Injective Protocol (INJ) - an end of 2021 analysis

Summary

Three years since the beginning of the Injective Protocol, how far has it gone, and where can it still go from now on?

This article contains the essential information you should know about the project, the token INJ, and some insights into analyzing it from an investor’s perspective.

Contents

  1. What is Injective Protocol?
    1.1. Injective's value proposition
  2. INJ Token and Tokenomics
  3. INJ Token Analysis
    3.1. Project's Team
    3.2. The Product: Market timing and Suitability
    3.3. Community
    3.4. Token Mechanics
    3.5. Governance
  4. Conclusions
  5. Index
  6. References

1. What is Injective Protocol?

For starters: Injective Labs is the company behind Injective Protocol.

Injective Protocol is a fully-decentralized Layer-2 DEX (Derivative Exchanges) protocol. It is implemented on top of Tendermint using the Cosmos-SDK, which hosts Injective’s decentralized exchange protocol — at the end of this article, there is an Index where you can understand those technical concepts if you are not familiar with them yet.

At Injective, users can create any financial market on their fast, cross-chain, zero gas fee, secure, and fully decentralized exchange protocol.

And what does it mean to be fully-decentralized? Most DEX exchanges are decentralized when it comes to custody (without a central authority), but users don’t have control over the exchange infrastructure. Injective proposes to make their decentralized exchange infrastructure open to the public, which means investors and traders could define what is offered, i.e., creating a derivative market as long as there is demand for it. Additionally, new listings or network changes are voted on a Decentralized Autonomous Organization (DAO) structure.

1.1. Injective’s value proposition

Decentralized exchanges’ main cons are that they have high gas fees and do not prevent front running, which is when bots or miners explore the delay in blockchain transactions, pay higher gas fees to get their orders to be executed first and immediately sell them with profit. On the other hand, there are usually no restrictions, KYC, and they have the security of the blockchain.

Centralized exchanges’ main cons are they are less secure and have higher regulatory restrictions (which may lead to some countries being unable to participate) even though they usually have a much higher volume and more liquidity for transactions.

Injective Protocol’s main proposal — since Eric Chen and Albert Chon’s article published in December 2018 — is to merge all the benefits of decentralized and centralized exchanges into a fully decentralized environment. Having the pros of each of them and resolving their cons, with a plus of accessing the most diverse markets (spot, perpetual, future, commodities, equities, forex, and more), makes the company a candidate for a complete exchange in the world.

Injective Protocol FAQ: Unique features and value proposition.

2. INJ Token and Tokenomics

As described in Injective Protocol’s FAQ, the INJ token is used for (1) Protocol governance, (2) Exchange fee value capture, (3) Derivative collateralization, (4) Liquidity mining, and (5) Staking.

  • (1) Protocol Governance: the INJ token governs Injective’s sidechain, such as the futures protocol, exchange parameters, and protocol upgrades via a DAO structure.
  • (2) Exchange Fee Value Capture: the exchange fees will undergo an on-chain buy-back-and-burn event to accrue value for INJ. The company uses a buy-back and burn mechanism every two weeks, where 60% of the trading fees are used to buy back and burn INJ, and 40% are used as referral rewards for exchanges/players related to the protocol.
  • (3) Collateral Backing for Derivatives: INJ will be utilized as an alternative to stablecoins as margin and collateral for Injective’s derivatives markets. INJ can also be used for collateral backing or insurance pool staking in some futures markets, where stakers can earn interest on their locked tokens.
  • (4) Exchange Participation Incentives: in the future, 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.
  • (5) Tendermint-based Proof-of-Stake (PoS) Security: To ensure the security of Injective’s sidechain, the company will incentivize nodes to stake INJ and participate in the sidechain’s network consensus with block rewards.

As long as the community keeps growing, the tokenomics behind INJ make total sense when analyzing a healthy usage of it.

3. INJ Token Analysis

Traditional valuation methods do not work when analyzing crypto assets since there aren’t much data applicable when evaluating companies in this sector.

