By Alex Xu, Research Partner at Mint Ventures
This quick review focuses on the competition among leading Dex in the emerging L2 ecosystem zkSync, and attempts to answer the following questions:
– Why is it necessary to pay attention to zkSync and its Dex track?
– What is the current status of zkSync’s trading track projects?
– What are the qualities of the many competing projects, what are their advantages, and which one is more likely to win?
The following article represents the author’s interim views at the time of publication. It may contain errors and biases in facts and opinions. It is for discussion purposes only, and we look forward to corrections from other investment research colleagues.
Why you should pay attention to zkSync and its Dexs
zkSync: A big year for L2, a strong competitor for the top L2
2023 is the year of L2.
In terms of business data, while the TVL of public chains represented by Ethereum remains low, the TVL of L2 has grown rapidly this year, breaking new highs.
Source: https://defillama.com/chain/Ethereum?tvl
Source: https://l2beat.com/scaling/tvl
In addition to on-chain funds, on-chain activity data also confirms this. Since L2's actual TPS effectively surpassed Ethereum in October last year, the data has further risen rapidly this year. Currently, the actual TPS of the L2 network is about 3 times that of Ethereum. This data will obviously continue to rise in the future.
Below: Comparison of L2 actual TPS with Ethereum
Source: https://l2beat.com/scaling/activity
In addition to business data, the Cancun upgrade coming in October this year will also significantly reduce the cost of L2 and drive users and applications to further migrate to L2.
In terms of the competitive landscape, L2 is similar to L1. The network effect built by users, developers, and funds is so powerful that it is second only to stablecoins in the Web3 world, and the first-mover advantage is very obvious.
In the field of OP Rollup, Arbitrum and OP are the two strongest players. There may still be a competition in the future with Coinbase's L2 Base built on OP stack, but there will probably not be many new players who can come to the table in the short term.
The battle in the ZK Rollup field has just begun. As a long-term direction supported by the Ethereum Foundation and Vitalik, ZK is bound to occupy a place in the increasingly fierce L2 war in the future. After Arbitrum completed the airdrop this year, zkSync became the next highly anticipated L2 airdrop project. Its TVL and active user numbers continued to rise. In less than 3 months since its launch, it has become the L2 with the second largest TVL after Arbitrum and Optimism. It is also the ZK Rollup project with the largest TVL and number of users. At present, the types of on-chain projects are gradually enriched, including DeFi infrastructure and meme projects such as Cheems.
Overall, zkSync has taken the lead in the ZK L2 competition.
Dexs: Infrastructure for users and funds to converge
Dex, lending and stablecoins are the three most basic financial components of L1 & L2. However, referring to the past development of L1 and L2, it is easy to find that there is often only one "native Dex" at the head of each chain. The author has two definition criteria for "head" here, and at least one of them must be met:
TVL and transaction volume are much higher than competitors, with at least one market share exceeding 50%.
The token has been listed on first-tier trading platforms such as Binance
Data source: Deflama Time: 2023.6.7 Table: Mint Ventures
As the leading Dex in the chain, it enjoys more advantages than other competitors, such as:
With a higher mindset, it is easier to become the preferred platform for user transactions and market making, and has a higher degree of trust.
Business advantages: it is easier to gain favor from other partners and become the first stop for liquidity deployment or launchpad business cooperation
Traffic is convenient, and top Dex are more likely to be mentioned and cited in various business rankings, information, and research reports, gaining more free exposure and natural traffic
Cross-border network effect advantages formed by leading liquidity and trading volume
Tokens are more likely to be listed on top CEXs, gaining liquidity premiums and more token holders
As a relatively new L2 ecosystem, zkSync is in the early stages of growth in terms of users, funds, and developers. The market structure of each track has not yet solidified. Brand projects on other chains have not yet completed cross-chain arrangements (such as Uniswap V3 and Aave), and native projects still have time to compete and consolidate their positions.
