Usher in a second spring with Arbitrum? Comprehensive analysis of Trader Joe's business status, token model and valuation level

Trader Joe's core strengths lie in its tenacity, excellent delivery capabilities and innovative core team. Good product experience and innovation in liquidity order books have led to rapid user growth. Arbitrum is currently the main engine of its business growth.

Written by: Mint Ventures

1. Report Highlights

1.1 Core investment logic

Trader Joe's core strengths lie in its tenacity, excellent delivery capabilities and innovative core team. Good product experience and innovation in liquidity order books have led to rapid user growth. Arbitrum is currently the main engine of its business growth.

Although the fierce competition in the Dexs track is still going on, it means that each project in the track has no strong bargaining power for traders and liquidity providers, and most projects are operating at a loss or with small profits. This kind of market The competitive situation is difficult to improve in a short time. However, due to the dual cyclicality of the encryption market and the Dexs track, projects represented by Trader Joe are still expected to outperform the market in the bull market.

1.2 Main Risks

Mainly due to fierce competition. Avalanche, the base camp market, faces ecological shrinkage and competition from Uniswap v3. Arbitrum, as the current main growth market, is still in the stage of low prices and subsidized swaps. The growth of transaction volume and handling fees is still unstable. Rely on the business volume brought by event-based projects.

1.3 Valuation

At present, Trader Joe enjoys a higher valuation than similar projects in multiple indicators of PF, PS, and PE. See 4.2 Valuation Level for details.

2. Basic information of the project

2.1 Project business scope

Trader Joe is a comprehensive DeFi project. Its business includes spot Dex, decentralized lending (Banker Joe), NFT trading platform (Joepeg) and launchpad (Rocket Joe). Trader Joe's current trading operations span Avalanche, Arbitrum, and BNBchain. Among them, spot trading is the current core business of Trader Joe, and it is also a relatively leading business segment.

2.1.1 Spot Dex

As its current main business, Trader Joe's spot Dex business has carried out many product mechanism innovations, which are embodied in its V2 product - Liquidity Orderbook (LB for short).

The liquidity order book is actually a re-innovation of the centralized liquidity concept of Uniswap V3. In essence, it is a combination of the two mechanisms of "order book" and "liquidity pool".

a. Order Book: Collection of Bins

LB introduces the price range unit "Bin" on the basis of concentrated liquidity. A Bin (flow box) represents a range full of liquidity.

Bin distribution and Bin trading volume of AVAX-USDC trading pair on Trader Joe

The width of the Bin of each liquidity pool is fixed and equal, and the difference between the Bins is called "Bin step". For example, the Bin step of the AVAX-USDC trading pair in the above figure is 20BP=0.02%. The Bin step of the Pool of each transaction pair is a parameter that can be set by the creator, so Pools with different Bin steps can be initiated for the same transaction pair.

Trader Joe's Bin is similar to the price of pending orders in the CEX-based order book matching mode, and the Bin step is the smallest unit between the prices of pending orders in CEX.

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Binance’s order book status for the Avax-USDT trading pair

Therefore, Trader Joe's Dex is a custom order book with the width of the Bin as the pending order trading unit.

b. Liquidity: Bin capacity

The mechanism of Uniswap V3 is to concentrate liquidity in a price range in the form of X*Y=K (constant product), while Trader Joe disperses liquidity into Bins with equal width price ranges. The liquidity conforms to the P·X+Y=K (constant sum) equation (here P=Y/X), and each Bin is a liquidity pool, which becomes the smallest unit of liquidity management.

Although the concept of centralized liquidity is also adopted, the core innovation of the Bin-based order book model compared to Uniswap V3 is that its liquidity is aggregated vertically in each Bin, while the liquidity of V3 is distributed horizontally. Heterogeneously stacked together vertically.

In simpler words, Uni v3's LP is an independent whole, based on the spanning price range and liquidity volume composition, directly stacked together; while LB splits liquidity into different The price ranges are stacked vertically, and the liquidity in the same Bin range is homogeneous.

