and with the expected introduction of EVM compatibility this year, Injective is striving to further develop and build the user ecosystem on the execution layer.

INJ Token Economic Model

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The native token INJ was initially released as an ERC-20 and then migrated to its own chain. INJ is a multipurpose token that functions like a bolt in the most critical area of a complex engine:

1. The security of the chain depends on INJ: Since Injective's Tendermint consensus is based on Delegated Proof of Stake (dPoS), block producers need to pledge INJ to verify blocks and receive INJ as a contribution reward. Currently, the minimum amount required to become a validator is 1 INJ.

2. The governance of the trading platform is the governance of the chain: INJ holders can Vote on trading platform improvements, parameter changes, new feature implementations, and chain update and inflation reward mechanisms.

Since it is critical for the chain to maintain its security and governance efficiency, the Injective Protocol incentivizes staking by offering transaction fee discounts . With the Injective VIP program, the greater the amount of INJ staked, the greater the transaction fee discount.

3. For transaction fee auction: 40% of the transaction fee After being allocated to the DApps that introduced the transaction, the remaining 60% of the transaction fee income will be auctioned and destroyed. The protocol conducts weekly auctions, with participants bidding on transaction fees for that week via INJ. The final winning bidder will receive a basket of tokens and arbitrage profits, and the INJ paid will be destroyed.

The maximum supply of INJ was initially set at 100 million. However, since block rewards are compensated by minting new tokens, there is inflationary pressure on this number, turning it into a soft cap and an anchor for the required supply.

In theory, the total supply of INJ can exceed the anchor value. But weekly burns have a deflationary effect and partially offset the increase in supply created by token minting. More precisely, a 5% annual inflation rate of 13 million staked INJ equates to 650,000 INJ newly minted in a year, compared to a total burn of 204,000 in just eight weeks, for a net annual burn of approximately 1,326,000 INJ, accounting for 1.325% of the total supply.

Future Plans

With solid execution, Injective can further expand its impact with the help of its community to increase the adoption rate of the Cosmos ecosystem, and to promote the continued growth of decentralized trading platforms. The introduction of new products such as future insurance DApps and trading guilds can further enhance the user experience, making Injective a more comprehensive decentralized financial toolbox.

Someone may It will be argued that as a blockchain based on specific applications, it may not be easy to obtain the current popular Layer-1 liquidity and its native tools, but with its cross-chain bridge with Ethereum and supporting IBC, and the upcoming EVM compatibility, Injective Protocol can overcome this obstacle. If Injective becomes a hot spot for decentralized chain development, the protocol has the potential to become the recognized infrastructure for cross-chain transaction services and power future decentralized markets.