Detailed explanation of Native: competition and risks of programmable liquidity layer

Original title: "First Class Warehouse Public Due Diligence: Programmable Liquidity Layer Native"

Original source: First Class Blockchain Research Institute

Project Overview

Native is positioned as a programmable liquidity layer. It currently has protocol-oriented liquidity interface Native, Cross-chain trading aggregates three products: NativeX and Aqua, a new lending tool for market makers. Native can help project parties directly access Native liquidity on their own web pages. NativeX is already at the forefront of the cross-chain aggregation trading track. Although the overall demand for the track is low, it reflects the team's operational capabilities to a certain extent. The design of its new lending product Aqua greatly improves the capital efficiency of market makers while controlling risks, and is highly innovative. Native has received two rounds of funding from Nomad Capital and is launching its core product, Aqua.

Native can help project parties launch trading functions on their own websites, giving protocol users a more convenient interactive experience. The protocol can easily access Native’s liquidity on its own website and change transaction fees by using Native’s tools.

Although cross-chain transaction aggregation products are currently rarely used, they have certain growth potential. Users have great demand for cross-chain bridges and transaction aggregation, but they often operate them separately, and there are fewer users who directly use cross-chain transaction aggregation. Although cross-chain transaction aggregation can provide a convenient transaction experience, it has not been widely adopted due to issues such as liquidity and user habits. NativeX is already at the forefront in the field of cross-chain aggregation. It has integrated more liquidity and accumulated more market maker resources. It can receive more than 70% of DeFi's order flow, which will help the subsequent launch of Aqua. And with the outbreak of major L1 and L2, the demand for cross-chain transactions increases, and cross-chain transaction aggregation may gain more user adoption.

Aqua, as a new lending tool, improves the capital efficiency of market makers while reducing user capital risks as much as possible. Credit lending agreements for institutions often do not require collateral. Institutions can directly lend user funds after being reviewed. Information disclosure such as the purpose and whereabouts of funds after lending is basically zero, and users need to bear greater risks of institutional default. The market makers that borrow money from Aqua are all over-collateralized and do not actually lend out the funds. Market makers only use the funds in the Aqua pool for transaction settlement, and there are two-way transactions between users and the Aqua pool before and after settlement. Then the market maker generates corresponding long positions and short positions in the Aqua pool, and the market maker can simultaneously perform reverse operations on the centralized exchange to earn the transaction price difference. For deposit users, the funds used for mortgage by market makers have always been stored in the Aqua pool, the risk of default is minimized, and users can obtain sustainable low-risk returns. For institutions, they gain liquidity on the asset-free blockchain and can open more positions, maximizing capital efficiency.

As joint products, Native, NativeX and Aqua can provide each other with pricing, order flow and liquidity, forming a linked competitive advantage.

Overall, Native has accumulated a lot of resources in cross-chain transaction aggregation, which will help the further development of its new product Aqua. Expand. And form the effect of the linkage between Native, NativeX and Aqua. As a new product of Native, Aqua creates a new paradigm for cooperation between liquidity providers and market makers. While ensuring the safety of deposit users' funds, it also provides market makers with higher capital efficiency and convenience, forming a win-win situation. As a rare innovation in the DeFi field, there is currently no similar product, and Native deserves attention.

1. Basic Overview

1.1. Project Introduction

Native is positioned as a programmable liquidity layer. It currently has a protocol-oriented liquidity interface Native and a cross-chain transaction aggregation product NativeX to provide trading users with more convenient Trading experience. Native has launched Aqua, a new lending protocol for users and market makers, on the testnet. Aqua allows market makers to obtain borrowing capacity through mortgages and settle users' transactions through funds in the Aqua pool, which increases capital efficiency while minimizing the market maker's default risk.

1.2. Basic information

· Date of establishment: November 2022

· Sector: DeFi, transaction aggregation & lending

· Fundraising status: Undisclosed

2. Project Detailed explanation

2.1. Team

According to Linkedin data, team members are 3-10 people. The core members are introduced as follows:

Meina Zhou: Native’s CEO. He has a master's degree in data science from New York University, has more than 8 years of experience in leading data science teams, and has extensive experience in machine learning, data mining and project management. Meina Zhou is also the founder and host of the CryptoMeina Podcast.

