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Shade Protocol
Shade MetaEngine - a financial system with an array of self-referential, privacy-preserving applications sharing value accrual, governance, & interconnected functions under a single overarching token.
DeFi's first true MetaEngine
The Shade MetaEngine - a financial system with a superset of self-referential, privacy-preserving applications sharing value accrual, governance, and interconnected financial functions under a single overarching token that governs Protocol Owned Liquidity (POL) and fees. The key component of the Shade MetaEngine is that every additional app enhances the system in terms of utility and/or shared liquidity.
While many single purpose protocols focus on competing in a broader competitive market, Shade Protocol instead aims to make an entirely self-referential DeFi economy of interwoven applications where each $1 of activity creates a ripple effect across the entire set of Shade apps - all of which is captured and repurposed within the Shade MetaEngine.
The future of Shade's MetaEngine sustainability is intimately tied to the ability of builders to creatively expand the interconnected DeFi offering under one unified user experience.
The Shade MetaEngine exists to solve the following core problems that exist within Web 3.0 & Decentralized Finance:
- Stablecoins, DEXs, Lending, etc.
- Fractured liquidity
- Fractured UI/UX
- Truly decentralized money should not be pegged to centralized monetary systems
- Assemblies, etc.
- Shade MetaEngine
Mainstream adoption of Transparent DeFi applications is difficult. Imagine the following scenarios:
You walk up to a hot dog stand and purchase a hot dog using bitcoin. Due to the transparent nature of these blockchains, the cashier could see your entire crypto balance and every transaction you have made since you created the wallet.You open a lending position on MakerDAO, with a liquidation price point of $1,000 ETH. A whale scanning the transparent Ethereum blockchain manipulates the price in order to force your liquidation - locking in guaranteed profit for the whale.You decide to make a trade on Uniswap. Due to the transparent blockchain, a bot front-runs your trade - costing you additional fees as a result of MEV (Miner Extractable Value).You are a large VC wanting to invest in multiple projects. Unfortunately, people are copy trading your investments as all of your asset movements are trackable onchain. As a result, you are forced to use OTC markets in order to protect your trading and investment strategies.
Leveraging privacy, powered by Secret Network, Shade Protocol is able to bridge commerce from Web3 to everyday life in the form of Silk - a privacy-preserving stablecoin pegged to a basket of global currencies and commodities. Additionally, Shade Protocol applications are private by default. This means your trades on ShadeSwap are private and front-running resistant. Your payments and requests on Silk Pay are fully encrypted. Your lending positions are kept safely private on ShadeLend.
Privacy is the key to unlocking the full value of a decentralized future
Privacy is also key for institutions. In order for them to invest safely, and to protect their trading strategies privacy is the expectation. Shade Protocol applications bring parity to Web3 applications, providing privacy by default.
Using viewing key architecture on Secret Network, users are able to decrypt their encrypted balances and transactions. Users can hand off their viewing key for audit purposes, empowering institutions to leverage Shade Protocol applications safely. Viewing keys can be uniquely permissioned, giving users the flexibility they need to hand off decryption access to trusted third parties for compliance purposes.
Ultimately, viewing keys empower data sovereignty powered by private-by-default smart contracts leveraged by Shade Protocol.
Existing Web3 problem: fractured liquidity, fractured UI/UX
Successful DeFi is driven by four key servicing variables:
- Liquidity
- UI/UX
- Utility
- Value capture
All of these are key variables in providing an excellent service to end users. Unfortunately, DeFi has created confusing end-user experiences where every service provided has its own unique token that users need to learn and care about. It's not uncommon for an L1 ecosystem to have 10+ lending products, 20+ DEXs, and a range of stablecoins scattered across a wide range of websites.
This confusion reduces stickiness and product cohesion. If a user wants to use a lending product that works with a DEX, they have to jump between multiple tabs and websites to achieve their desired goal. DeFi primitives have difficulties working together due to diverging incentives that emerge from two apps having different tokens. Finally, with the massive amounts of tokens at play, liquidity gets fractured across different product categories - with lending products competing with the same liquidity that is locked up in different staking schemas or LP opportunities.
Shade Protocol unifies UI/UX, utility, and liquidity
Shade Protocol solves these key servicing variables:
- Liquidity shared across multiple Defi primitives
- Apps can interact with each other in unique, permissioned ways due to being unified by SHD.
- Drives value to users with unique functionality
- Drives value back to SHD stakers
- All apps live on the same website
- Increases utility
- Simplifies end-user experience
Because Shade Protocol only has a single token, the various DeFi primitives can interact in creative ways in terms of both UI/UX and tokenomics. An example of this unification: Shade Protocol users will be able to purchase ShadeBonds directly on the ShadeSwap LP experience.