Structure comparison of Uni V3 and LB liquidity, the vertical axis is liquidity, the horizontal axis is price, and different color blocks represent different users

Source: Trader Joe V2.1 Documentation

Based on Bin's vertical aggregation of liquidity, LB's liquidity token follows a standard similar to ERC1155. Before introducing the characteristics of LB's liquidity token, let's make a brief introduction to the ERC1155 token standard.

ERC-1155 was developed by Enjin, which solves the problem that the same token smart contract can only support homogeneous tokens (ERC20), or can only support non-homogeneous tokens (ERC721), ERC-1155 tokens The contract can support both homogeneous and non-homogeneous tokens in a token contract. In the ERC1155 contract, each token is marked by its ID instead of the contract address standard, which means that the contract can manage multiple ID tokens, under the same ID, may be many homogeneous tokens, or a single non-homogeneous token.

The most common application scenario of ERC-1155 is the game, because the game system contains a variety of homogeneous tokens and a variety of non-homogeneous tokens.

LB adopts a method similar to ERC-1155, utilizing the idea of its ID system, specifically:

• The LB liquidity tokens in the same Bin are homogeneous. Homogeneous liquidity tokens can firstly reduce gas consumption, and secondly provide a convenient way for the calculation of handling fees in the agreement and the lightening of the complexity of the entire accounting system. possibility
• Different Bins have different IDs, which are used to distinguish the homogeneous liquidity within different Bins
• The combination of 1 and 2 allows LB LPs to easily adopt more complex strategies to allocate their own liquidity and achieve various purposes

As shown in the figure below, Trader Joe provides a wealth of LP deployment options to meet user needs:

Image Source: Trader Joe Documentation

In addition, Trader Joe's LB features include:

• Before the liquidity in the same Bin is exhausted, the price of the transaction remains unchanged, so the advantage of transaction quotations makes it easier to capture the trading volume from the route, and of course this also magnifies the impermanent loss
• Introduced a variable fee rate, that is, the greater the price volatility of the token, the higher the transaction fee rate, and the impermanent loss of LP is compensated by increasing the transaction fee income
• Better composability, compared to Uni V3's LP vouchers using the ERC-721 NFT format (harder to be integrated by ERC20-oriented Defi), LPs based on Bin-based liquidity order books are similar to ERC-1155 In theory, this makes its LP certificates more similar to homogeneous ERC20 tokens, so it has better composability.

c. Scenario of liquidity order book

The convenient market-making and pending order strategies and easy combination based on Bin allow other projects and users to try more methods based on liquidity order books.

• The project party's attempt

"White Lotus", which was launched on May 9th, used Trader Joe's order book model for token sale and Ponzi mechanism operation:

1. The total supply of the project token LOTUS is 30,000,000 tokens, and sales of uniform orders are carried out through the Trader's JOE pool. The starting price of the Bin where the first token is located is $0.20, and the price of the Bin where the last token is located The ETH used by users to purchase LOTUS will be locked in the pool as liquidity. The pending order interval of LOTUS Bin is 5 Bins, and the specific distribution of pending orders is as follows:

Image source: White Lotus Documentation

2. When users sell LOTUS, a 10% tax will be levied, 8% of which will be permanently destroyed to cause token deflation, and the remaining 2% will be used to reward LOTUS pledgers.

3. LOTUS has an automatic liquidity rebalancing mechanism. Every time the price moves by 5 Bins, liquidity rebalancing will be automatically performed, and the ETH liquidity in the pool will be redistributed as follows:

a. 10% of the ETH in the pool is used as "direct trading liquidity" and arranged in the Bin adjacent to the current active price, which is convenient for users to trade in the current price range.

b. Calculate the "guaranteed floor price" of LOUTS from the total ETH value/LOTUS, and put all the remaining 90% of ETH in the Bin with the guaranteed floor price for pending orders. The floor price can accept the sale of all LOTUS circulating tokens at any time.