However, the future Dex landscape of zkSync will most likely be like other L1&L2, with only one native Dex at the top (or it will be occupied by Uniswap V3).
So the question is, who will become the leading native Dex of zkSync in the future?
zkSync Dexs track layout
Currently, there are a large number of zkSync Dex projects, and the mechanisms adopted are different. However, judging from the business data, there has been a trend of market share concentration.
Data source: Deflama and official project data Time: 2023.6.6 Table created by: Mint Ventures PS: [Share] here is calculated based on the total business volume of the first five Dex
In terms of business mechanism, 3 of the top 5 Dex (SyncSwap, Mute and Velocore) adopted the V2 dynamic pool + steady-state pool model. Among them, Velocore also adopted the ve (3,3) mechanism similar to Velodrome in the economic model, and also engaged in liquidity market business.
However, judging from the two core business data of TVL and transaction volume, the current first-tier Dexs of zkSync are SyncSwap and iZiswap, and the future leading Dex is most likely to be born from these two companies.
Syncswap vs Ziswap
Next, the author will sort out and compare the basic situation of these two first-line Dex in the zkSync ecosystem, mainly covering the project's mechanism design, business indicators, economic model and team situation.
Syncswap
Mechanism Design
Pool Type
In general, Syncswap does not have much innovation in Dex's product mechanism. It adopts the multi-pool mechanism commonly used by ve (3,3) type projects. It is currently mainly based on Uniswap v2's Classic Pool (mainly suitable for trading pairs with large exchange rate fluctuations) and Curve's Stable Pool (suitable for trading pairs with stable exchange rates).
Below: Syncswap’s Pool list
Source: https://syncswap.xyz/pools Transaction Fees
Syncswap calls its fee mechanism “Dynamic Fees”, but in fact it is not the dynamic fee mechanism we understand (the higher the asset price volatility, the higher the fee rate to compensate for the LP’s impermanent loss). Perhaps a more accurate expression should be “customized fees”.
Specifically, Syncswap’s fees include the following functions:
Adjustable fees: Different pools can set different transaction fee rates, with an upper limit of 10%
Direction Fee: Set different rates according to the transaction direction (buy/sell), such as 0.1% for buy and 0.5% for sell
Fee discount: Get transaction fee reduction based on token pledge
Fee allocation agent: can directly allocate Pool fees to external addresses
It can be seen that Syncswap's Dynamic Fees actually has nothing to do with "dynamics", it just provides more customized permissions.
Business Performance
We conducted a statistical analysis of Syncswap's business situation from four perspectives: transaction volume, number of users, liquidity, and transaction fees (LP fees and protocol revenue).
Transaction volume and number of users
Syncswap itself does not provide a complete trading volume data dashboard. Based on the on-chain data, Syncswap's 7-day and 30-day trading volumes are counted. Its trading volume in the past 30 days (2023.5.8-6.7) is 431,351,415$, corresponding to an average daily trading volume of 14,378,380$; the trading volume in 7 days (2023.6.1-6.7) is 103,743,812$, corresponding to an average daily trading volume of 14,820,5444$.
The above transaction data is roughly consistent with Dexscreener’s 24-hour transaction volume statistics and the 24-hour transaction volume statistics of each official pool.
Below: Syncswap 24-hour trading volume
Source: https://dexscreener.com/zksync/syncswap
Below: Syncswap’s largest pool business data, with a daily transaction volume of about $10 million
Source: https://syncswap.xyz/pool
In terms of transaction volume composition, the ETH-USDC Pool accounted for the largest share, 60.8%, followed by stablecoins, and the actual zkSync native asset transaction volume accounted for less than 5%.
Also based on on-chain data, the number of monthly active addresses of Syncswap from May 8 to June 7, 2023 was 843,692, the number of weekly active addresses from June 1 to June 7 was 247,814, and the number of independent addresses of zkSync as of June 5 was 922,000, which means that nearly 91.4% of the addresses have interacted with Syncswap in a month.