Compare this to OlympusDAO, where users are forced to leave the website, mint an LP token, and then return to the website. This makes sense, as Uniswap does not have tokenomic incentives to promote OlmypusDAO.
Another example is Shade Arbitrage - this product passively earns revenue for the protocol by arbing price disparities between ShadeSwap and other Cosmos DEXs. Shade Arbitrage has permissioned access to ShadeSwap fees as well as the Silk minter, empowering Shade Arbitrage to arb opportunities that other entities do not have access to. These are just two of many examples where utility is unlocked in ways that have never been previously possible.
Silk featured in the center
Stablecoins that are pegged to sovereign currencies (i.e. USD, EURO) suffer from a simple cognitive dissonance:
Truly decentralized money cannot claim to be decentralized while it is simultaneously pegged to centralized monetary systems
Shade Protocol solves the problem of decentralized currencies with its flagship product Silk. This reflexive currency is unique because SHD token holders are capable of voting on the currencies and commodities that create the composition of the Silk basket as well as their respective weights. Because of this, Silk is able to adapt to changing global macro conditions. If 50% of all global commerce was made of bitcoin transactions, Silk could migrate its peg composition to have 50% of the basket consist of bitcoin. Thus, Silk has created a brand new category known as reflexive currencies:
- Decentralized
- Privacy-preserving
- Fungible
- Capable of evolving a target peg overtime
- Pegged to more than a single asset or currency
Silk is well positioned as a global interoperability hub for value transfer between various assets and currencies. The decentralized nature of Silk makes it robust, with a unique composition that makes it an excellent source of volatility resistance within the context of the global economy.
Silk features, backtest performance, and Silk peg composition
Contrast this to the existing stablecoin architecture whereby the risks and impact of inflation or macroeconomic collapses are transferred directly to holders of the stablecoins without recourse or a path to future adaptability of the peg.
The power of decentralized communities is only as powerful as their ability to elicit change in favor of the underlying protocol. This ability to create change is hampered by limited functionality available with respect to tooling. Shade Protocol scales governance using the following structure:
- Assemblies
- Sub-Assemblies
- General Token Governance
- Elections
- Representatives
- Sanity Checks
Fictional example of what assembly governance architecture could look like
An Assembly is an elected multisig with X amount of participants that have the ability to execute Y amount of transaction types. Assemblies are updated during election cycles. Assemblies were designed with flexibility in mind, giving them the ability to perform scoped, whitelisted actions for the protocol (such as issuing a bond, selling an asset, or staking). Each action taken by an assembly must pass a "sanity check" which is a low quorum vote. This empowers general token governance to have transparency and control over actions taken by the ShadeDAO and its respective assemblies. Finally, Shade Protocol leverages representatives. When a user stakes SHD, they can delegate their vote to a different address to vote for them.
Fee streams generated within the Shade MetaEngine can be converted by the ShadeDAO into the following:
- 1.Protocol owned liquidity
- 2.Buyback + burn
- 3.Staking rewards
- 4.Yield bearing assets
- 5.Smart contract operational gas costs
These functions use a variety of Automated Market Operations (AMOs) performed on a regularly recurring basis. The ability to modidy these will come once transitioned to Governance, but currently include the following:
- Purchase SHD on ShadeSwap using collected fees
- Distribute SHD to stakers that was purchased on open market via the ShadeDAO
- Burn SHD that was purchased on open market
- Purchase SILK on ShadeSwap using collected fees
- Purchase stATOM on ShadeSwap using collected fees
- Mint SILK/SHD LP token
- Mint SHD/ASSET LP token
Fees that get converted into SHD can be directly distributed to stakers - this distribution transfers governance power to those who have locked up collateral to engage in governance. Stakers protect the distributed admin control over certain aspects of Shade Protocol smart contracts. SHD purchased with fees can also be burned, slowly increasing the scarcity of SHD overtime. The burning of SHD equally benefits all SHD tokenholders. Additionally, fees converted into SHD can be used to provide liquidity on ShadeSwap, or other applications in the future.
To date, the vast majority of DeFi projects are in a race to bootstrap large enough user bases to eventually lower emissions and enter into a phase of real sustainability. These DeFi projects typically have singular use cases, and they are forced to emit value at external platforms or partners in the hopes of eventually achieving sustainability.
On a deeper level, bootstrapping liquidity for an isolated product amplifies the need for protocols to compete on emissions. In the absence of true innovation, APR is their main source of differentiation. Attracting users and attention through economic incentives alone is an unsustainable path plaguing many projects.
