Injective, the pioneer of native order book chain, is a DeFi public chain based on COSMOS.

Injective is a DeFi public chain based on COSMOS and is known for its native order book chain.

Public Chain Order Book Track Pattern

When it comes to DEX, most people immediately think of AMM, which is very useful and a key DeFi primitive mechanism. Although onchain LOB (on-chain order book) is criticized for lacking LP ecosystems and regulatory arbitrage behaviors of centralized exchanges on the chain compared to AMM, onchain LOB also plays an important role in the entire DEX track, especially for professional traders and institutions. It is an important sub-track of the DEX track.

Overall, order book exchanges can be understood in four types. The first type has excellent trading speed and high performance but is highly centralized, known as CEX, which is the trading choice for most people in the market, such as Binance/OKX. The second type is the Ethereum L1 on-chain order book, such as Gridex, which achieves a high level of decentralization. However, due to direct on-chain execution of transactions, the performance is limited, and users need to pay high gas fees. The third type is based on Rollup, a high-performance off-chain order book, which matches off-chain to reduce gas fees and ensures security through on-chain batch settlement, such as dYdX v3, Vertex, Zigzag, etc. ETH L2 Base recently called for onchain order book DEX to be part of its ecosystem fund and deployed in its ecosystem. The development of each L2 will provide a good development environment for onchain order book. The fourth type is a high-performance DeFi native chain/customized chain that meets the high-performance requirements of orders, such as Injective, Sei (which has not yet launched its mainnet), dYdX V4, etc.

In the fourth type of DeFi order book native chains, in addition to typical projects including Injective, dYdX V4 in the testing network, SEI, there are also Osmosis, Kujira, and Crescent, etc. Currently, DYdX and Injective have developed to a large scale and benefited from the Ignite consensus framework (formerly known as Tendermint, a proprietary Byzantine fault-tolerant BFT PoS infrastructure), IBC, and the special structure of customizable SDK. Almost all order book native chains are built on the Cosmos ecosystem. However, Injective is the pioneer in building an on-chain order book on Cosmos.

This article mainly introduces Injective in the DeFi order book native chains, focusing on the core advantages and moats of the public chain order book DEX and the competitive situation to see whether Injective has a fundamental advantage.

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Injective is an L1 blockchain optimized for DeFi with interoperability. In fact, before announcing the integration with Cosmos, Injective was also regarded as an Ethereum L2/sidechain. However, after having the consensus layer and sovereignty on Cosmos, Injective has become a financial infrastructure with plug-and-play functionality, including high-performance on-chain decentralized exchange infrastructure, decentralized bridges, oracles, and a composable smart contract layer with CosmWasm. Other protocols in the ecosystem can utilize Injective’s on-chain order book to launch liquidity and matching services, adding another layer of composability.

The construction of Cosmos Tendermint/Ignite, SDK, and IBC technology components helps Injective utilize the high finality and low transaction costs of the network to support its order book functionality, further improving capital efficiency and liquidity fragmentation while maintaining interoperability with Ethereum. Using the FBA (frequent batch auctions) order matching engine, which aggregates each order at the end of the block and executes all market orders at the same price, Injective prevents front-running trading in an OME (order matching engine) manner, making it a decentralized financial infrastructure compared to traditional financial order books and other AMMs, with decentralization, high transaction speed, high finality, and defense against MEV.

Injective Construction

Injective Chain is a core component of Injective and is built using the Cosmos Tendermint/Ignite standard. The Injective Chain inherits decentralization, security, and high performance.

The above figure shows the composition of the entire Injective Stack.

Service Domain

The service layer acts as a bridge between exchange DApps (such as Helix) and the underlying blockchain layer. It consists of multiple APIs, including exchange API, coordinator API, derivative API, and The Graph API. These APIs play a critical role in ensuring seamless communication between different components in the Injective ecosystem, helping users trade and access various DeFi services. The APIs within the service layer enable Helix to interact with the Tendermint/Ignite-based Cosmos chain and the Ethereum blockchain. This modular API design approach provides greater flexibility and scalability, ensuring that Injective can continue to grow and evolve to meet the ever-changing needs of the DeFi field.