Source: https://dune.com/dev_1hermn/zksync-era Liquidity
The total liquidity of Syncswap is $67.61 million, of which the ETH-USDC Pool accounts for $57.61 million, accounting for 84.5%.
Source: https://syncswap.xyz/pools
Among the top 10 pools in terms of liquidity, zkSync’s native non-stablecoin assets are Cheems (meme) and ZAT (NFT), accounting for only 1.5%.
Transaction fees and protocol revenue
The author has compiled statistics on the protocol revenue of the top 10 pools in terms of Syncswap transaction volume on June 9, as follows:
Data source: Syncswap official Time: 2023.6.9 Table created by: Mint Ventures
According to the table above, we can find that the protocol revenue of ETH trading pairs accounts for 90.6%, which is the bulk of the fees and revenue. In addition, Syncswap's fee sharing ratio for Cheems and USD+ (Tangible's stablecoin) is only 10% and 20%, giving most of the revenue to LP, with an obvious intention to compete for this part of liquidity.
What is commendable is that Syncswap has not yet issued tokens, started liquidity or transaction subsidies, and is a relatively rare DeFi project that can achieve positive returns. Of course, this has a lot to do with the fact that zkSync and Syncswap have not yet issued tokens, and there are a large number of airdrop hunters interacting.
Economic Model
Although Syncswap has not yet officially issued its token, it has announced some information about the token. Its token is SYNC, with a total of 100 million.
In terms of token rules, Syncswap partially refers to Curve's ve model. Coin holders need to convert SYNC into veSYNC before they can obtain token utility, including:
Voting Governance
Agreement fee dividend
Discounted transaction fees
However, the specific unlocking mechanism is different from Curve. After veSYNC chooses to unlock, there is a 6-month linear unlocking period, of which 50% of the tokens can be obtained on the 20th day after choosing to unlock, and the remaining 50% will continue to be unlocked linearly.
Despite this, the disclosure of Syncswap’s token economic model is still incomplete, such as the token distribution ratio, the speed of release, and whether the ve model is used to guide the Pool emission of tokens. However, judging from the overall mechanism of the current project, Syncswap is more like a ve(3,3) Dex project.
In addition, although the SYNC token has not been listed, Syncswap has launched a token incentive activity, namely the "Loyalty Program". The main incentive of this program is the fees generated by specific trading pairs, which is similar to "transaction mining".
Source: https://syncswap.xyz/rewards
The rules for token mining for the loyalty program are as follows:
The more transaction fees a user generates when trading in a specified trading pair, the more ySYNC tokens he or she will receive. The amount of ySYNC received = the transaction fees contributed by the user.
A planning cycle is called an epoch. Except for the Genesis epoch (epoch1) which is one month, the subsequent epochs are all one day.
Users redeem rewards based on ySYNC, but rewards are issued in veSYNC. If users need to sell, they must first unlock veSYNC.
The genesis epoch of the loyalty program was from April 10 to May 10 this year, with a total reward of 900,000 veSYNC. The final ySYNC obtained by participating users was 1,189,624.5, which means that during the event, users paid a total of $1,189,624.5 in transaction fees on the designated trading pairs, corresponding to a cost of ≈$1.32 for 1 veSYNC.
However, the loyalty program is currently suspended and has only been running for one phase.
Team and Funding
Syncswap's team is anonymous, the team size and personnel are unclear, and no financing information has been disclosed so far.
Ziswap
Mechanism Design
iZiswap is one of the products of iZUMi Finance. iZUMi is a DeFi project that provides multi-chain liquidity services (Liquidity as a service, LaaS). iZiswap is the Dex product of its liquidity services. Other products currently launched include:
LiquidBox: Liquidity incentive service around the centralized liquidity (Uni V3 and its derivatives) mechanism, which can help project owners customize liquidity incentives according to price ranges
Bond financing service: Provide project owners with a financing method similar to convertible bonds in traditional finance
This article mainly focuses on the competition among the top Dex in the zkSync ecosystem, so it will mainly focus on the situation of iZiswap in the zkSync network.