After a certain rebalancing, the liquidity pending orders of LOTUS are as follows:

c. Under ideal circumstances, due to the limited total amount of LOTUS, with the token burning and reserve price increase brought about by the transaction, LOTUS has the power to spiral upward.

However, White Lotus failed soon after its launch due to many reasons (the trading pools built by other users did not contribute handling fees and burning, the vacuum between centralized liquidity and reserve prices was too large), but the imitation disks launched after it were as follows: Jimbo and others have also adopted Trader Joe's liquidity order book as the bottom layer of their mechanism.

• User's practice

LB's convenient market-making experience has also received a good response on the user side. After the airdrop of ARB tokens in March this year, the transaction volume on the chain remained high. Uniswap V3, which landed on Arbitrum early, naturally obtained the largest liquidity and transaction volume, but Trader Joe also relied on LB's product experience + market-making rewards at that time Operational activities became Dex, which generated ARB's second largest transaction volume at that time, and once accounted for 45% of ETH-ARB transaction volume.

In addition, Trader JOE v2 is also very suitable for asset selling and bargain hunting through the “Cost Averaging (DCA)” through its pending order function. For example, the user has a demand and wants to sell 100 ETH to take profit as the price rises in the price range of around 2000-2500 US dollars, and hopes to sell more positions at a higher price, and finally at 2500 US dollars Close all left and right, which is a variant of the Cost Averaging (DCA) closeout strategy.

This demand is easily realized through LB V2. We only need to deposit 100ETH on one side, set the selling range (2000-2500), and choose the Bid-Ask mode (the amount of pending selling orders increases with the price), that is This requirement can be easily realized.

As shown below:

Conversely, if you want to buy 100,000 USD worth of ETH at a price of 1300-1800 USD, as the price drops, and complete all purchases around 1300, this is a variant of the Cost Averaging (DCA) position building strategy. We only need to click Deposit 100,000 USDC, set the buying range (1300-1800), and select the Bid-Ask mode. When ETH falls to this range, the position will be automatically completed, as shown in the figure below:

In general, Trader Joe's liquidity order book is based on the Bin and order book model, which lowers the management threshold for centralized liquidity on the LP side, and this convenience also provides more abundant trading and market-making strategies.

In addition, among the many Dex surveyed by the author, Trader Joe's product interaction experience ranks among the best, specifically including:

1. Simple and beautiful UI design and intuitive and easy-to-understand page layout, even new users are easy to use
2. The data dimensions of order pool and pledge amount are rich, detailed, and easy to understand. I think this is very important for DeFi financial products. The real-time and transparency of business data is one of the main characteristics of DeFi products compared to TradFi. However, the data Visualization is equally important

2.1.2 Lending: Banker Joe

Banker Joe is a lending product released by the project party in 2021, forked from Compound and Cream. At the peak of its online business, it once had a TVL of 1 billion US dollars. However, the deposit funds of the lending business have shrunk to about 10 million US dollars. The contribution to the operation and profit of the project has been very small, and it is not currently the focus of the project's development.

Current Banker Joe business data, source:

2.1.3 NFT transaction: Joepegs

Launched in April 2022, Joepegs currently supports NFT transactions on Avalanche and BNBchain, but judging from the transaction volume, the NFT transaction volume on the two chains is not high.

Joepegs' Avalanche NFT trading volume, the largest trading volume of the NFT series, the total trading volume of 7 days is 902AVAX (about 12,600 US dollars), and the volume of BNBchain's NFT with the highest trading volume last week was only 37.9BNB (about 11,470 US dollars).

The business of the NFT sector also contributes little and is a marginal business (but the project party is still actively promoting it). In addition, Trader Joe also launched the launchpad module Rocket Joe in early 2022, but now the business has basically stagnated, and the last co-launched project was CHRO in June 22.

2.2 Project History and Roadmap

The following are important events since the Trader Joe project was launched, as of mid-May 2023.