Cosmos Layer

The Cosmos layer is the foundation of the Injective Chain, built on Tendermint/Ignite, responsible for executing various transactions and derivative order types. This layer includes the Injective API and Injective EVM remote procedure call (RPC), enabling connectivity with the Injective Chain and Injective Explorer. The EVM (Ethereum Virtual Machine) is a decentralized, Turing-complete virtual machine used to execute smart contracts on the Ethereum blockchain. Injective Explorer is a tool used to track all transactions taking place on the Injective Chain, providing valuable insights into platform activity and performance. The instant finality property of Tendermint makes it an ideal choice to support the Injective Chain, as it enables fast transaction execution and settlement. The Cosmos layer also provides a range of security and performance advantages, including the Tendermint/Ignite consensus mechanism, horizontal scalability, and a powerful application framework for building custom blockchain applications.

Importance of Consensus Mechanism

The selection of Tendermint/Ignite as the consensus mechanism for the Injective Chain is because it can provide near-instant finality, high fault tolerance, and support for horizontal scalability. In the context of a trading platform, near-instant finality is particularly important as it ensures transactions can be executed quickly and efficiently without the risk of rollbacks or double-spending. This allows Injective to maintain a high level of performance even as transaction activity on the platform increases. The Tendermint PoS consensus algorithm also provides high fault tolerance, ensuring that the Injective Chain can continue to operate correctly even in the presence of malicious or faulty nodes.

Specifically, the Tendermint/Ignite protocol uses multiple rounds to propagate blocks to network validators through proposal messages. For a block to be propagated, it must be supported by multiple block proposers and signed by the corresponding validators’ private keys. Validators communicate on the Tendermint/Ignite through a peer-to-peer (P2P) gossip protocol. To consider a block valid, it must receive acceptance from two-thirds or more of the validators, which is known as the Byzantine Fault Tolerant (BFT) Proof-of-Stake (PoS) consensus mechanism.

Ethereum Domain

The bridging layer is crucial for the cross-chain interoperability and communication between Injective and the Ethereum network. It consists of the Injective Bridge smart contract, which itself relies on Wormhole, Peggy, IBC, and Axelar. The bridging layer interacts with the Injective chain, the Ethereum network, and other supported blockchains. The Injective Bridge enables the bidirectional transfer of ERC-20 tokens and assets between Injective and the Ethereum blockchain through Peggy. The cross-chain interoperability achieved by Wormhole, Axelar, and IBC is essential for decentralized blockchain infrastructure as it allows different networks to seamlessly share data and assets. Through the Injective Bridge, Injective and the entire Cosmos ecosystem can inherit a portion of the large liquidity on the Ethereum network and its DApps ecosystem.

Project Background

Injective is incubated by Binance and is one of the eight projects incubated in the first phase of Binance Labs, receiving support from numerous investment institutions. Although Binance was heavily impacted by the SEC crackdown, the impact on decentralized exchange Injective is limited.

Injective Protocol’s co-founder and CEO, Eric Chen, graduated from the New York University Computer Science College. The core team has a strong professional background and has worked at internationally renowned companies such as Open Zeppelin, Amazon, and hedge funds. Core team members have graduated from prestigious institutions such as Stanford University.

On July 29, 2020, Injective raised $2.6 million in a seed round of financing led by LianGuaintera Capital, with participation from QCP Soteria and Axia8 Ventures.

On April 20, 2021, Injective raised $10 million in a “Party” financing round, with participation from LianGuaintera Capital, Mark Cuban, and Hashed.

On August 10, 2022, Injective raised $40 million in a financing round, with participants including Jump Crypto and BH Digital.