The main innovation of iZiswap lies in the proposal and implementation of DL-AMM.
DL stands for Discretized Contentrated Liquidity. DL-AMM does not use a constant product formula, but places liquidity at discrete price points. Each price point follows the constant sum formula L = X* √ P + Y/ √P.
Countless discrete price points are connected to form a complete AMM price curve similar to Uniswap, as shown in the left figure below.
Source: https://assets.iZUMi.finance/paper/dswap.pdf
The liquidity in DL-AMM will be divided into two categories: LP liquidity and limit order liquidity. The two are combined and superimposed on different price areas, as shown in the figure on the right.
The former is dual-token liquidity, while the latter is single-token. The goal is to exchange for another token at a specific price. Once the target price is reached, it will be exchanged and will not be exchanged back (Uni V3 can also implement limit order logic by hanging unilateral liquidity between small blocks, but it will be exchanged back to the original token when the price returns), and will remain in the contract until the user withdraws.
In addition, based on the point-like distribution characteristics of iZiswap liquidity, it also provides an order book trading interface version (iZiswap Pro), providing users with a trading experience similar to CEX.
Source: https://iZUMi.finance/trade
When it comes to liquidity order books, it is easy to think of the more well-known Dex project Trader Joe, which launched the Liquidity Book (LB for short) in November 2022. It also distributes liquidity in a point-like manner, and the liquidity at specific price points also uses a constant sum formula instead of a constant product.
For the specific situation of Trader Joe’s, you can read the author’s research report "Using Arbitrum to usher in a second spring? A comprehensive analysis of Trader Joe’s business status, token model and valuation level."
In fact, Trader Joe's liquidity order book concept is likely to have originated from the DL-AMM proposed by iZUMi. iZUMi's paper on DL-AMM, "iZiSwap: Building Decentralized Exchange with Discretized Concentrated Liquidity and Limit Order", was published in November 2021, and iZiswap was launched in May 2022 (first released on BNBchain), both of which were far earlier than the launch of Trader Joe's LB function. Trader Joe also noted the thanks and references to iZUMi in its V2 white paper.
In addition to DL-AMM, iZUMi has also designed LiquidBox, a liquidity incentive service based on centralized liquidity. The liquidity mining incentive based on V2 is very simple. Users can get token rewards by staking LP certificates, which is equivalent to incentivizing liquidity in all price ranges. However, the incentive design of centralized liquidity such as V3, DL-AMM and BL is much more complicated.
Assume that a token is priced at $100, and one LP provides liquidity in the range of $95-105 with $1,000, and another LP also provides liquidity in the range of $10-20 with $1,000 (one-sided order). The former's liquidity utilization efficiency is much higher than the latter. If we refer to the V2 model and directly provide the same reward according to the liquidity value, it is obviously unreasonable.
For users, LiquidBox is a place where they deposit liquidity and receive incentives. For the incentivizer (usually the token project and iZUMi), the obtained liquidity can be allocated in differentiated intervals to achieve the liquidity target desired by the project.
LiquidBox's solution is to provide three solutions, and the liquidity incentive party (usually the token project party and iZUMi) jointly decides which one to adopt:
1. One-sided mode (oneside): The project tokens in the liquidity deposited by users will not be deposited into the pool, but will be pledged separately to reduce the number of project tokens in the pool and reduce the resistance when the price rises; the other half of the value coins (ETH or stablecoins) will be allocated to the left side of the current token market price to strengthen the buying during the decline. For the project party, this actually achieves the effect of "increasing token buying and reducing token selling". For users, if the price of project tokens rises, there will be no impermanent loss caused by "selling all the way up". Of course, if the token falls, since the project token has not been sold at a high level, the impermanent loss caused by the decline will be magnified. So this can be understood as a market-making mechanism that encourages users to pledge tokens and not sell them, and jointly (3,3).