The most important criteria to consider when evaluating crypto assets are (1) the project’s team, (2) product: market timing and suitability, (3) community, (4) token mechanics, and (5) governance.

3.1. Project’s Team

There are dozens of thousands of cryptocurrencies around the globe. Naturally, many of these are probably scams or have a weak, effortless team whose only goal is to capitalize the token then dump on the project to get their load of money. First of all, you should analyze:

  1. Who is the team behind the cryptocurrency? Are they working full-time on the project?
  2. Do they have their social media accounts linked to the project’s website?
  3. What is their experience? Do they have a crypto-related background?
  4. Do they have a split of team members in various areas, such as engineering, programming, legal, marketing?
  5. Do they have experience members from traditional markets as advisors?
  6. Are they actively posting and providing content and updates to the community?

The project on Injective Labs started back in December 2018, and today (three years later), the team already has a solid base. There are around 40 members, most of them with their social media linked on the website, from different backgrounds and area expertise, especially engineering, and some with previous blockchain experience.

When it comes to the team behind INJ, it is a green flag.

3.2. The Product: Market timing and Suitability

As discussed before in this article, especially on “1.1. Injective’s value proposition” and “2. INJ Token and Tokenomics”, Injective Labs has done a great job so far, creating a job that solves a problem and is up-to-date with the actual level of technology development.

We’ve already seen many projects that started as possible solutions for existing problems but eventually got stuck in time and were outdated by more recent and rapidly evolving technologies.

Injective’s major challenge will be achieving the solutions it has initially proposed to solve while keeping an eye on market moves: what are their competitors doing? How are they evolving? Are there new competitors with updated technologies on the way?

The product solves a problem that is still around — in fact, its competitors with thousands of millions of market volume still experience it — so the market timing couldn’t be better. Injective has recently launched its mainnet, although it is still developing some elements and fixing minor bugs that will naturally exist. It is soon to derive conclusions, so if the launch is successful and accepted by the users and the community grows at a wholesome pace, the perceived value of Injective will probably increase over time.

3.3. Community

We’ve seen many cases where the community supporting the project/coin is way more relevant than what the team is accomplishing data-related (i.e., Dogecoin, Shiba INU).

As of November 2021, Injective has the following data:

  • Twitter: 92.4K Followers
  • Telegram: 17K members, 1.5K online
  • Discord: 8.2K members, around 870 online
  • Reddit: 4.4K members

The company is in constant touch with the community, especially on Discord (where users can directly contact the devs), Telegram (same, but less technical issues) and Twitter (with constant updates related to the project).

How to analyze the community growth over time? Some tools might bring some insights and are also quick and easy to use:

  • Reddit: Injective’s Subreddit Stats: since July 2020, the amount of Subreddit members has grown almost at a constant rate. My analysis shows that the project is constantly attracting newcomers and has not yet been widely spread. Some other exciting metrics are worth taking a look at.
Injective Subscribers on Reddit: Subscribers growing over time at a healthy rate.
Reddit: Injective's subscribers over time
  • Twitter: Injective’s Socialblade: on quick research (without using APIs), I was only able to track around one year of data. Since October 2020, the community has grown more than eight times.
Socialblade: Injective's followers over time

Injective has a strong, healthy, growing community and does a great job providing content and delivering what is expected from its members.

3.4. Token Mechanics

Anything that makes the token appealing to the investors should be an essential factor that might soar the project’s perceived value by the market. If a company has a decent idea, but the token usage doesn’t fit within the project, why would investors be incentivized to hold it?

The developers have it all sorted out as discussed on “2. INJ Token and Tokenomics”. The currency is used for various functions such as staking, exchange fee, collateral and protocol governance. Since the project aims to solve a problem and the token has practical applications in daily use (such as Binance’s BNB), the model being followed by Injective is reasonable.

As the project is developed and more partnerships are set, the token will have even more functions, and the market will naturally provide more liquidity.

3.5. Governance

Injective wishes to be fully decentralized, which means the community decides the project’s directions and new launches through a DAO structure.