In January of this year, Injective announced the establishment of a $150 million ecosystem fund to promote ecosystem development. The Injective ecosystem currently has over 20 projects, including Astroport, Celer Network, and Helix. In April, Injective announced a partnership with Tencent Cloud to support developers on Injective.

Tokenomics

The total supply of INJ is 100 million. Block rewards compensate for inflationary pressure by minting new tokens, with a target inflation rate of 7% in the initial state, gradually decreasing to 2% over time. However, 60% of the transaction fees are used to buy back INJ and burn them, resulting in a deflationary state. Over 90% of the tokens have already been released, with around 5% expected to be released in the near future (6-8 months), most of which will come from the Team, Advisors, Ecosystem Development, and Community Growth. The portion belonging to the Team and advisors may create potential selling pressure, while the rest will be converted into APY within Injective, which may also create some selling pressure but with higher incentives to increase Injective’s ecosystem data.

INJ is deflationary, with 60% of the fees generated by dApps being used for on-chain buybacks and burning (60% of the trading fees are auctioned off to bidders who bid with INJ, and the INJ obtained from the auction will be burned). The weekly supply burning creates a deflationary effect, partially offsetting the supply increase caused by token minting. More specifically, the inflation rate of the 39.78 million staked INJ tokens is 5% per year, equivalent to minting 2 million INJ within a year. Currently, a total of 5.32 million INJ has been burned, accounting for 5.32% of the total supply.

Figure: INJ Burn

Figure: INJ Stake

Value Capture

1) Protocol Fee Value Capture

40% of the trading fees are allocated to the exchange dApps, and Injective uses the remaining 60% for buybacks. The protocol conducts an auction every week, and participants bid with INJ for the fees of that week. The auction winner profits from arbitrage opportunities and the protocol uses the proceeds to buy and burn INJ, maintaining the deflationary nature of the INJ token.

2) Tendermint-based Proof-of-Stake (PoS) Security

INJ tokens are used to secure the Injective blockchain through a Proof-of-Stake mechanism. Both validator nodes and delegators can participate in staking.

3) Developer Incentives

40% of the fees generated by dApp users on Injective are directly used to incentivize new developers to build applications on Injective, leading to a growing community of developers.

4) Protocol Governance

INJ tokens are responsible for governing every aspect of Injective, including upgrades to the chain.

Token Allocation

Token Sales Data

Ecosystem Projects

There are currently 24 dApps live on the Injective mainnet, with most of them being DeFi-related. There are also applications built on Injective in the areas of communication infrastructure, information protocols, NFTs, and more.

Key DApps on Injective

Helix

Helix is the front-end of the Injective order book trading, originally known as Injective Pro. Its goal is to provide cross-chain spot and perpetual contract markets, allowing users to engage in various cryptocurrency transactions. Helix supports zero gas fees, helping to reduce users’ transaction costs.

Mito

After a long period of anticipation, Injective Labs officially announced Mito last month, formerly known as “Project X,” and launched closed beta access to the platform. Mito is a protocol consisting of smart contract-driven automated trading Vaults, with each vault executing advanced trading algorithms typically held by institutions and hedge funds, currently in the early access stage. Mito consists of two key components: an automated strategy vault for easy yield generation and a sophisticated token launch platform. Through this innovative platform, users can access various trading strategies to generate profits while exploring new tokens in the cryptocurrency space.

Astroport

Astroport is an AMM protocol that allows any user to exchange or provide liquidity for cryptographic assets using various types of pools, including Curve-style stablecoin exchange pools and Uniswap V2-style constant product pools. Astroport is able to leverage the interoperability network of Injective to exchange assets bridged from Cosmos or Ethereum as well as assets bridged from Solana, Aptos, and Avalanche through Injective’s recent Wormhole integration.

