Detaialed Explaination of Native

Forward the Original Title ‘头等仓公开尽调：可编程的流动性层Native’

Project Overview

Native is positioned as a programmable liquidity layer. It currently has three products: Native, a protocol-oriented liquidity interface, NativeX, a cross-chain trading aggregator, and Aqua, a new lending tool for market makers. Native can help projects directly access Native liquidity on their own webpages. NativeX is already at the forefront of the cross-chain aggregation trading track. Although the overall demand for the track is low, it reflects the team’s operational capabilities to a certain extent. The design of its new lending product Aqua greatly improves the capital efficiency of market makers while controlling risks, and is highly innovative. Native has received two rounds of funding from Nomad Capital and is launching its core product, Aqua.

Native can help project parties launch trading functions on their own websites, giving protocol users a more convenient interactive experience. By using Native’s tools, protocols can easily access Native’s liquidity on their own websites and change transaction fees by themselves.

Although cross-chain trading aggregation products are currently less adopted, they have certain growth potential. Users have great demand for cross-chain bridges and trading aggregators,but often operate separately, and there are fewer users who directly use cross-chain trading aggregation. Although cross-chain transaction aggregation can provide a convenient transaction experience, it has not been widely adopted due to liquidity and user habits. NativeX is already at the forefront in the field of cross-chain aggregation. It has integrated more liquidity and accumulated more market maker resources. It can receive more than 70% of DeFi’s order flow, which will help the subsequent launch of Aqua. And with the outbreak of major L1 and L2, the demand for cross-chain trading is increasing, and cross-chain trading aggregation may get more user adoption.

As a new lending tool, Aqua improves the capital efficiency of market makers while reducing user capital risks as much as possible. Credit lending protocols facing institutions often do not require collateral. Institutions can directly lend user funds after being audited. Information disclosure such as the use and whereabouts of funds after lending is basically zero, and users need to bear greater risks of institutional default. However, all the market makers borrowing in Aqua are over-collateralized, and they do not actually lend out funds. The market makers only use the funds in the Aqua pool for transaction settlement, and the transactions before and after settlement are two-way transactions for users and the Aqua pool. The market maker then creates corresponding long and short positions in the Aqua pool, and the market maker can simultaneously perform reverse operations on centralized exchanges to earn the price difference. For deposit users, the funds used for the market maker’s collateral are always in the Aqua pool, the default risk is reduced to the lowest, and users can obtain sustainable low-risk returns. For institutions, they have obtained liquidity on the blockchain without assets and can open more positions to maximize capital efficiency.

As joint products, Native, NativeX and Aqua can provide each other with pricing, order flow and liquidity, forming a linked competitive advantage.

Overall, Native has accumulated a lot of resources in cross-chain trading aggregation, which will help the further development of its new product Aqua, and forms the effect of Native, NativeX and Aqua linkage. As a new product of Native, Aqua creates a new paradigm for cooperation between liquidity providers and market makers. While ensuring the safety of deposit users’ funds, it provides market makers with higher capital efficiency and convenience, forming a win-win situation. As a rare innovation in the DeFi field, there are currently no similar products, and Native is worth paying attention to.

1. Basic Overview

1.1.Project Introduction

Native is positioned as a programmable liquidity layer. It currently has a protocol-oriented liquidity interface Native, and a cross-chain trading aggregator product NativeX to provide trading users with a more convenient trading experience. Native has launched Aqua, a new lending protocol for users and market makers, on the testnet. Aqua enables market makers to obtain borrowing capabilities through collateral and to settle user transactions with funds from the Aqua pool, thus increasing capital efficiency while minimizing default risk as much as possible.

1.2.Basic information

2. Project details

2.1.Team

According to Linkedin data, team members range from 3 -10 people. The core members are introduced as follows:

Meina Zhou, CEO of Native. He has a master’s degree in data science from New York University, has more than 8 years of experience in leading data science teams, and has extensive experience in machine learning, data mining and project management. Meina Zhou is also the founder and host of the CryptoMeina Podcast.

