Everything you should know about Injective Protocol

Injective protocol

Defi has surfaced as an oversaturated market in all perspectives, depending on the possibility to crowdsource more funds by launching hundreds of projects in a single space with no viewable regulations. There are so many lending protocols, decentralized exchanges, and platforms of yield farming. Every newly developed Defi project now focuses only on standing out from the rest by all means. Talking about the Injective Protocol, it has a project targeting the market of derivatives with a scalable and decentralized approach. It is difficult to ignore a team that speaks of unlimited access to DeFi markets with absolutely no barriers, with the help of backup by the major industries like Pantera, Binance, and CMS.

What is an Injective Protocol? 

Founded by Eric Chen and Albert Chon in the year 2018, Injective Protocol is a decentralized derivatives exchange based on Ethereum backed by a layer-2 solution. This system of Injective Protocol with layer-2 solution backup allows investors to quickly and securely access DeFi markets. Injective Labs unveiled its first product as the first fully decentralized exchange system in DeFi in April 2020. The first purpose of the programming team was to overcome the restrictions of the DEXs at the time, which limited users by depending on order book trading, excessive latency, insufficient Liquidity, and other centralized designs.

When we talk about Injective Protocol, we’re not only talking about a DEX that allows you to transfer tokens and farm yields. Rather, we’ll take a look at a DEX that focuses on the derivatives market. Injective Protocol aims to deliver decentralized futures, margin, spot trading, and everlasting swaps to DeFi investors. Every component that supports the DEX, according to Injective Labs, is constructed in a censorship-resistant, public, and entirely trustless manner. Injective Chain, Injective Exchange, and the Injective Futures platform are the project’s three main components.

Motive

Injective Protocol visions a newly constructed economy that is decentralized in nature. The motto behind this vision is to invent a more safe and confidential system of exchange, payments and remittances. Injective thus creates a solution that helps exchange cryptos, making the crypto a public utility decentralized in nature. This crypto exchange solution given by Injective Protocol has assisted the users giving them and their community the required value in the exchange landscape. The cross-chain blockchain-based forex trading, derivatives, and futures entertain participation from anyone and everyone from around the world with the help of Injective technology.

Injective Protocol is creating an exchange model that holds power to transform the industry as it is happening with the help of technological innovations, which positively pushes the settlement and trade execution pace in an effective and decentralized manner, without any permission or censorship.

What problem does the Injective Protocol solve?

Injесtvе Prоtосоl is a tесhnоlоgу created tо solve the problem of third party involvement in trade by рrоduсing thе right sequеnсе bу which оrdеrs саn bе ассеlеrаtеd sесurеlу with no collision barriers. The invention was created to bring out the advantage of DEX liquidity while also eliminating the need for a third party to match trade orders within the same block. The tесhnоlоgу аlsо аllоws раrtiсiраnts to select оrdеr сараblе of tаking it without knowing the details of the orders belonging to other traders. This will prevent front-running and ensure that a large number of additional orders can be fulfilled without difficulty. The Injective Prоtосоl is also designed to match the аggrеgаtiоn аgrееmеnt bеtwееn most DEX to ensure Liquidity by matching orders respectively to provide flexibility and efficiency.

Let us now understand the various components of Injective Protocol and how they solve third-party involvement in trade, as mentioned below.

 

 

Injective Chain

Injective Chain, as defined by the Injective lab, is the core backbone for Injective’s sidechain layer 2, which works based on a hand-in-hand process with Cosmos zone. The Injective Chain also represents the infrastructure of the project. This infrastructure powers the Defi applications of next-gen in a decentralized and trustworthy mechanism. Injective Chain is a platform of derivatives that fully hosts an orderbook, EVM execution environment, trade execution coordinator, and a token bridge to Ethereum that is bi-directional. With the help of the sidechain that is cosmos-backed supporting EVM environments, Protocol to scale via L2 solutions, even though it offers solutions on Ethereum, is possible with the assistance of the Injective Chain. For a better understanding of the Injective Chain, let us unfold the components of the Injective Chain.

EVM Execution Environment

The generalization of smart contract execution is supported by the Injective Chain across the modular implementation of the EVM on top of cosmos SDK. Users utilize a scalable and interoperable implementation of Ethereum built on Proof-of-Stake with 1-block finality after implementing EVM on top of Tendermint.

The undermentioned contracts are deployed on Injective EVM:

  • Injective EVM Bridge Contracts
  • Staking Contract
  • Injective Coordinator Contract
  • 0x V3 Exchange Contracts
  • Injective Derivatives Contracts
  • Injective DEX Contracts

Decentralized Orderbook

A decentralized Orderbook can be defined as an Ox-based orderbook that is fully decentralized in nature, allowing the order relay of sidechains with the help of on-chain settlement. An implementation that is decentralized in nature belonging to the off-chain order relay, which is traditionally centralized. This order book is majorly used by the decentralized exchanges, which are also the central limit order book. A decentralized and censorship-resistant orderbook is hosted by the nodes of the Injective Chain, which also relays and stores orders for derivatives trading and spot trading.

