Author just completed a grueling century bike event (103 miles, 1 mile elevation gain in the pouring rain), and busy recovering. Today we release an article we prewrote that shamelessly plugs a random protocol we’ve been advising for months. Don’t like it? Kindly find your way to the unsubscribe button below…
The Chain-Native DEX Hypothesis
One of our working hypotheses, based on our observations of trends in DEX development, is that each chain will naturally develop its own “native DEX.”
Ethereum mainnet is large enough of a prize that, even with Uniswap being dominant, Curve and others that gain traction on mainnet do good enough business that it’s not particularly worthwhile to over-invest into sidechains.
Curve for its sake aggressively deployed its DEX infrastructure to most major sidechains, which has yet to deliver a meaningful return relative to this investment of time. Even on chains Curve gets traction and sees competitive volume, these sidechains hardly account for a visible percent of the revenue Curve gets from mainnet.
There’s a reasonable case to be made Curve should simply ignore sidechains and keep its focus on mainnet, its bread and butter. We’re not here today to advance or refute this argument, but to contextualize it relative to the rise of Chain-Native DEXes. It can simultaneously be true that each L2 can be sufficient opportunity for a localized DEX to build a business, while also being too small an opportunity for an L1 DEX to chase.
With many people arguing that DEXes are a race-to-the-bottom competition ending in commoditization, it’s a bright spot for DEX innovation. New players can gain a foothold by building the native DEX for a particular chain.
As of Q2 2024, we observe an explosion of L2s, all of which need infrastructure. This demand can be adequately serviced by copy/pasting infrastructure from other chains. Or a DEX can thrive by planting their flag on a particular chain and owning it.
Think GMX on Arbitrum, Velodrome on Optimism… whereever a DEX is able to be extremely attentive to the needs of a particular chain, it will gain home field advantage and the thunderous applause of its local fan base.
Enter Firefly…
Firefly
Last year, I got a message from an anon crypto investor and longtime newsletter reader asking me to formally serve as advisor as he and his team were interested in building out a DEX.
Aside: I often get such messages that sit unread in my DMs, but I owed this particular gentledegen a debt of gratitude. He’d frequently interacted with my newsletter in its earliest days and helped steer it in the right direction. One example… in the early days I pretty much ignored 𝕏 (then Twitter). He’d convinced me on the merits of recapping my article in thread form. The idea worked well, and nowadays the the 𝕏 threads, even while siloed to the modest pro-Curve corner of the site, do better numbers than the Substack. So… I’m in his debt.
At the time their DEX was targeting to launch on ZKFair. Strategic considerations would eventually push the team towards Manta (more on this below), but the key principles stayed the same. Their concept very much aligned with my nascent thesis about the potent opportunity in launching chain-native DEXes.
In nearly any startup I’ve worked with (web2 or web3), I’ve learned that the target customer literally builds the product for you if you are onto something. You’ll easily be successful if you throw away your own idiotic opinions and simply ask your target customers their pain point. It’s an easy playbook for success, but most entrepreneurs are too egocentric to see beyond their own myopic ideas.
One Firefly core principle is extreme attention to their community.
This level of focus on the community has already had practical upshot. Our favorite story on this front is how user advice turned their $TIA / $USDT into their top traded pair on their nascent DEX:
One of the key ways they’re demonstrating this community focus is a new feature we’ve not yet seen on any other DEX, but one which could easily become a standard… 24/7 live chat support with real humans.
There’s all sorts of opinions on this level of customer service, but I always see it as a fantastic way to get unfiltered feedback from real users. Google famously goes toward the other extreme… outside of ad sales it’s almost impossible to connect with a person. Of course, Google is quite successful as a company, but we also tend to believe that since the long bygone Gmail era they’ve been unable to build a successful product
It’s something we’ve also often observed from YC startups, whose end user is generally VCs demanding big exits, and customers merely serve as a means unto this end. We’re not bashing here… the accelerator’s strategy has clearly been successful, and the breed of startups it yields are quite adept at growing quick and selling… but as an occasional end user I’ve come to expect a coarse customer experience and an overall lack of longevity when interacting with these companies.