Wee Howe Ang, Advisor of Native, holds a bachelor’s degree in electrical engineering from the National University of Singapore. He has served as Software Development Manager (Assistant Vice President) at Deutsche Bank, CTO of cryptocurrency trading company Altonomy, and CTO of cryptocurrency trading company Tokka Labs.

Hung, the technical lead of Native, entered the crypto industry in March 2019. He is a full-stack engineer who is familiar with EVM class smart contracts.

Although the number of Native team members is small, the team has clear division of labor and rich industry experience in technology, trading, and promotional operations.

2.2. Funds

In April 2023, Nomad Capital led a seed round investment of $2 million. Nomad Capital received investment from Binance in March 2023 and invested in its first project, Native, the following month. In December 2023, Native received strategic investment from Nomad Capital.

Table 2-1 Financing situation

2.3. Products

2.3.1.Aqua

In the early days, decentralized exchanges mostly used order books and RFQ (Request for Quotation, which directly requests a quote from a market maker rather than placing an order, slightly different from the order book) trading types. However, the cost of order book trading on the Ethereum network is too high, the transaction depth is poor, and matching is difficult. Therefore, the automatic market maker mechanism has become the mainstream model of decentralized exchanges. Take Uniswap as an example. Uniswap adopts a constant product market making model. Although it achieves self-discovery of prices, its capital efficiency is low and a large amount of liquidity is required to reduce the price impact of transactions, and liquidity providers still face free losses. The risks and benefits of providing liquidity are often not as high as simply holding tokens.

Native is launching a new trading paradigm called Aqua. Aqua is a new lending product for ordinary users and market makers, which combines the attributes of decentralized exchanges and lending products. It is committed to increasing the capital efficiency of market makers and users’ deposit income while ensuring the safety of user funds. Usually, market makers’ funds are stored in centralized exchanges and individual blockchains. If there is a certain demand for market making on a new blockchain, they need to allocate part of the funds and bear the security risks of this blockchain. Market makers may give up part of their market-making profits as a result.

Through Aqua, market makers use collateral to borrow money to make markets in the new blockchain network (the collateral can exist on other chains). Generally, the RFQ mechanism is used, which has high capital efficiency but does not suffer from slippage, MEV and other disadvantages. Its funds come from deposit users/liquidity providers (deposit users can also obtain certain borrowing capabilities). Assume that the user sells ETH for USDT, and the market maker gives a quotation and settles it through Aqua’s funds (deposited by the user). After settlement, the market maker generates a short position in USDT and a long position in ETH (equivalent to the market maker borrowing USDT in the pool and depositing ETH, but the funds are all in the Aqua contract). Within its borrowing range, the market maker can maintain multiple positions at the same time, maximizing the liquidity and capital efficiency of the market maker.

Aqua not only improves the capital efficiency of market makers, but also solves the problem of market makers lacking liquidity on some blockchains. The bigger highlight is that the money borrowed by the market maker always stays in the Aqua contract, and the actual manifestation is long and short positions. The market maker’s asset form is more transparent, and the borrowed assets cannot be misappropriated, the risk is significantly lower than traditional institutional lending protocols.

For lending users, the return is layered on the traditional lending protocol with the interest on the money used by the market maker (the interest cost of opening a position). The deposited funds have more lending scenarios, the yield is higher than the traditional lending protocol, and they do not have to face the credit risk of the market maker (the funds are always in the Aqua contract). And market makers have a continuous demand for transaction settlement, that is, the income of deposit users is relatively stable and sustainable.

Figure 2-5 Aqua operation logic

Aqua market makers are all over-collateralized, and the collateral and settlement funds do not need to exist in the same blockchain. Aqua uses a fixed-rate lending model that adjusts based on market conditions and capital utilization. Interest will be calculated through off-chain calculations (the specific interest amount is determined based on the number of blocks passed and position changes), and the calculated interest amount will be sent to the chain periodically. Aqua uses off-chain quotes, and when a market maker’s loan exceeds its borrowing limit, whitelisted liquidators can propose a liquidation proposal. Aqua will verify the proposal and return a signature, and the liquidator will then perform liquidation on chain.