Below: Comparison between unilateral mode and V2
Source: iZUMi Documentation
2. Fixed range mode (Fix range): This is easier to understand, that is, to incentivize liquidity in a fixed price range, which is more suitable for incentives for stablecoins and packaged assets.
Fixed interval incentives, source: iZUMi documentation
3. Dynamic Range: Users participate in liquidity mining by providing liquidity within the range of (0.25Pc, 4Pc) of the current price (Pc). The width of the price range can also be set by the project party, such as (0.5Pc, 2Pc). The advantage is that there will be better liquidity around the market price range, but if the token price fluctuates sharply beyond the user's initial market-making range, the user will need to frequently re-extract LP and re-stake while bearing impermanent losses, which will result in higher operational losses.
In reality, most of the currently active LiquidBoxes have chosen the dynamic mode.
In addition, LiquidBox supports LPs of Uniswap V3 and iZiswap to participate in staking incentives, and most of the opened incentive pools are on the zkSync network.
Business Performance
Transaction volume and number of users
The author also uses on-chain data to compare iZiswap's data with Syncwap's data over the same period. Its trading volume in the past 30 days (May 8-June 7, 2023) is $195,025,494, corresponding to an average daily trading volume of $6,500,849; its trading volume in the past 7 days (June 1-June 7, 2023) is $60,007,769, corresponding to an average daily trading volume of $8,572,538.
The above transaction data is roughly consistent with Dexscreener’s 24-hour transaction volume statistics and the 24-hour transaction volume statistics of each official pool.
Source: https://dexscreener.com/zksync/iziswap
Source: https://analytics.iZUMi.finance/Dashboard
Similar to Syncswap, iZiswap’s ETH-USDC trading volume is even more extreme, with the two pools accounting for 85.8% of the total daily trading volume, followed by stablecoins and its own token IZI.
Also based on on-chain data, the number of monthly active addresses of iZiswap from May 8 to June 7, 2023 was 301,993, and the number of weekly active addresses from June 1 to June 7 was 102,938. The active addresses are approximately 35-40% of Syncswap.
fluidity
In terms of liquidity statistics, there is a big gap between the data officially provided by iZiswap and that provided by Defillama. The official dashboard shows that the current liquidity is 44.78 million US dollars, while the data from Defillama shows 25.95 million US dollars.
iZiswap official liquidity data
Defillama’s ranking of Dex TVL on zkSync
The reason is that the official liquidity statistics include a lot of stablecoins and packaged assets issued by iZUMi itself, such as iUSD (debt-financed stablecoin) and slstETH, slUSDT (packaged assets issued across chains based on Ethereum collateral), as shown in the figure below.
However, in the current market environment, it is very difficult to promote self-operated stablecoins and packaged assets, because considering that the acceptance of assets has a single point of risk of a third party, most users and mainstream DeFi are not very receptive to packaged assets issued by third parties. At the same time, according to iZUMi feedback, packaged assets represented by slstETH are still in the preparation stage and have not officially started operations. Therefore, when we observe TVL, we use the data from Defillama as the basis, which is more referenceable.
After proposing the above-mentioned wrapped and self-operated stablecoin TVL, iZiswap's TVL is similar to Syncswap, with ETH Pool accounting for 86.8%.
In terms of liquidity incentives, iZiswap currently has a large number of LiquidBox mining pools opened on zkSync, all of which adopt the dual incentive model of project tokens + IZI tokens.
Source: https://iZUMi.finance/farm/iZi/dynamic
The author has calculated the current dual-mining token rewards and found that most of the total token rewards for various liquidity incentives are contributed by the project party. However, there are also a small number of pools where the IZI token is more valuable due to the decline in the project party's token.
Currently (June 14, 2023), the total amount of IZI's 8 LiquidBox liquidity incentive tokens on zkSync is 60,180 per day, with a value of approximately US$1,208.