As Astroport is built on Injective, users will be able to leverage Injective’s interoperability network to exchange assets bridged from Cosmos or Ethereum as well as assets bridged from Solana and other chains through Injective’s Wormhole integration. Users can bridge assets to Injective through the Injective Bridge and then create liquidity pools on Astroport to start earning profits as liquidity providers and begin trading in new markets.

Astroport brings significant advantages to the Injective ecosystem. Originally built on Terra, Astroport’s contributors spent a lot of time analyzing multiple major L1 networks and ultimately chose Injective as the hosting chain for its V2 version. Astroport has now officially migrated its mainnet to Injective, becoming one of the largest AMMs in the Injective ecosystem.

As of the end of June, Astroport’s total TVL is 32.94M, with TVL on the Neutron, Terra, and Injective chains being 21.99M, 6.42M, and 4.52M, respectively.

Competition Landscape

SEI is a protocol that is more comparable to Injective in terms of consensus mechanism, OME type (FBA), FDV, and other aspects. SEI has detailed differences with Injective in terms of the OME mechanism, which will be explained in detail below.

DYDX is about to migrate from Ethereum to Cosmos and launch the dYdX Chain (dYdX V4). Currently, V4 is in the testnet, and the mainnet launch of dYdX v4 may have a certain impact on Injective’s market share, depending on the trading incentives and institutional preferences of the two platforms. From the perspective of token release, 90% of Injective tokens have been released, and dYdX, including the unreleased SEI, may have an advantage in token incentive space.

In terms of valuation, SEI completed a $300 million financing round with a valuation of $800 million, with participation from Jump Capital and Distributed Global. Currently, Injective is valued at less than $800 million, while dYdX is valued at $1.9 billion. Injective still has room for growth in terms of valuation, but its key business data, such as trading volume, is clearly not as good as other competitors (Helix’s 24-hour trading volume is 22 million, dydx’s is 600 million), and the difference in trading volume with dydx is very large. This is related to the fact that Injective’s trading pairs are mainly assets within the Cosmos ecosystem.

Compared to other blockchains on the Cosmos network, Injective is currently the fastest, with an average block time of about 1 second. The graph shows that Injective’s block production speed is significantly higher than other chains.

Comparison of Order Matching Engines (OME)

The above image compares the order matching mechanisms of SEI, Injective, dYdX V4, Serum, and Uni V3 by @3V Labs.

Order book resistance to MEV is in demand for dealing with large-scale institutional order flow. Currently, most public chain-based order book DEXs use frequent batch auctions (FBA) to minimize adverse MEV. In addition to FBA, Off-Chain Low-Latency OME is the order matching mode for dYdX V4.

For Injective, the FBA matching mechanism is an important upgrade, which adopts a frequent batch auction model. The result is to maintain fast transaction times and approach market prices with higher liquidity, narrowing the spread.

So what is FBA? Understanding FBA requires first understanding the concept of Continuous Double Auction (CDA), and FBA actually solves the inefficiency problem of CDA.

The Problem with CDA Continuous Double Auction

Both crypto derivatives and centralized exchanges in traditional financial markets use the Continuous Double Auction (CDA) model. In this model, orders are processed as soon as they arrive at the exchange. This can be achieved by immediately executing the order on the opposite side of the order book or by keeping it on the order book until a matching order is found.

The way CDA processes orders incentivizes speed, and the high volatility of the market creates huge arbitrage opportunities. Market makers (MMs) play the role of following the market price of an asset and providing depth by placing orders on both sides of the order book. As the price changes, MMs must cancel and create orders accordingly.

However, between price updates of external signals, high-frequency traders (HFTs) have the opportunity to execute outdated MM orders before the MMs cancel them. As a result, HFTs are able to capture arbitrage profits. The profit from this game of grabbing outdated orders is large and sustained, to the extent that HFTs invest in advanced technologies such as microwave towers and FPGAs to compete at nanosecond (billionth of a second) speeds, putting MMs at an insurmountable disadvantage.