2.3.2.Native & NativeX

Since the GAS issue of Ethereum was criticized, the crypto market is gradually moving towards multi-chain. From the perspective of TVL, the TVL ratio of the Ethereum network has remained around 58% in the past two years, indicating that other blockchains have certain market competitiveness and have maintained a certain liquidity. From the perspective of public chain narrative, Ethereum will serve the second-layer network as the core, and more of its future funds will migrate to the second-layer network. It can be expected that the future crypto market will be a multi-chain parallel rather than purely Ethereum’s monopoly.

Figure 2-1 Ethereum TVL market share[1]

As more blockchains are launched, liquidity becomes fragmented. Whether it is the first-layer blockchain of Solana and Aptos or the second-layer network of Ethereum, there is a huge demand for liquidity.

For traders, centralized exchanges’ current price order book trading model and deep liquidity can reduce transaction costs, but it also means that users have to give up asset ownership and cannot trade tokens that are not listed. On decentralized exchanges, although asset ownership can be retained, due to the liquidity on the chain, traders have to bear slippage, price impact, and MEV losses.

Native is a liquidity solution that integrates multi-chain liquidity sources. Its product Native can help project parties integrate Native’s liquidity on their websites and launch trading functions. Another product, NativeX, has both cross-chain bridge and trading aggregation functions, allowing users to conduct cross-chain transactions. As of March 18, 2024, NativeX supports 10 EVM-compatible chains including Ethereum, Arbitrum, Polygon, BNB Chain and Base, and continues to add more blockchains.

Figure 2-2 NativeX Swap interface display

NativeX collaborates with multiple Private Market Makers on the basis of aggregating liquidity from multiple DEXs (including aggregators) and cross-chain bridges, providing traders with better quotes. Private market makers differ from traditional automated market makers. They are individual entities that provide a Request for Quotation (RFQ) mechanism similar to limit order on centralized exchanges, and provide liquidity for their partners (such as trading aggregators) through their own algorithms and pricing models. Compared with the automated market maker mechanism, the RFQ mechanism is more flexible and greatly improves capital efficiency.

When a user sends an order request, Native will obtain quotations from multiple decentralized exchanges. At the same time, Native will also obtain quotations from private market makers, and the private market makers will reply with encrypted signature quotations (which can avoid front-running, price impact and slippage loss). Native provides traders with the optimal price strategy after aggregating quotations. If the order is placed with a private market maker, Native will finally verify the trader’s digital signature. When the trading conditions are met, the trader and the market maker perform atomic swaps. Otherwise, the order will be automatically canceled to ensure the safety of the funds of both parties.

Figure 2-3 Native RFQ aggregation mechanism

There are no losses such as transaction fees and price impact when users place orders with private market makers. That is to say, Native reduces users’ transaction costs to a certain extent on the basis of retaining ownership of user assets.

NativeX is aimed at traders, and for project parties, they can connect to Native’s liquidity source through the built-in Native program. By adding trading functions, project parties can choose to charge transaction fees (default is 0%) and provide additional token rewards to liquidity providers. Currently, BendDAO, Aboard, Range Protocol and Velo have built-in Native to achieve a more convenient trading experience, and ZetaSwap is built directly using Native.

Figure 2-4 BendDAO Native trading interface[2]

For market makers, accessing Native’s liquidity can obtain more order flows, and aggregators accessing Native can also obtain more quotation sources, which is conducive to further optimization of prices.

Summary: Native team advisors have held executive roles in two cryptocurrency trading companies and have a wealth of market-making experience. The protocol’s products include NativeX and Aqua. NativeX is similar to a cross-chain bridge and trading aggregator, helping users to trade more conveniently. Aqua, the team’s new product, has created a new paradigm for cooperation between liquidity providers and market makers. It can solve the problem of market makers lacking liquidity on certain blockchains and improve the capital efficiency of market makers. Simultaneously, deposit users’ funds now have more demand, increasing user deposit income while also ensuring the safety of user funds as much as possible.