Transaction fees and protocol revenue
iZiswap’s data dashboard shows the fees generated by each pool. Below is the ranking of the top 10 pools in terms of weekly fees.
Data source: iziswap official Time: 2023.6.14 Table: Mint Ventures PS: Protocol distribution income refers to the income distributed to izi token users, which is 25% of the handling fee
Compared with Syncswap’s daily protocol revenue of $11,631.4, iZiswap’s daily protocol revenue is $6,312.5. However, according to the token design, 50% of this revenue will be used to repurchase iUSD and as market funds, which means that only 25% of the transaction fees are allocated to IZI token users.
Economic Model
iZiswap is a product module of iZUMi and is also the main module for generating revenue. In terms of business volume and development prospects, zkSync is currently iZiswap's main battlefield.
Total, Allocation and Supply
iZUMi's project token is IZI, with a total supply of 2 billion, distributed on Ethereum, BNBchain, Polygon, Arbitrum and zkSync.
Its token distribution and release speed are as follows:
Source: https://docs.iZUMi.finance/tokens/tokenomics
According to CMC data, the total amount of unlocked tokens is currently 787,400,000, but 276,091,843.3IZI of them are in ve staking.
Token Usage
IZI tokens have three planned uses:
1. Governance voting: used to vote on the destination of token emission (not yet online)
2. Staking dividends: After staking, you can get 25% of the IZI repurchased by iZiswap transaction fees
3. Accelerated income: After staking, you can accelerate your mining in LiquidBox by up to 2.5 times, similar to Curve’s boost mechanism
The intrinsic value of the Dex token of the ve model mainly comes from two sources: 1. The value of governance rights used to command liquidity, whose price is determined by the liquidity price of the corresponding Dex and is affected by the liquidity procurement needs of other project parties in the chain; 2. The discounted cash flow of transaction fee dividends.
Currently, iZiswap’s ve voting function has not yet been launched, and half of the transaction fee share is diverted to the bond repurchase module, suppressing the intrinsic value of the token.
Team and Funding
According to information disclosed by Rootdata, the founder of iZUMi Finance is Jimmy Yin, who graduated from Tsinghua University and currently has a team of more than 20 people.
According to data disclosed by rootdata, iZUMi has completed 4 rounds of financing in the past:
2021.11: Seed round, US$2.1 million, corresponding valuation of US$14 million
2021.12: Series A, US$3.5 million, corresponding valuation US$35 million
2022.5: Convertible bond financing through Solv, US$30 million, for liquidity operations
2023.4: Raise $22 million in fund form through Solv for liquidity operations
It is worth noting that iZUMi’s two recent rounds of financing did not adopt the method of direct token sales, but instead adopted the method of bond or fund raising. The purpose of its financing is not only for project expenses and team recruitment, but also for liquidity operations (market making). The operating income can be used for team income and payment of financing returns.
in conclusion
In the competition with zkSync’s leading Dex, Syncswap is quite standard in terms of product mechanism, with basically no impressive native innovation, while iZiswap’s products have relatively rich native exploration, but whether it can be converted into growth in users and funds is not optimistic at present. Because from the specific business data, Syncswap currently occupies a clear leading position in both TVL and transaction volume, and its tokens have not yet been distributed, and the expectation of project airdrops has a strong appeal to users’ funds and trading behaviors, enjoying lower operating costs (on the contrary, iZiswap still has daily token incentive expenses).
However, the common problem faced by both parties is that zkSync has only been around for a short time and there are not enough viable native projects. Most of the liquidity and trading volume of the two Dex are related to ETH.
In the future, more native projects will be born on zkSync. Which platform will these projects choose to deploy initial liquidity on? Is it zkSync, which has a more advanced business, or iZiswap, which has a richer mechanism and gameplay? This also leaves some suspense for subsequent competition. In addition, Uniswap voted to deploy V3 to zkSync as early as October 2022, and may enter this new market at any time, bringing greater competitive pressure.
We will wait and see the subsequent developments.