Single use-case bootstrapping compete on APR & volume to try to attract organic liquidity
Protocol bootstrapping has additional complexity due to the opportunity cost of capital. If a user can earn 10% yield to LP an ATOM/stATOM pool on another platform, then a new protocol will need to provide a yield greater than or equal to 10% during the bootstrapping phase in order to offset the opportunity cost that the capital could earn elsewhere. The emissions bootstrapping race competes on APR to attract liquidity - increasing opportunity costs for users, and pushing other protocols toward high inflation.
It's expensive to attract the necessary liquidity and usage which converts into organic liquidity - especially when simultaneously being reliant on third party platforms and competing with unsustainable opportunity costs.
In addition to the bootstrapping problem, DeFi ecosystems struggle from broader problems such as:
- Silos of fractured liquidity
- Fractured incentive structures across multiple public goods
- Isolated UI/UX across multiple DeFi primitives - creating worse UI/UX
- External dependencies that provide a broader attack surface
Enter the Shade MetaEngine - a series of connected public goods that use generated fees to reinvest into underlying public goods in a way that enhances the service provided to users while slowly lowering emission costs overtime.
DeFi Sustainability via the Shade MetaEngine
The Shade MetaEngine provides multiple services to users, resulting in fees that accrue back to the ShadeDAO. The fees accrued are as follows:
Shade believes in Protocol Owned Liquidity (POL) in liquidity pools tied to it's main token. Shade Protocol believes that making deep liquidity for SHD is more beneficial than distributing all accrued fees back to stakers. Deeper liquidity allows new users to buy into the Shade Protocol vision, and current holders are able to tap into the benefit of fees accrued in the past. For that reason Shade's automated operations currently seeks to continuously help grow:
- SILK/SHD
- SHD/stATOM
The SILK/SHD pool has a variety of utilities that it provides to SHD tokenholders, all of which are improved via Protocol Owned Liquidity (POL):
- SILK owned by POL represents an interest payment fee stream owed to ShadeDAO
- Increased SILK/SHD liquidity improves the ability of stablecoin holders to acquire SHD via ShadeSwap routing
- Increased SILK/SHD liquidity makes it easier for borrowed SILK to acquire SHD
- Increased SILK/SHD liquidity empowers SHD to potentially be used as collateral on ShadeLend
- Increased SILK/SHD liquidity empowers SILK/SHD LP token to potentially be used as collateral on ShadeLend
- Increased SILK/SHD liquidity improves slippage across ShadeSwap as a key route, for increased trading fees.
- SILK/SHD LP could be leveraged to cover protocol development costs
In addition to the above benefits, every single SILK/SHD LP owned by the ShadeDAO represents buy pressure on these assets from all of the collected protocol fees being converted into SILK or SHD. The advantages of collecting ATOM liquidity via POL has the following advantages:
- Increases liquidity with the most liquid localized Cosmos asset
- Price correlation of SHD gets intimately tied to ATOM as liquidity deepens
- Economic alignment with ATOM can convert into shared security agreement overtime
- stATOM passively generates ATOM yield for the ShadeDAO
The following fee allocation strikes a healthy balance between key stakeholders (stakers, tokenholders, and users).
Staking fee allocation is 20% because stakers hold the longest term perspective on Shade Protocol. The ability to tap into and govern long term fees of Shade Protocol is an incredible opportunity, but this privilege must be balanced with the need to repurpose fees to deepen liquidity and increase the number of yield bearing opportunities held by the ShadeDAO (which is ultimately governed by stakers). Finally, buyback and burn is an equitable way to slowly increase the scarcity of SHD which is beneficial to all parties. This mechanic starts at 0%, but could be activated once there is a net profit when fees > emissions.
The Shade MetaEngine focuses on creating a sustainable closed loop ecosystem tied to user demand of underlying services. In doing so, it generates an immense amount of value in the form of fees that are continually and programmatically repurposed so as to improve liquidity of key ShadeSwap pairs, increase the scarcity of SHD, distribute governance power to stakers, improve the utility of SHD & SILK, all while building price correlation to apex assets such as ATOM.
If done in a sustainable manner, the Shade MetaEngine has the opportunity to become a platform that consists of every key financial app that will continue to improve overtime in an entirely demand driven self-sustaining fashion.
A daisy chain of public goods all working together to amplify each other with perfectly aligned incentives, creating vertical sustainability that improves accessibility, utility, and usability.
Over a long time horizon this creates a moat for the protocol, making it less reliant on outside liquidity while simultaneously turning the ShadeDAO into a core participant within the array of ecosystem revenue opportunities.
Shade MetaEngine - An Interwoven Economy
Last modified 4mo ago