Due to these obvious issues, MMs are often forced to increase their investment in competing technological solutions, which is indirectly paid by traders through higher transaction fees. In addition, MMs often become more risk-averse by providing a large amount of depth near the market price. This not only harms retail traders who want to execute orders at a fair price, but also causes high volatility within the price spread, disrupting market stability on a small time scale. Therefore, retail traders are often forced to establish positions at less than ideal prices.

A continuous double auction matching engine needs to handle high throughput processing at unpredictable times, with minimal demand for most other times. Even if built by centralized institutions, exchanges based on continuous double auctions rarely meet the market demand for 100% uptime. This situation worsens within the scope of blockchain networks. Therefore, compared to the most modular centralized exchanges today, decentralized exchanges have much less flexibility in addressing the same challenges.

In the design of Continuous Double Auction (CDA) in decentralized exchanges, minor changes have been proven to be unsatisfactory and ultimately result in economic losses for retail traders. For example, orders that pay higher gas fees are executed without considering the submission time, ignoring other orders with reasonable gas fees.

Any user who engages in more aggressive trading on a specific AMM exchange protocol has experienced the pain of robots profiting on the margin of trader slippage paid for by high gas fees. AMMs aim to eliminate the need for institutional MMs, while the capital inefficiency costs associated with CDA are directly passed on to retail traders.

Now let’s look at the advantages of FBA and Injective FBA

Injective’s Frequent Batch Auction (FBA) has been widely proposed as a clear solution to address the capital inefficiency issues associated with CDA. One advantage of FBA is to improve market fairness and liquidity by eliminating pre-trade.

Injective FBA is defined by three characteristics:

1) Discrete time; orders are accepted within a discrete time period called the auction interval. At the end of each auction interval, orders are filled in the following priority order:

First, fill market orders, then fill unfilled limit orders from previous auction intervals, and finally fill limit orders from the latest auction interval. If the quantities of the buy and sell sides are different, the side with the smaller quantity is filled completely, and the orders from the side with the larger quantity are filled proportionally (uniformly filled).

2) Uniform clearing price; limit orders are filled at a uniform clearing price based on the highest quantity of cross orders. If the quantities of the buy and sell sides are the same, the mid-price is used as the clearing price.

3) Sealed bidding; orders are not publicly displayed on the order book until the end of the auction interval and batch auction execution. This eliminates the possibility of pre-trade and negative spreads.

The longer auction intervals in frequent batch auctions provide market makers with enough time to cancel outdated orders before HFTs can execute. This eliminates the risk of market makers having to deal with front-running issues, so they don’t need to invest their capital in advanced technology.

Market makers are encouraged to provide deeper liquidity and tighter spreads near the market price, which is not only better for retail traders trying to fill orders at or near the fair price, but also reduces volatility associated with potential price crashes.

Frequent batch auctions aggregate orders into a group for status changes or order book inclusion. The blockchain queues and writes transactions in batches to continuously produce blocks. The optimal batch interval for FBA is still controversial, but academic reports have reported it to be between 0.2 and 0.9 seconds, which aligns with the auction intervals of Injective, where batch auctions are executed at the end of each block.

As a protocol using FBA as order matching on Cosmos, SEI has some differences from Injective FBA at a detailed level. 1) SEI implements parallel processing of blocks instead of sequential processing. It can simultaneously process multiple transactions involving different markets, thus improving performance. According to recent load tests, block time has been reduced by 75-90% compared to sequential processing, with parallel processing delays ranging from 40-120 milliseconds, while sequential processing delays range from 200-1370 milliseconds; 2) SEI’s price oracle is responsible for streaming off-chain price data to the blockchain and is built into the chain. This means that all validators need to propose their prices (exchange rates) when submitting blocks. Only when all validators agree on a common price will a block be created. Validators will be penalized if they miss certain voting windows or provide prices that deviate too much from the median; 3) Transaction order bundling, where market makers can cancel and create orders involving multiple markets in a single transaction (i.e., consolidating all BTC perpetual contract orders into a smart contract call for a specific market).