Wee Howe Ang: Consultant at Native, Bachelor of Electrical Engineering from the National University of Singapore. Served as Software Development Manager (Assistant Vice President) at Deutsche Bank. CTO of cryptocurrency exchange Altonomy, CTO of cryptocurrency exchange Tokka Labs.

Hung:Native’s technical lead. Entered the encryption industry in March 2019. He is a full-stack engineer and is familiar with EVM smart contracts.

Native has a small number of members, but the team has a clear division of labor and has rich industry experience in the fields of technology, trading and publicity operations.

2.2. Funding

In April 2023, Nomad led a $2 million seed investment wheel. Nomad Capital received investment from Binance in March 2023 and invested in its first project, Native, the following month. In December 2023, Native received strategic investment from Nomad Capital.

Table 2-1 Financing situation

2.3. Products

2.3.1.Aqua

Decentralization In the early days, exchanges mostly used order book and RFQ (requesting quotations directly from market makers instead of placing orders, which is slightly different from order books) trading types. However, the cost of order book transactions on the Ethereum network is too high, the transaction depth is poor, and matching is difficult. Therefore, the automatic market maker mechanism has become the mainstream model of decentralized exchanges. Take Uniswap as an example. Uniswap adopts a constant product market making model. Although it achieves self-discovery of prices, its capital efficiency is low and a large amount of liquidity is required to reduce the price impact of transactions, and liquidity providers still face free losses. The risks and benefits of providing liquidity are often not as high as simply holding tokens.

Native is launching Aqua, a new paradigm of trading model. Aqua is a new lending product for ordinary users and market makers, which combines a decentralized exchange. and loan product attributes. It is committed to increasing the capital efficiency of market makers and users' deposit income while ensuring the safety of user funds. Usually, market makers' funds are stored in centralized exchanges and individual blockchains. If there is a certain demand for market making on a new blockchain, they need to allocate part of the funds and bear the security risks of this blockchain. Market makers may give up part of their market-making profits as a result.

Through Aqua, market makers use asset collateral to make loans and make markets in the new blockchain network (collateral can exist on other chains), generally Using the RFQ mechanism, the capital efficiency is high but there are no disadvantages such as slippage and MEV. Its funds come from deposit users/liquidity providers (deposit users can also obtain certain borrowing capabilities). Assuming that the user sells ETH for USDT, the market maker gives a quotation and settles it through Aqua's funds (deposited by the user). After settlement, the market maker generates a short position in USDT and a long position in ETH (equivalent to doing The market maker lent USDT in the pool and deposited ETH, but the funds were all in the Aqua contract). Within the scope of its borrowing, a market maker can maintain multiple positions simultaneously, maximizing the market maker's liquidity and capital efficiency.

Aqua not only improves the capital efficiency of market makers, but also solves the problem of market makers' lack of liquidity on some blockchains. The bigger highlight is that the money borrowed by the market maker has always been in Aqua's contract, and the actual manifestations are long positions and short positions. The market maker's asset sheet is more transparent and the borrowed assets cannot be misappropriated, and the risk is significantly lower than that of traditional institutions. Lending Agreement.

For lending users, the income is superimposed on the traditional lending agreement with the interest on funds used by the market maker (the amount of money for opening a position Interest charges), the deposited funds have more lending scenarios, and the yield is higher than traditional lending agreements, but there is no need to face the credit risk of the market maker (the funds are always stored in the Aqua contract). And market makers have a continuous need for transaction settlement, that is, the income of deposit users is relatively stable and sustainable.

