Shade Protocol is an array of connected privacy-preserving DeFi applications built on Secret Network - all accruing value back to SHD ("shade"), the treasury, and governance token.
All great innovations begin with difficult problems. Shade Protocol exists to solve the following core problems that exist within Web3 DeFi:
- Transparent DeFi applications
- Fractured application ecosystems
- Fractured liquidity
- Fractured UI/UX
- Sovereign-currency pegged stablecoins
- Truly decentralized money should not be pegged to centralized monetary systems
- Governance scalability
- Sustainable DeFi tokenomics
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:
- 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:
- 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.
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:
- General Token Governance
- 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.
Value creation and value capture are not one and the same. DeFi protocols that fail to create value fail to create a service that is compelling for users to use. If a protocol fails to create value, then it will never have the opportunity to sustainably capture value. However, a protocol could create a significant amount of value (i.e. high LP emissions, creating a good trading environment / service on a DEX) while simultaneously not capturing value sustainably (i.e. emitting high LP emissions, and capturing less revenue than the value of the emissions being emitted to generate the "value creation" that brings users in the first place). In order for Shade Protocol to succeed, it must strike a balance between value creation and thoughtful and sustainable value accrual.
(X) * value creation + (Y) * value capture > value of emissions where Y > X
The values of X and Y are unknown. However, it would stand to reason that Y > X consistently, as value capture (revenue) can be converted into improving an existing service of the protocol. Using the power of Shade Bonds, Shade Protocol has a direct path to Protocol Owned Liquidity. Services will be built on top of this POL, generating revenue from usage. This revenue can then be used to purchase more assets - deepening liquidity. This process repeated into perpetuity creates a flywheel of sustainable growth, assuming that users continue to use the services provided by Shade Protocol.