Injective is built on the Tendermint/Ignite BFT-based PoS consensus, which has instant finality characteristics that align well with FBA execution at the end of each interval. Since FBA does not have the concept of time priority within auction intervals, it is a market design that perfectly matches a blockchain operating on the same basis. This is because Tendermint/Ignite is a consensus engine based on a BFT (Byzantine Fault Tolerant) consensus algorithm. It achieves consensus through a pre-selected set of validator nodes and votes and confirms the order of transactions through consensus rounds. Tendermint/Ignite is designed for high security and determinism, suitable for applications that require strong consistency and finality, which aligns perfectly with Injective’s underlying architecture.

By replacing Continuous Double Auctions (CDA) with Frequent Batch Auctions (FBA), Injective adopts a market design that is technically powerful and competitive with centralized exchanges. Injective is able to eliminate front-running that harms traders’ interests and helps market makers provide deeper liquidity and tighter spreads. The implementation of frequent batch auctions prepares Injective to compete with institutional-level centralized exchanges in terms of trading volume.

Summary

Injective has the best transaction speed, immediate finality, almost zero gas fees, and advantages such as anti-MEV. These advantages come from: 1) the fast block confirmation speed based on the Tendermint BFT consensus mechanism (but the degree of centralization is relatively high) and the timely finality; 2) since exchanges broadcast signature messages to Injective Chain nodes instead of traders themselves, all costs related to interacting with the chain are paid by the exchange’s DApp, which means traders do not need to pay any gas fees; 3) using frequent batch auctions (FBA) as the order settlement mechanism. Orders submitted to the memory pool are executed at the end of each block (approximately 1 second block time) and are not published on the order book until the auction process is completed, effectively preventing front-running transactions by MEV bots.

Compared to AMMs, the built-in settings of Injective’s on-chain order book are more user-friendly for ordinary users, especially institutional users (although Univ4 may be able to achieve stop-loss orders to some extent). AMMs have a large TVL, and LPs have become an organic part of the entire market. For LOBs, the natural absence of on-chain staking assets makes it difficult to attract MMs without external subsidies, and it is difficult to form an LP ecosystem similar to AMMs and capture the value chain derived from the LP ecosystem. Of course, AMM-like products can also be built on Injective, but currently, the majority of trading volume on Injective still occurs on the order book front-end Helix.

Before rollups greatly improve the performance of LOB DEX, building native chains on Cosmos is still the best solution for high-performance LOBs. The launch of dYdX v4 mainnet may squeeze Injective’s market share to a certain extent, depending on the trading incentives and institutional preferences of the two. LOB DEXs on rollups will also form certain competition, but due to the definition of dapps as non-public chains and the lack of sovereignty, the valuation system and order book on the native chain are completely different.

Both LOB DEX and AMM adopt decentralized methods, and at this stage, there is no need to define what the end state should be. This market always needs diversified solutions.

Injective uses LOB as its core trading model and has the feature of “MEV protection”. It provides a secure and efficient platform for institutional order flow and market makers in trading applications by building a highly decentralized, high-performance, and reliable environment on Tendermint that can be used for cross-chain derivatives, foreign exchange (FX), synthetic assets, and futures trading. It eliminates the risk of market manipulation and exploitation by high-frequency traders. The implementation of frequent batch auctions prepares Injective to compete with institutional centralized exchanges in terms of trading volume and makes Injective a decentralized trading platform naturally favored by institutions. However, this also means that the price of Injective is closely related to institutional funding. In the next cycle, the implementation of a high-performance chain-based trading engine, one-click chain deployment, and other engineering solutions will further promote professional market makers to establish liquidity in the DEX field and, together with AMMs, help transfer pricing power from CEX to DEX gradually.

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