3. Development

3.1.History

Table 3-1 Native major events

Judging from the historical process of Native, product delivery and new support network speeds are relatively fast, and it has gained certain market demand in a relatively short period of time.

3.2.Current situation

Since its launch in April 2023, Native has accumulated a trading volume of US$2.45 billion, with a total number of transactions of 3 million, and the assets of its partnered private market makers exceed 100 million USD.

Figure 3-1 Native cumulative data[3]

The protocol’s main trading volume comes from Ethereum, Avalanche, and BNB Chain, primarily from tokens like WAVAX, USDT, and ETH on these platforms. Assuming traders consider factors like slippage, Native’s competitive strength lies in the aforementioned trading pairs. Private market makers collaborating with Native mainly provide liquidity for mETH, AVAX, and BTC tokens on Ethereum and BNB Chain.

Figure 3-2 Native’s top 10 trading pairs

3.3.Future

Native is in the final stages of testing Aqua, which includes an on-chain contract audit and off-chain structural execution. Following this, Native will deploy Aqua and launch it on the mainnet. This will gradually support RFQ for perpetual contracts and an on-chain zero-knowledge proof credit mechanism.

Summary: Native team’s product delivery speed is quite fast, gaining a certain market share. The team is about to launch its lending product Aqua aimed at market makers, and subsequently integrating into the field of perpetual contracts and introducing an on-chain zero-knowledge proof type of credit mechanism. As the team’s main product in the future, the performance and data of Aqua after its launch will be critical for Native.

4.Economic Model

Native has not issued cryptocurrency yet and has not yet announced its economic model.

5. Competition

5.1. Industry Overview

Currently, Native has two products: NativeX, a cross-chain trading aggregator, and Aqua, a lending protocol aimed at market makers. Cross-chain trading aggregation has always been a niche track, whereas lending protocols aimed at institutions often grant KYC institutions the right to uncollateralized lending. After lending out the funds, the information is opaque, and there are no restrictions on the use of funds, making it difficult to ensure the safety of user funds.

Users have always had a large demand for transaction aggregation. As an example, on March 18, 2024, the transaction volume realized through aggregators accounted for 36.7% of the total DEX transaction volume. Although transaction aggregation has always had a large user base and demand, its sub-track, cross-chain transaction aggregation, has always struggled to win the market. Among the top ten aggregators in terms of transaction volume, only the tenth-ranked Jumper Exchange (a product under LI.FI) is a cross-chain transaction aggregator. Overall, cross-chain transaction aggregation is still a niche track, and users are more familiar with using well-known aggregators such as 1inch, Jupiter, and CowSwap.

Figure 5-1 Transaction Volume Ranking of Aggregators

Lending protocols for institutions often do not require full collateral, and partnered institutions can lend without collateral. The transparency of the protocol’s fund direction and retention is extremely low, and users may not even know the amount of funds lent out and the borrower. Depositors face a significant risk of institutional default and low fund security. For example, Goldfinch in the RWA track experienced two security issues from September to October 2023. Goldfinch is already a relatively cautious protocol in terms of borrowing in the track, but there are still many deficiencies in borrowing information and disclosure. As can be seen, lending protocols aimed at institutions seriously lack transparency and carry a significant risk of institutional default, so the TVL of the track has always been at a lower level.

5.2.Competitive analysis

5.2.1 Aqua

Native’s new product, Aqua, is highly innovative in its product logic. Aqua contains the characteristics of both a decentralized exchange and a lending protocol, which creates a new cooperation paradigm for market makers and liquidity providers. The funds deposited by the liquidity provider will be stored in the Aqua contract, and market makers can use the funds in the Aqua pool for market making after over-collateralization. When the market maker conducts a transaction, the market maker settles with the funds in the Aqua pool. This is equivalent to having a long and short position in the pool (instead of lending the funds out of the contract for market making), and the market maker can simultaneously perform reverse operations on centralized exchanges to earn the transaction spread.