Firefly has a disdainful stance towards VCs, a stance that resonates with our own particular biases (and a bias that nudged us towards Curve in the early days.) As Firefly was admitted to the Manta incubator, perhaps it may one day be forced to change its stance, but at least it will have the right attitude going into its ongoing airdrop…
The story of $JUP on Solana is a key part of their airdrop strategy. Firefly just launched their airdrop program, for which they’re earmarking a hefty amount to the community.
Airdrop farmers can get the full intel in the docs. It’s notably structured over a reasonably long window to avoid the mercenary farm-and-dump community.
In many other ways, Firefly has been architected in direct response to community feedback.
The DEX is a Uniswap v3 fork, with all the pros and cons that come therein. From our vantage point, this design choice appears to be motivated by responsiveness to user requests for CEX-like trading features. Firefly has layered on some key community-requested features to create a DEX that functions like a CEX. This includes order-book style trades (limit orders, take-profit orders) and some flexible features for LPs (single-sided or flexible liquidity).
All of Firefly’s code is open sourced and audited, so we recommend you give it a look.
The team are sharp, a web2 pedigreed group that’s made the jump over to web3.
Overall, the entire project is still relatively small for DeFi, just passing $1MM, but we expect this is likely to explode given their focus on Manta.
Manta
In probing our community, we’ve learned that literally nobody we know is interested in Manta, so we are fully prepared today’s article to go over like a lead balloon.
Part of this fact may be a function of geography, reportedly the chain is more popular in the East than the West, though our frens in the region cannot confirm this.
Others have a bad impression of the chain from their ill-fated airdrop (study $STONE). We lack too much context to corroborate or refute this, except to humbly observe that most chains (including Ethereum) have faced plenty of growing pains.
We’ve ourselves not used Manta, as we’re too lazy to have significant activity outside Ethereum mainnet. But we do recognize there appears to be a major opportunity here.
L2Beat ranks Manta Pacific as the 7th largest, with nearly $1 billion in total value.
Only about $200MM of this value has yet to find its way into DeFi, so the potential for growth is enormous. If Firefly catches just a piece of this…
Manta is a “modular” chain, which means transaction data is kept offchain via a partnership with Celestia. One might argue this makes the chain centralized, which would land it among the same company as… well… literally every other L2.
We may not relish the centralization of sidechains, but we also strive to be realists. We can’t ignore the fact that users are increasingly pouring activity and money onto L2s in spite of centralization concerns.
We’re not going to wade too far into any of the fierce ongoing debates here (we remain Ethereum maxis in all such debates), but in the spirit of realism, we can’t ignore that there’s a real and tangible cohort of the crypto community pushing “modularity.” We acknowledge this is a thing until it isn’t, so it’s worth us studying.
The modular nature of Manta is interesting… it’s very much faster and less expensive than other L2s. We know every new chain advertises this until they get big, and that it’s not the strongest argument while mainnet gas fees scrape 3 gwei, but we do believe that Manta’s advantage on this front may actually be able to persist with scale.
More on the modularity thesis…
Firefly has an ambitious referral program as part of their points program, but note that none of the links within this newsletter are so registered! We’re writing about this because we find it interesting and want to support our colleagues.
If you are similarly interested, here are some of said links to learn more:
Website: https://fireflydex.io/
Discord: https://discord.gg/fireflydex
Twitter: https://twitter.com/FireFlydexZK
Medium: https://medium.com/@fireflydex
Disclaimers! Author is an advisor to Firefly, and as such is likely to receive tokens via the airdrop despite our insufficiently Shermanesque request to the contrary. If so, we intend to donate any such proceeds directly to Leviathan News.