This may be one of the most undervalued defi protocols right now 🚀🚀🚀

Risk Disclaimer: New DeFi projects can be highly imperfect, harboring risks like potential rugs leading to loss of invested capital. This article reflects my thoughts as a developer and founder on valuable lessons from some good web3 products, not financial advice. By reading on, you acknowledge this.🔒🔒🔒

A week or two ago, we witnessed the rapid rise of #Blast. I even wrote an [article](https://medium.com/@kwg6qlyv/500m-tvl-within-1-week-what-developers-and-founders-can-learn-from-blasts-strategy-fddc1ba1fa23) analyzing the valuable experiences developers and founders could learn from the project’s founding team to better launch and operate their own projects.

This week, I came across another very promising defi project that has followed most of the excellent industry practices I mentioned in that previous article. Most importantly, it’s still in a very early stage, not too late to research as a developer/founder or participate as a user. This is the new Decentralized Perpetual Exchange on Arbitrum: EQUATION.

Due to regulatory uncertainty in the US, most mainstream DeFi projects block US IPs. So you may need a VPN to switch IPs and access their site if you’re in the US. Please abide by local laws.

In [my analysis](https://hackernoon.com/$500m-tvl-within-a-week-lessons-from-blur-and-blast) of Blast’s strategies, I summarized key factors for successful web3 products:

1. Validate product-market fit by replicating past successes in proven sectors, with incremental innovation.
2. Focus incremental innovations on improving poor user experiences in mainstream products. Create mechanisms that greatly enhance these experiences.
3. Align token incentives tightly with these innovative mechanisms to create tremendous user benefits that ensure their success. This is crucial! As most early users are airdrop hunters who will flock in for major benefits.
4. Another area for token incentives is vampire attacks on mainstream products. If we’ve designed an innovative mechanism targeting pain points of mainstream products, and driven airdrop hunters and early adopters to help realize it through token incentives, we can now siphon existing users through airdrops and retain them.
5. “Strong user interest” + “simplified solution/product” are key to creating killer apps. Besides airdrop hunters, we need to consider mainstream users. Only the most straightforward and seemingly low-risk participation can remove their barriers to entry, like UST’s Anchor protocol and Blast’s deposit ETH/stablecoins for airdrops.

So, Let’s examine EQUATION’s strategies against this framework:

Firstly, Decentralized Perpetual Exchange is a proven sector. Leaders here have demonstrated product-market fit. Comparing CEXs and DEXes shows DEX penetration is still low, an early-stage sector. Data from Coingecko shows even top DEX dYdX remains negligible compared to CEX behemoths like Binance futures on metrics like volume.

However, Decentralized Perpetual Exchanges are a key DeFi infrastructure component. Leaders have achieved remarkable success, fully validating product-market fit. Below are the top chains and protocols by revenue generated over the past year according to Token Terminal. We can see GMX generated over $130M revenue during the bear market, while dYdX also made over $80M.

With the market gradually recovering and volatility increasing, the sector is poised to explode again. Web3 products hinge on narrative and anticipation. Sector potential sets the imagination ceiling.

The main problems with CEXs are needing to register, KYC, and deposit margins. This creates major friction in unfriendly jurisdictions. DEXs like dYdX, GMX, and EQUATION alleviate some of these issues.

Also, LPs only earn trading fees, not protocol revenue.

EQUATION’s incremental innovation versus dYdX and GMX starts with further reducing Maintenance Margin and greatly increasing Maximum Leverage. The lowest MM is GMX’s 1%, while EQUATION went lower to 0.25%. The highest MAX Leverage among DEXes is GMX’s 50x. EQUATION goes up to 200x. The high upside is very enticing for perpetual traders seeking high risk-reward.

For the problem of LPs having low capital efficiency, EQUATION allows LPs to use leverage. This significantly enhances their capital efficiency. LPs also share trading fees besides earning liquidity rewards, further improving incentives.

We can see in its Pools panel that even providing ETH/USDT liquidity can yield over 110% max APR with this design, a compelling innovation.

This is critical for early success, especially for community fair launches without VC backing.

EQUATION designed its IDO as a collaborative mining process with incentives for different stakeholders. Its whitepaper shows the daily EQU emissions are distributed as:

The biggest portion goes to position holders, users of the protocol. With 10,000 EQU minted daily, 40% is 4000 EQU worth about $210,000 at current prices.

The second portion goes to LPs providing EQU/ETH liquidity on Uniswap, worth around $110,000 daily.

The third portion goes to LPs providing liquidity to the Risk Buffer Fund, worth around $90,000 daily.

The fourth portion rewards KOLs helping promote the community (requires holding EFC membership NFTs), also worth around $90,000 daily.

The fifth portion rewards EQUATION’s own LPs, worth around $35,000 daily.

Importantly, these are all extra rewards provided during the IDO beyond base protocol incentives. For example, if you provide ETH/USDT liquidity on EQUATION, you already earn 100%+ APR. On top of that, you share part of the $210,000 in daily EQU emissions. The two are complimentary.