Figure 2-5 Aqua running logic

Aqua market makers are all over-collateralized, and the collateral and settlement funds do not need to exist in the same blockchain. Aqua uses a fixed-rate lending model that adjusts based on market conditions and funding utilization. Interest will be calculated through off-chain calculations (the specific interest amount is determined based on the number of blocks passed and position changes), and the calculated interest amount will be sent to the chain periodically. Aqua uses off-chain quotes. When a market maker's borrowing exceeds its borrowing limit, a whitelisted liquidator can propose a liquidation proposal. Aqua will verify the proposal and return a signature, and the liquidator will then perform liquidation on the chain.

2.3.2.Native & NativeX

Since The GAS problem of Ethereum has been criticized, and the encryption market is gradually moving towards multi-chain. From the perspective of TVL, the TVL ratio of the Ethereum network has remained around 58% in the past two years, which shows that other blockchains have certain market competitiveness and maintain a certain degree of liquidity. From the perspective of public chain narrative, Ethereum will serve the second-layer network as its core, and more of its funds will migrate to the second-layer network in the future. It can be expected that the future encryption market will be a multi-chain parallel rather than a simple Ethereum one-size-fits-all situation.

Figure 2-1 Ethereum TVL market share[1]

As more and more blockchains are launched, liquidity becomes fragmented. Whether it is the first-layer blockchain of Solana and Aptos or the second-layer network of Ethereum, there is a huge demand for liquidity.

For traders, the current price order book trading model and deep liquidity of centralized exchanges can reduce transaction costs, but it also means that users need to give up their assets. ownership and cannot trade unlisted tokens. Although asset ownership can be retained on decentralized exchanges, it is limited to on-chain liquidity, and traders have to bear slippage, price impact, and MEV losses.

Native is a liquidity solution that integrates multi-chain liquidity sources. Its product Native can help project parties access Native’s liquidity and launch trading functions on their own websites. Another product, NativeX, has both cross-chain bridge and transaction aggregation functions, allowing users to conduct cross-chain transactions. As of March 18, 2024, NativeX supports 10 EVM-compatible chains including Ethereum, Arbitrum, Polygon, BNB Chain, and Base, and continues to add more blockchains.

Picture 2-2 NativeX Swap interface display

NativeX is based on aggregating the liquidity of multiple DEXs (including aggregators) and cross-chain bridges. Cooperate with Private Market Makers to give traders better quotes. Private market makers are different from traditional automatic market makers. Private market makers are independent individuals and provide a request for quotation (Request for Quotation) mechanism similar to the limit order of a centralized exchange. Own algorithms and pricing models to provide liquidity to its partners (such as trading aggregators). The RFQ mechanism has higher flexibility than the automatic market maker mechanism, and has greatly improved financial efficiency.

When a user issues an order request, Native will obtain quotes from multiple decentralized exchanges. At the same time, Native will also obtain quotes from private market makers. Private Market makers reply with cryptographically signed quotes (which avoids front running, price impact and slippage losses). Native provides traders with the optimal price strategy after aggregating quotes. If an order is placed with a private market maker, Native will finally verify the trader's digital signature. When the trading conditions are met, the trader and the market maker perform atomic swaps. Otherwise, the order will be automatically canceled to ensure the safety of the funds of both parties.

Figure 2-3 Native quotation aggregation mechanism

There is no transaction fee, price impact or other losses when users place orders with private market makers. That is to say, Native reduces the user's transaction costs to a certain extent while retaining the ownership of the user's assets.

Native For the trading function, project parties can choose to charge transaction fees (default 0%) and provide additional token rewards to liquidity providers. Currently, BendDAO, Aboard, Range Protocol and Velo have built-in Native to achieve a more convenient trading experience, and ZetaSwap is built directly using Native.

Figure 2-4 BendDAO Native trading interface[2]

For market makers, accessing Native’s liquidity can obtain more order flows, and aggregators accessing Native can also obtain more quotation sources, which is beneficial to Further optimization of price.

Summary: Native team consultants are executives of two cryptocurrency trading companies and have more market making experience. The products of the agreement include NativeX and Aqua. NativeX is similar to a cross-chain bridge and a transaction aggregator, helping users conduct more convenient transactions. As a new product of the team, Aqua creates a new paradigm for cooperation between liquidity providers and market makers. It can solve the problem of market makers' lack of liquidity on some blockchains and improve the capital efficiency of market makers, while depositing users There are more demand sides for funds, which not only improves users’ deposit income, but also protects users’ fund security as much as possible.