Traditional lending protocols like Compound and AAVE mainly lend for users to increase leverage, shorting, and interest rate arbitrage. They need sufficient market volatility and other factors to create lending demand, such as market rebound leading to an increase in stablecoin interest rates and Ethereum staking income improving ETH deposit returns. Compared with Compound, the funds deposited by users into Aqua have more lending demand and higher returns. And the interest rate of lending protocols is often affected by market volatility, while the demand of market makers is more stable. That is, the income of users is relatively stable and sustainable. From beginning to end, the user’s funds are always in Aqua’s contract, and market makers are all over-collateralized with transparent positions. Compared with transferring funds directly to market makers or institutions, the security of Aqua’s lending mode is significantly enhanced.

Market makers can open more positions simultaneously by settling through Aqua, thereby maximizing their capital efficiency compared to direct lending. Through collateralization, they can access liquidity on multiple blockchains. This greatly diversifies the market-making scenarios available to them and represents an innovative product in DeFi. Private market makers use the liquidity deposited by users. By employing the RFQ mechanism, they can offer stronger quotes per unit of liquidity than automated market makers. This could disrupt the current dominance of the automated market maker mechanism in decentralized exchanges.

5.2.2 Native & NativeX

In cross-chain trading aggregation, NativeX’s 24-hour transaction volume of 3.5 million US dollars is already at the forefront of this track (overall ranking 12 among aggregators), with trading volume second only to Jumper Exchange in this track. Jumper Exchange, developed by LI.FI, has received $5.5 million and $17.5 million in financing in July 2022 and March 2023 respectively, with the seed round led by 1kx, making it the strongest contender in this track. As a new fund invested by Binance, Nomad has a good reputation in the DeFi field, and Native is already top-tier in terms of financing background.

The product logic of cross-chain trading aggregation is relatively simple. The protocol aggregates more liquidity sources from cross-chain bridges and decentralized exchanges, and cooperates with some private market makers to provide more sources of liquidity. Finally, cross-chain trading aggregation synthesizes quotes and selects the optimal solution for traders, providing a more convenient and efficient trading experience. Similar to NativeX, LI.FI’s promotion method is mainly to integrate with websites of other protocols. LI.FI has launched a pre-built user interface component tool. Projects can integrate Jumper Exchange’s swapping service into their own websites, achieving one-stop cross-chain trading aggregation services.

Since its launch in April 2023, as of March 19, 2024, Native has aggregated 3 million transactions and $2.45 billion in trading volume. LI.FI has currently aggregated 5 million transactions and $4 billion in trading volume. Native, which was launched later, currently has total trading data of about 60% of LI.FI, and its daily trading volume of $3.5 million is about 53% of LI.FI.

Figure 5-2 LI.FI aggregated data

Currently, NativeX supports 10 EVM chains. Although the number is less than LI.FI, NativeX already supports most important EVM networks and is rapidly expanding to other networks. From the data point of view, NativeX is already at the top level in cross-chain trading aggregation.

Figure 5-3 LI.FI multi-chain liquidity

Summary: Native’s product NativeX is already at the top level in the cross-chain trading aggregation track and has a high market competitiveness. However, overall, cross-chain trading aggregation still belongs to a niche track with lesser overall demand. Its new product Aqua has many innovations. It uses a unified pool to manage funds, and market makers use Aqua pool liquidity to settle transactions. It not only greatly increases the capital efficiency of market makers and helps them gain liquidity on more blockchains, but also ensures the safety of users’ funds as much as possible.

6. Risk

1) Code risk

Native’s code is audited by Salus, Veridise and Halborn, and its immune fi bounty program is about to go live soon. However, there still exist code risks.

2) Delayed Liquidation

Aqua’s liquidation is carried out regularly by whitelist liquidators. If the market maker has obvious token exposure and encounters extreme market conditions, there could be a possibility of delayed liquidation causing losses for liquidity providers.

Disclaimer：

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