Time event 2021.6 On June 1, the project was officially announced, the Trader Joe contract code was open sourced in the second half of the year, and the project was officially launched at the end of June. 2021.9 Received a strategic investment of 5 million US dollars, led by Defiance Capital, GBV and Mechanism Capital, other investors include Three Arrows Capital, Coin98 Ventures, Delphi Digital, Avalanche Foundation and Aave founder Stani Kulechov, the financing valuation is 5000 million dollars. 2021.10 The lending product Banker Joe was launched. Banker Joe forked from Compound and Cream, and used Chainlink oracles for asset quotations. 2021.10Trader Joe and Avalanche jointly launched a liquidity mining plan worth 20 million US dollars, each providing 10 million US dollars for Joe and 10 million US dollars for Avax. 2022.1 The launchpad product Rocket Joe will be released. Users who have pledged Joe tokens will continue to receive rJOE points as a condition for participating in the launchpad. 2022.2 The economic model revision, Staking V2, was released, and the veJoe model was introduced. veJoe is generated based on Joe's pledge. The longer the pledge duration, the more veJoe, and veJoe is used to accelerate the user's liquidity mining income. 2022.4 Launch the NFT trading market Joepegs. 2022.8 Release the V2 white paper and launch the Liquidity Book (liquidity book) strategy. This solution is similar to Uni V3's centralized liquidity solution, except that "bin" is used as the unit of the price range, and a dynamic rate mechanism is introduced to increase currency LP fee income during periods of large price fluctuations. 2022.11Liquidity Book (V2) is officially launched. 2022.12 Trader Joe deployed to Arbitrum. 2023.1 Announced the plan to deploy Trader Joe and Joepegs to BNBchain, which will be completed by the end of March. 2023.1 Preview of Trader JoeV2.1 features, including incentive plan based on liquidity order book, automatic liquidity management function, limit order and permissionless liquidity order pool. 2023.1 The token model has been adjusted again. The new content includes Joe's native multi-chain deployment, sJoe's application on Arbitrum and BNBchain, veJoe's reward acceleration function in the liquidity order book, and the deprecation of rJoe. 2023.2 Announced cooperation with Layer0 to turn Joe into a native multi-chain token. 2023.4Trader JoeV2.1 version is officially launched.

2.3 Team situation

The Trader Joe team is anonymous, with @cryptofishx and @0xmurloc being its two co-founders. Among them, @cryptofishx is a full-stack engineer with extensive work experience in the Web3 field. He has been a contributor to @throwsnowballs, @Pandaswapex and @sherpa_cash on Avalanche. He has also worked at Google and a decentralized Worked on a derivatives exchange.

Not long ago on May 13th, @cryptofishx also emotionally reviewed his experience in the 17-18 bear market on twitter. He was a doctor at the age of 30 and lost all his profits in the bear market and 2/3 of the capital, used business time to learn programming and advanced mathematics, and obtained 2 related degrees in 2 and a half years and entered Google, then started Trader Joe part-time and achieved success .

On May 17th, @cryptofishx sent another emotional speech and pinned it to the top:

“When we first started Joe, I made a promise to myself that I would still be on the project 2 years later, because that’s when most projects die. Our 2nd birthday is coming up, and I think it’s very Happy to say: we're still here and building with the exact same energy as day one."

This may be an example of the founder still maintaining a good entrepreneurial state and having a lot of affection for the project.

Another co-founder of Trader Joe @0xmurloc disclosed less information. The public information only mentions that he is a full-stack engineer and product manager. The person in charge has a degree in electrical engineering from a reputed university.

The author also consulted the community staff of Trader Joe on the issue of team size, and the other party said that it is inconvenient to disclose relevant information for the time being.

In the fast-changing market competition and impetuous entrepreneurial environment in the encrypted world, the diligence of the Trader Joe team is still impressive. On the one hand, it is reflected in the fact that it has tried and implemented multiple product directions in just two years (Dex, Lending, launchpad, NFT trading platform), actively follow up the trends and demands emerging in the market; more importantly, they have carried out active native mechanism innovation on the core basic disk of Dex, and the design and experimentation of economic models Also very positive (see the “Token Model” analysis section for details).

