"Alpha Mining Series 6" — Shadow Exchange (@ShadowOnSonic) Recently, in the primary market, the public chain Sonic, led by "DeFi Father" Andre Cronje, boldly navigates the market's dull period through new projects, new activities, and new wealth-generating effects, creating an ecosystem that thrives against the odds.Under AC's leadership, DeFi protocols on the Sonic chain are flourishing, with various protocols within the ecosystem attracting users through innovative mechanisms or high-yield benefits. Among these, the DeFi protocol Shadow Exchange has successfully attracted market attention by directly presenting an enhanced version of the ve(3,3) mechanism, known as x(3,3).—————————————————————————What is ve(3,3)?Before understanding x(3,3), we need to first understand its predecessor, ve(3,3). Ve(3,3) was originally proposed in 2021 by the DeFi legendary developer Andre Cronje. The main goal of ve(3,3) is to solve the distribution and management problems of DeFi tokens by combining Curve's "Ve-Token" with Olympus's "3,3" concept.The main ideas are:👉 The issuance of tokens is adjusted based on the number of locked tokens.👉 Longer lock periods produce higher APRs, thus incentivizing long-term locking.👉 The holding ratio of ve tokens changes with the issuance volume.👉 Holders of locked tokens can convert their positions into NFTs for trading in the secondary market.From these ideas, it is evident that a significant drawback is that the exit liquidity mechanism of ve(3,3) is not efficient enough; NFTs essentially just bundle claims.—————————————————————————Can the evolved version x(3,3) perfectly solve the DEX's impossible triangle?Throughout DeFi history, the "three impossible problems of DEX" have similarly troubled many protocols, and this triangle includes "traders," "liquidity providers (LPs)," and "token holders," with incentives among the three difficult to balance.Andre Cronje's ve(3,3) theoretically addresses this problem, but due to the model's need for long lock periods, it indirectly reduces overall participation willingness.1️⃣ First-generation Uniswap: Focused on the interests of traders and LPs, ignoring the rights of token holders, making the ecosystem prone to vampire attacks from other protocols.2️⃣ Second-generation ve(3,3): Balances the triangle by adjusting the rights of token holders, but forced participation and no exit mechanism reduce users' willingness to participate.3️⃣ Third-generation x(3,3): Based on ve(3,3), adds an exit mechanism that can be exited at any time and replaces the lock period with incentive mechanisms.—————————————————————————Operating Principles of Shadow ExchangeBuilding on the new mechanism x(3,3), what functions does Shadow Exchange utilize to eliminate the defects of previous DEXs? Here are the main functions of Shadow Exchange:Three-token mechanismShadow establishes the x(3,3) mechanism through a three-token system, which includes Shadow, xShadow, and x33.1️⃣ $Shadow: As the native token of the protocol, it can be traded on the market.2️⃣ $xShadow: Through Shadow custody exchanges, xShadow can be staked, voted to earn rewards, and also utilize the "exit mechanism" to withdraw liquidity.3️⃣ $x33: x33 is the liquidity version of xShadow, which can be freely traded on the market.PVP rebaseIn the previous ve(3,3) model, the core model is to readjust the weights of locked positions through rebase, preventing locked users from being diluted during subsequent token releases.Shadow Exchange adopts the PVP rebase mechanism, which not only solves the dilution problem but also serves as an additional revenue source. It replaces these two things:1️⃣ xShadow can obtain part of the revenue from users who choose "liquidity options" through the "Emission Exits" mechanism. In simple terms, when the protocol distributes new tokens, they will be divided into "liquidity option Shadow" and "non-liquidity option xShadow," with users choosing Shadow rewards transferring part of their tokens to other stakers, while those choosing xShadow can enjoy additional APR rewards.2️⃣ The exit mechanism of xShadow will confiscate a certain proportion of Shadow, and the confiscated tokens will flow back as rewards to stakers.User ExitUser exit, as the name suggests, allows xShadow holders to enter and exit the market freely without being restricted by forced lock periods. However, this exit method will inevitably involve a penalty mechanism. The exit mechanism is as follows:👉 Immediate exit will incur a 50% penalty.👉 Exiting after a partial period will incur a linear proportion penalty (for example, exiting after 3 months will incur a 27% penalty).👉 Choosing a 6-month exit will allow for 1:1 liquidity.Additionally, only during the initial 14 days can the exit be canceled; after the 14-day cancellation period, users will not be able to retract their cancellation.It is important to note that xShadow entering the exit period cannot vote or perform Rebase anymore.—————————————————————————xshaDow and x33 Incentive MechanismNext is the incentive mechanism. Currently, xShadow has three layers of income incentives:1️⃣ The first layer is that by staking xShadow, you can receive 100% of the protocol's transaction fees.2️⃣ The second layer is that after "active staking," you can earn additional rebase income, currently at 120.56%.3️⃣ The third layer is voting rights; stakers can vote to choose their favorite LP, and rewards are distributed at the end of each Epoch (every Thursday). The current LP's APR is around 120% to 190%.As for x33, being the liquidity version of xShadow, it can automatically vote, auto-compound rewards, and trade freely. However, its functions are significantly weakened compared to xShadow due to several advantages:1️⃣ First, regarding voting weight, compared to xShadow, x33's voting weight is reduced, with current data showing 29.07%. Additionally,2️⃣ As the exchange rate between x33 and xShadow increases with each epoch, there may be losses when redeeming xShadow with x33.—————————————————————————Is Shadow Worth Investing In?Before discussing whether Shadow is worth investing in, the author believes we first need to see if the Sonic ecosystem can gain long-term attention from the market. The influx of users and capital will determine how far the DEX can go; this is the first point.Next, looking at Shadow's TVL and trading volume, it can be found that Shadow's TVL growth is quite impressive, and the trading volume has slightly continued the trend from last week, indicating it is not just a flash in the pan.Moreover, since Sonic provides additional ecological incentive airdrops and Shadow's newly created "exit mechanism" allows users to replenish part of the Shadow for stakers upon exiting, the APR performance given to users is excellent. These advantages may continue to attract market investors in the future until the APR falls to a reasonable level.With the emerging Sonic ecosystem and the innovative x(3,3) mechanism, the author believes that Shadow is worth including in the watchlist. However, users should still be cautious of price and project team risks, and always DYOR first.
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