Trade Execution Coordinator

Implementation of decentralized coordinator based away from the specification of 0x coordinator. The trading from front-running with the assistance of Verifiable Delay Functions enabling the lower-latency trading via soft-cancellations is done with the help of Injective TEC.

Injective Exchange Client 

The Injective Exchange Client is defined as the comprehensive and friendly interface for graphical user-directed towards the general public and advanced users. Relayers have access to host the client on a server to permit users’ interaction with Protocol. Individuals also have access to run clients locally for direct interaction with Protocol. IPFS is the platform for the deployment of Exchange Client Interface.

Injective API Provider

Relayers in the Injective network are rewarded for sourcing liquidity under the Injective model. By doing so, exchange providers are driven to better serve customers by competing to deliver a better user experience, hence increasing global access to DeFi.

Injective API nodes serve two purposes:

  • Service for Transaction Relay
  • Layer of Data

Service for Transaction Relay

Although users can communicate directly with the Injective Chain by broadcasting a compliant Tendermint transaction encoding a compatible message type, most users would find this inconvenient. API nodes help users engage with the Protocol by providing a basic HTTP, gRPC, and Websocket API. After that, the API nodes create the necessary transactions and send them to the Injective Chain.

Layer of Data

External clients can use Injective Exchange API nodes as a data layer. Injective provides a data and analytics API that works with Injective’s sample frontend interface right out of the box.

For the Injective Client, the Injective Derivatives and Spot Exchange APIs, 0x Standard Coordinator API, Injective Derivatives Protocol Graph Node GraphQL API, and different API services are required. Injective Exchange Client is all supported by the Injective API.

Injective EVM RPC provider

This component makes the nodes compatible, providing the complete Ethereum JSON-RPC API smoothly connecting it to the Injective EVM.

Injective Bridge Contracts on Ethereum

This Injective ⮂ Ethereum Bridge mechanism is known as the bi-directional Injective Token Bridge serving as a two-way Ethereum peg-zone for ERC-20 tokens to be moved to the Injective Chain EVM, allows users to transfer ERC-20 tokens from Ethereum. The peg-zone is based on Peggy and is protected by the Injective Chain’s Proof-of-Stake security. The Injective Bridge allows ERC-20 tokens to be moved from Ethereum to the Injective Chain. The standard flow, as specified by Peggy, is used to guide the procedure.

Ethereum to Injective  

The basic procedure for transferring ERC-20 tokens from Ethereum to the Injective Chain is as follows. Validators observe ERC20 asset locking and sign a data package containing lock information, which is then conveyed to the Injective Chain and witnessed by the Ethereum Bridge module. The Oracle module released the funds and transferred them to the intended recipient’s Cosmos address if the Cosmos address was stated specifically in the lock event. Once a quorum of 2/3 of the validators by signing power has confirmed that the transaction’s information is valid, the funds are released by the Oracle module and transferred to the intended recipient’s Cosmos address if a Cosmos address was specified in the lock event. The user can also choose to move the ERC-20 token to the Injective EVM chain’s equivalent child ERC-20 token.

The end-user is only required to transfer their ERC-20 to the Injective Peg Zone contract and select whether they want their cash transmitted to their Cosmos address (as reflected in the Cosmos bank module) or the child ERC-20 contract on the Injective EVM.

The transfer flow for moving a token to the is as follows at a high level:

  • A LogLock event is emitted when the ERC-20 is sent to the Injective Bridge Contract.
  • Listening to the event, an Injective relayer prepares and signs a Tendermint transaction encoding the data, which is subsequently broadcast to the Injective Chain.
  • Legitimacy of the transaction is verified by the nodes of the Injective Chain.
  • In the bank module, new coins representing the ERC-20 are created.
  • Following that, the ERC-20 can be used on the Injective Chain’s EVM and the Cosmos-SDK-based application logic. The Injective Chain will facilitate cross-chain transfers via Cosmos IBC in the future.

Injective Chain to Ethereum

The basic procedure for transferring ETH/ERC-20 tokens from the Injective Chain to Ethereum is as follows,

  • Validators sign a data package containing the information after seeing transactions on the Injective Chain.
  • The user’s ETH/ERC-20 is burned on the Injective Chain, freeing the ERC-20 on Ethereum.
  • The data package containing the validator’s signature is subsequently sent to the Ethereum blockchain’s Injective Bridge contracts.
  • The money is released/minted to the intended recipient’s Ethereum address once enough other validators have validated that the transaction’s information is correct.

Economics of the Token

Exchange is being transformed into a fully decentralized public utility by the Injective, controlled and owned by a community of INJ Holder’s as juxtaposed to an entity that is single centralized. The concept of this community-based philosophy supports the complete Protocol where the value is supremely important being captured by the Injective Token holders and users.

The Injective Token Protocol (INJ) is used for the below-mentioned purposes:

Proof of Stake Security

Ensuring the security of the sidechain, the supply of the token is inflated to stake the INJ by incentivizing the nodes and participating in the Injective network.