They have developed a solid 4-phase governance structure (depositing, voting, tallying, implementing) where the INJ token is used as a medium for voting itself. As described in their Governance Proposal Procedure:

Governance can be used to propose new markets for listing on the Injective exchange, change the staking APY or any other parameter of the protocol as a whole. By doing so, Injective is able to pioneer a new economic system that is free, fair, and entirely governed by the global Injective community.

INJ Governance Proposal Procedure

4. Conclusions

Injective Labs has created a strong team, a strong value proposition and has the potential to keep showing its usefulness to the market. The team consistently delivers the items on the pipeline on time or earlier than the planned date.

Suppose the mainnet is widely accepted by users around the globe. In that case, it is possible that the volume transaction on it substantially multiplies, which theoretically would increase awareness of the project and likely drive prices up.

I like using the example of Binance, which is a successful case: it is a Chinese exchange responsible for a trillion crypto volume that managed to expand itself to many other countries, including the US and an already consolidated team here in Brazil.

I’ve been on the market since 2017. I had used Binance, and several other exchanges such as Bit-Z, OKEx, Livecoin, CoinFalcon, IDEX, and none of them could have exponential growth like Binance did (some don’t even exist anymore).

Here in Brazil, we have some national exchanges, but why use them when Binance provides a better service? Binance has its flaws and limitations, and that’s precisely what Injective Protocol intends to solve.

Furthermore, the idea of being a “One Stop Shop” where you can find not only crypto and futures, but commodities, equities, forex, and more, makes me inclined to have all my assets and trades into one platform eventually.
Injective was accepted in Binance Labs incubation program in 2018, has a $12.6m funding, a growing team, several launches on the roadmap and commercial partnerships in progress.

Dealroom.co — Injective Protocol Funding

Even after its value skyrocketed at 20x in around one year, there are way too many upsides. The risks within the project are that it does not keep being developed as the market does and that people do not actively use the platform that has just been released.

Based on what I’ve been following for the past several months, I have strong confidence in the team and that their growth strategies align with what they’re developing and what the market constantly demands. Fundamentally, that’s a buy.

5. Index

If you are not familiar with some terms in this article, don’t worry. I’ve been there before too. I’ve created a quick Index, so you don’t get confused or bored. If there are other terms you don’t know, please leave them in the comments.

Cosmos-SDK: the world’s most popular blockchain framework. Over $6 billion in assets are managed by public blockchains built with the Cosmos SDK. An SDK, by the way, is a software development kit (hardware, OS, programming language). So basically, Cosmos is a framework for building blockchains.

DAO: Decentralized autonomous organizations (DAOs) are member-owned communities without centralized leadership. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice and all activity is transparent and fully public.

DEX: a decentralized exchange (DEX) is a cryptocurrency exchange that operates in a decentralized way, without a central authority. They are run by self-executing agreements written in code called smart contracts. Some examples are Pancake Swap, Uniswap and Sushiswap.

Gas fees: payments made by users to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain. These fees go directly to miners who provide the necessary computer power to verify transactions and keep the network running.

Tendermint: the main contributor to Cosmos’ network. They are the software used in Cosmos, which is the blockchain. More about it in the article “Cosmos/Tendermint explained for real idiots” by Patrick Wieth.

6. References

  1. Injective Protocol (Whitepaper)
  2. Docs — Injective Protocol
  3. Injective Protocol (INJ): A Cross-Chain Trading Powerhouse
  4. Seq, Why Injective Protocol (INJ) Is an Incredible Investment Opportunity. Mainnet Launching Q2. Potential for Enormous Buy Back and Burn of INJ Each Month.
  5. Seq, Why Injective Protocol INJ Has the Potential to Be Bigger Than BNB. A Closer Look at the Buy Back and Burn Mechanism.
  6. Binance Research — Injective Protocol

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Matheus Brandão

Matheus Brandão

An economist venturing alternative assets investments, such as cryptocurrencies, trading cards, and other collections that may value over time.