Airdrop hunters care most about free yields or farming tokens at high expected ROI with minimal capital. EQUATION does decently here. The above pools can be farmed quite risk-free.

For instance, I hold equal long and short positions, neutralizing risk while being unable to profit from them. But if I have $10K each in long and short, my total position is $20K. I can then share part of the $210,000 in daily EQU rewards for my holdings.

Incentives for KOLs are covered by the fourth portion above.

If I were the developer/founder operating such a project, I feel the excellent design could be enhanced further:

Options traders are still a small portion of web3 users. Many avoid contracts and options entirely as they are far riskier with a steep learning curve.

EQUATION already helps by neutralizing risk through offsetting positions while allowing participation in IDO rewards. This is sufficient for existing options traders but not for most others unused to options.

I would deploy a contract allowing one-click deposits. Funds would be split equally into offsetting long and short positions. Leverage would be minimized to prevent liquidations. This provides a “painless” deposit experience similar to savings that equally allows participation in IDO rewards. Such a seamless experience would greatly lower mental hurdles and attract far more users to be protocol airdrop hunters.

dYdX has a circulating market cap of $560M, while GMX exceeds $500M. EQU’s current circulating market cap is just $3M (even FDV is only $18M). This huge difference is because EQUATION is new, but also shows room to improve expectation management.

EQUATION is performing well after launch, as evidenced by metrics. Open interest is critical for a Decentralized Perpetual Exchange. GMX’s official data shows its current total open interest is around $220M. EQUATION already exceeded $110M and growing. Despite the valuation gap, EQUATION is reaching parity with top Decentralized Perpetual Exchanges like GMX on key business metrics.📈📈📈

Our earlier estimate showed EQUATION provides over $500,000 in daily rewards currently to airdrop hunters and early users. This is great, but far from enough to create explosive growth like #Blast for degen users.

Firstly, they crave a sense of probabilistic certainty, even if psychologically illusory. This requires more endorsements and backers at launch to create a perception of guaranteed success. Some may say EQUATION is a community fair launch without VC backing, making endorsements like Blast’s improbable. However, as a smoothly developing protocol on par with GMX, is it possible to request some policy support from Arbitrum?

I think it’s feasible. Arbitrum faces fierce competition and has few impressive ecosystem projects. Its generous $ARB rewards to bootstrap GMX shows Arbitrum’s urgency to support development. If a project can gain traction now, Arbitrum would likely invest resources to aid it.

EQUATION has achieved this much with only an ABDK audit (also GMX’s auditor), and no official Arbitrum endorsement. Even just vocal backing, without significant $ARB rewards, from Arbitrum could boost EQUATION’s metrics tremendously.

Secondly, while these degen users care about yields, they care more about perceived high risk-reward, even if illusory expectations. This requires creating greater imagination space and upside potential during launch to drive such perceptions.

Some may argue the sector’s ceiling is clear. Even if you double open interest over GMX, get listed on top exchanges like Binance, and match GMX’s $512M FDV, that’s still nearly a 30X from EQUATION’s current $18M FDV. Isn’t that enticing enough?

While still decent, as a developer/founder I’d look for more open-ended narratives with greater upside to drive expectations, such as announcing EQUATION’s second L2 launch will be #Blast. [Blast has clear airdrop expectations for developers]( blast.io/ETOQE).

This wouldn’t even require requests like with Arbitrum. They have openly said half of season 1 airdrops will go to early users depositing ETH/stablecoins, and half to ecosystems developers. EQUATION entering and receiving airdrops is highly probable.💰💰💰

I could announce all Arbitrum support and Blast airdrops received will be added to the current IDO mining event pool, distributed proportionally as additional rewards to existing recipients.

Now early airdrop hunters and users wouldn’t just get $500,000 in daily $EQU emissions, but also significant expected $ARB and #BLAST airdrops. These are valuable L2 tokens. This creates expectations of even higher risk-reward to drive growth.

And with growth, we improve our chances of securing more support from Arbitrum and Blast. Fake it until you make it! Once we exceed dYdX and GMX in metrics, introduce VC funding, get listed on tier 1 exchanges like Binance and Coinbase. The flywheel starts spinning.🔥🔥🔥

In summary, the EQUATION team has performed excellently in project launch and early operations, reflected in current metrics. But token undervaluation may be the key bottleneck preventing a positive feedback loop and explosive growth. Optimizing launch and operational strategies in a few ways could help challenge leading protocols like GMX and dYdX:

1. Strengthen understanding of current mainstream user profiles. Lower mental hurdles and simplify participation for the masses through more seamless and foolproof product experiences.
2. Analyze the psychology of airdrop hunters and early degens more deeply. Manufacture higher perceived certainty and outsized risk-reward to more effectively direct expectations and drive growth.

What do you think? I look forward to your comments and thoughts!

And since you’ve read so far, please give me a like! 👍👍👍