Ensuring the security of the sidechain, the supply of the token is inflated to stake the INJ by incentivizing the nodes and participating in the Injective network.

Governance

Various components are governed by the INJ tokens, such as the exchange parameters, protocol updates, and future Protocol. The process of governance as per the Injective Core Node is discussed below in few steps,

Step 1: Submission of Proposal

Blockchain is the place where the proposal is submitted along with a deposit.

Step 2: Vote 

The next step is to confirm the proposal and open the votes once the deposit has reached a certain minimum deposit value. The transactions can then be sent by the bonded INJ holders to vote on the proposal.

Step 3: Signal and Switch 

If an upgradation concerning the software is juxtaposed to a plain text proposal, the validators will be giving a signal once they are ready to shift to the new version. After the 75% of validators have given the switching signal, the software automatically shifts to the newer version.

INJ holders can request and initiate a required referendum concerning any governance decision by simply submitting the signed proposal on-chain. Once the proposal is supported by 1% of the INJ token holders’ total supply, the commencement of the 14-day referendum period will be done. During this referendum period, the INJ token holders need not lock their tokens can go simply out their votes on-chain for convenience. After the end of the 14-day referendum period, the voting power of the INJ token holders, which is proportionate to the token balance, will be calculated. The proposal will only be accepted when the majority of the voting power approves the proposal after the elapse of the voting window, and the proposal will also be accepted only when a predetermined percentage of total supply has actively taken part in the election.

Market Maker Incentives

For incentivizing the Liquidity, make orders to receive the net positive fee rebate. Based on the snapshots, the distribution will take place periodically. The decentralized exchange initially implements the minimum global exchange fee, which for makers is set at a rate of 0.1% and for the takers at a rate of 0.2%.

Relayer Incentives

Nodes and validators of Injective sidechains also can act as relayers catering to the traders in the most needful way. Relayers sharing the order in the orderbook are rewarded with incentives to provide them with the best traders experience. An exchange fee will be received by the node which discovers the first make order. Similarly, the node first relays a take order will get a ratio of an exchange fee of each make order found by them. This will be set to 40% and can also be subject to change by the governance.
Exchange Fee Value Accrual

The remaining exchange fee will go under an on-chain buy-back-and-burn event concerning the accrued value for INJ. Exchange fees gathered from all trading pairs are pooled over a certain period of time and sold in batch to market makers who bid with INJ tokens, as consumers don’t need to spend INJ for the exchange fee. This is done by using an absolute auction method that occurs once a month. A derivatives protocol contract will continually pool all exchange fees collected over the course of a month and have a week-long blind auction at the conclusion of the month. To conduct the trade, the smart contract will simply verify and select the highest bidder. The auction’s proceeds will be burned.

Collateral Backing for Derivatives 

INJ will be used as a margin and collateral alternative to stablecoins in Injective’s derivatives markets. INJ can also be utilized as collateral backing or insurance pool staking in various futures markets, allowing stakers to receive interest on their locked tokens.

Exchange Participation Incentives

While wanting to release a set quantity of INJ tokens every day for a set length of time, a snapshot will be taken of all account profit and loss in selected marketplaces. The address’s total profit and loss will be calculated and used as the token distribution weight. In practice, even if they have a larger profit-and-loss percentage, an eager Injective participant with high notional profit will receive more INJ than another participant with lesser notional profit.

What Injective Protocol development services does LeewayHertz provide?

Smart Contract Development

We provide services concerning the development of the solidity smart contracts pertaining to the platform of Injective Protocol. As the entire Injective Protocol platform is knit together with the help of INJ token, the important protocol interactions and the economics of token of the Injective network are formed with the help of the various Ethereum based smart contracts namely,

  • Injective Coordinator Contracts
  • Staking Contracts
  • Injective Futures Contracts
  • Injective Bridge Contracts
  • Injective Token Contracts

dApp Development

We have skilled developers who hold the expertise in creating the decentralized applications of industrial grade based on the platform of the Injective Protocol for the people wanting to work on and use the Injective Protocol for their organizational work system. Our developers create and launch diverse series of dApps on top of the Injective Protocol.

Nodes Setup

The API nodes on the Injective Protocol has two major purposes, one is the provision of transaction relay services and the second is of serving in the form data layer for Protocol. we have skilled blockchain developers who create and setup highly optimized nodes pertaining to the platform of Injective Protocol.

Conclusion

The Injective Protocol allows the traders to enter into and create on a Blockchain by executing the decentralized swap contracts which are perpetual in nature, based on any market that is arbitrary. The design of the Injective Protocol adapts on the account balance model recording all the positions publicly concerning the respective accounts. The core logic of the Injective Protocol is applied on the on-chain smart contracts while simultaneously matching order through the Injective Chain.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the founder and CEO at LeewayHertz. With the experience of building over 100+ platforms for startups and enterprise allows Akash to rapidly architect and design solutions that are scalable and beautiful.
Akash's ability to build enterprise-grade technology solutions has attracted over 30 Fortune 500 companies, including Siemens, 3M, P&G and Hershey’s. Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.

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