3. Development

3.1. History

Table 3-1 Native major events

From the historical process of Native It seems that product delivery and new support network speeds are faster, and certain market demand has been achieved in a relatively short period of time.

3.2. Current situation

Since its launch in April 2023, Native’s cumulative transaction volume has reached US$2.45 billion, with total transactions The number is 3 million times, and the private market makers it cooperates with have assets exceeding US$100 million.

Figure 3-1 Native Cumulative data[3]

The main transaction volume of the protocol comes from Ethereum, Avalanche and BNB Chain, mainly the WAVAX, USDT and ETH tokens on them. Assuming that traders consider slippage and other factors, Native's main competitiveness is the above-mentioned trading pairs. The private market makers that Native cooperates with mainly provide liquidity for Ethereum and BNB Chain's mETH, AVAX and BTC tokens.

Figure 3-2 Native’s top 10 trading pairs

3.3. Future

Native is completing the final testing of Aqua (including the audit of on-chain contracts and the structure of off-chain Execution), Native will subsequently deploy Aqua and launch it on the main network, and will gradually support the RFQ of the perpetual contract and the on-chain credit mechanism of zero-knowledge proof.

Summary: The Native team’s overall product delivery speed is faster and it has gained a certain market share. The team is launching its lending product Aqua for market makers, and will later integrate it into the perpetual contract field and launch an on-chain zero-knowledge proof-type credit mechanism. As the team’s subsequent flagship product, Aqua’s performance and data after its launch are critical to Native.

4. Economic Model

Native has not issued coins yet. Its economic model has not yet been released.

5. Competition

5.1. Industry Overview

Native currently has two products, the cross-chain transaction aggregation NativeX and the lending protocol Aqua for market makers. Cross-chain transaction aggregation has always been a niche track, and lending agreements for institutions often give KYC institutions the right to borrow without collateral. After institutions lend funds, the information is not transparent, and there are no restrictions on the use of funds, making it difficult to ensure the safety of user funds.

Users have always had a greater demand for transaction aggregation. Taking March 18, 2024 as an example, the transaction volume achieved through aggregators accounted for 36.7% of the total DEX transaction volume %. Although transaction aggregation has always had a huge user group and demand, its segmented cross-chain transaction aggregation has been difficult to win the market. Among the top ten aggregators by transaction volume, only the tenth-ranked Jumper Exchange (a product of LI.FI) is a cross-chain transaction aggregator. Overall, cross-chain transaction aggregation is still a niche track, and users are more familiar with it. Well-known aggregators such as 1inch, Jupiter and CowSwap.

Figure 5-1 Aggregator transaction volume ranking

Lending agreements for institutions often do not require full mortgage. Cooperating institutions can directly lend unsecured loans. The transparency of the whereabouts and retention of funds in the agreement is extremely low. Users do not even know that the funds are being used. The amount lent and the lender. Depositors face greater risks of institutional default and lower capital security. Taking RWA track Goldfinch as an example, it experienced two safety issues from September to October 2023. Goldfinch is already a prudent borrowing agreement within the track, but there are still many insufficient borrowing information and disclosures. It can be seen that the lending agreement for institutions seriously lacks transparency and there is a large risk of institutional default. Therefore, the TVL of the track has always been at a low level.

5.2. Competitive Analysis

5.2.1 Aqua

Native's new product Aqua has highly innovative product logic. Aqua contains the characteristics of both a decentralized exchange and a lending protocol, which creates a new cooperation paradigm for market makers and liquidity providers. The funds deposited by the liquidity provider will be stored in Aqua's contract. Market makers can use the funds in the Aqua pool to make markets after being over-collateralized. When the market maker conducts a transaction, the market maker uses Aqua The funds in the pool are settled. It is equivalent to having a long position and a short position in the pool (rather than lending funds to the contract for market making operations). The market maker can simultaneously perform reverse operations on the centralized exchange to earn the transaction price difference.

The main lending scenarios of traditional lending protocols such as Compound and AAVE are users’ own increased leverage, short selling and interest rate arbitrage, which require sufficient market fluctuations and other factors to create Lending and borrowing needs, such as the increase in stablecoin interest rates brought about by the market rebound and the increase in Ethereum pledge income and ETH deposit income, etc. Compared with Compound, users’ funds deposited in Aqua have more borrowing needs and higher yields. Moreover, the interest rates of lending agreements are often subject to market fluctuations, and the demand of market makers is more stable. That is to say, the user's income is relatively more stable and sustainable. From beginning to end, user funds have always existed in Aqua’s contracts, and market makers are over-collateralized and positions are transparent. Compared with transferring funds directly to market makers or institutions, Aqua’s lending model is safer Sexuality increased significantly.

For market makers, market makers can open more positions at the same time through Aqua settlement, which maximizes market making compared to directly lending funds. business capital efficiency. And through staking, you can obtain liquidity on multiple blockchains, which greatly enriches the market-making scenarios of market makers. It is currently an innovative product of DeFi. Private market makers use the liquidity deposited by users, and through the RFQ mechanism, can provide better quotations than automatic market makers in terms of unit liquidity, which may subvert the current situation where the automatic market maker mechanism of decentralized exchanges dominates. .

5.2.2 Native & NativeX

In cross In chain transaction aggregation, NativeX's 24-hour transaction volume of US$3.5 million is already at the forefront of this track (the overall aggregator ranks 12th), and its transaction volume is second only to Jumper Exchange in this track. Jumper Exchange was built by LI.FI. The LI.FI team raised US$5.5 million in July 2022 and US$17.5 million in March 2023. The seed round was led by 1kx, which is currently the strongest player on the track. As a new venture fund invested by Binance, Nomad also has a good reputation in the DeFi field, and Native is already at the top level in terms of financing background

Cross-chain transactions The product logic of aggregation is relatively simple. The protocol aggregates more liquidity sources from cross-chain bridges and decentralized exchanges, and on this basis cooperates with certain private market makers to provide more liquidity sources, and finally cross-chain bridges and decentralized exchanges. Chain trading aggregates comprehensive quotes and selects the optimal solution for traders, providing a more convenient and efficient trading experience. Similar to NativeX, LI.FI's promotion method is mainly to integrate with websites of other protocols. LI.FI has launched pre-built user interface component tools. Projects can integrate Jumper Exchange's exchange services into their own websites and implement One-stop cross-chain transaction aggregation service.

Since going online in April 2023, as of March 19, 2024, Native has aggregated 3 million transactions and a transaction volume of US$2.45 billion, LI .FI currently aggregates 5 million transactions and $4 billion in transaction volume. Native launched late, and its current total transaction data is about 60% of LI.FI, and its daily trading volume of $3.5 million is about 53% of LI.FI.

Figure 5-2 LI.FI aggregated data

Currently, NativeX supports 10 EVM chains. Although the number is less than LI.FI, NativeX already supports most important EVM networks and is rapidly expanding to other networks. From the data point of view, NativeX is already at the first-tier level in cross-chain transaction aggregation.

Figure 5-3 LI.FI multi-chain liquidity

Summary: Native’s product Native Chain transaction aggregation is still a niche track, and the overall demand is small. Its new product Aqua has many innovations. It uses a unified pool to manage funds, and market makers use the Aqua pool liquidity to settle transactions. It not only greatly increases the capital efficiency of market makers and helps market makers obtain liquidity on more blockchains, but also ensures the safety of users' funds as much as possible.

6. Risk

1) Code risk

Native's code is audited by Salus, Veridise and Halborn, and its immune bounty program will be launched soon, but there are still code risks.

2) Liquidation is not timely

Aqua’s liquidation is carried out regularly by whitelist liquidators. If the market maker has significant token exposure and encounters extreme market conditions, the liquidity provider may suffer losses due to untimely liquidation by the market maker.

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