2.4 Financing and important partners

According to public information, Trader Joe has only conducted institutional financing once, in September 2021 (3 months after the product was officially launched), with a financing amount of US$5 million and a valuation of US$50 million at that time. At the time, the financing was led by Defiance Capital, GBV and Mechanism Capital, with participation from Three Arrows Capital, Coin98 Ventures, Delphi Digital, Avalanche Foundation and Aave founder Stani Kulechov.

3. Business Analysis

3.1 Industry Space and Potential

Dexs is a track that the author and Mint Ventures have been paying attention to and tracking for a long time. It has been analyzed in the past special research report on Curve and the track research report on the ve(3,3) project. Spot trading is an encrypted business scenario with the largest number of users and the most frequent exchange of funds. According to DeFillama data, the total 24-hour trading volume of Dexs is 2.27 billion US dollars, accounting for 14.75% of the total encrypted spot trading volume. : The business status, ecological development, moat and valuation comparison of the top liquidity market" (written in February 2023) The statistical data in the research report has increased by nearly 100%.

Data Sources:

In addition to spot transactions, the business of Dexs track itself also has a liquid procurement business. Most of the representative projects operating this business adopt the ve token model (representing the Balancer project) pioneered by Curve, or further develop based on the ve model. Modified ve(3,3) model (representing project Velodrome). If you only look at the bribery revenue of the liquidity procurement business (referring to the bribery fees paid by other project parties to purchase liquidity in Dexs), you will find that this part of the income seems to be much higher than the spot transaction of Dexs, but if the ve class Dex itself Token incentives are regarded as "liquidity procurement costs", and bribe income is regarded as "liquidity sales income", so most of the Dex operating this business are currently at a loss (here does not consider the direct purchase of token pledges) “indirect income” from governance rights).

PS：

1. The statistics and calculation time of the above data is 2023.5.5, and the data marked in yellow are estimated values. The original text comes from the Mint Ventures research report "From Velodrome to Chronos, ve(3,3) has made a comeback, it is better Dex mode?》

*2. The basic data sources used for calculation are mainly official disclosure and Defillama. *

*3.Curve and Balancer's bribe income, using bribe data from Votium, Hiddenhand and Votemarket. *

*[Profit and loss] here refers to income (handling fee + bribe) - liquidity emission incentive

The impetus for the growth of the Dexs track, in addition to the increase in the overall asset size of the encrypted business world, also includes several key points:

• The loss of users' trust in centralized institutions and the increase in demand for asset autonomy
• The composability of the DeFi ecology where Dex is located greatly improves the capital efficiency and freedom of users
• Most of the native Web3 projects choose Dexs as the first stop for trading and arranging liquidity

But on the other hand, Dexs, as the clearest and most basic business model track, has already entered the Red Sea competition stage. Uniswap V3 at the head continues to provide free services, while other improved versions based on various micro-innovations emerge in endlessly, and the token subsidies of various Dexs are far from stopping. After the subsidies are included, the entire industry is suffering losses A state of fierce competition.

To get out of this state, in addition to looking forward to the business growth brought about by the recovery of the encryption market, what is more important is whether Dexs can find a way to build a solid barrier and start to realize profitability.

3.2 Business Situation

In this section, the author will conduct statistics and analysis on Trader Joe Dex’s business data such as TVL, transaction volume, handling fee\income, and number of active users. However, due to the low business volume, the loan and NFT business have little impact on the fundamentals of the project. No specific analysis here.

3.2.1TVL

At the peak of Trader Joe’s last round of bull market, the TVL was as high as 2.6 billion US dollars, but as the market entered a bear market, liquidity was rapidly lost. Currently, the TVL of Dex (total of V1, V2, and V2.1) is about 110 million US dollars.

Trader Joe's TVL composition, data source:

Among them, Avalanche accounted for 65%, Arbitrum accounted for 33%, and BNBchain accounted for 2%. Judging from the TVL trend in the above chart, the liquidity of Trader Joe's in Arbitrum continues to rise, while that of Avalanche decreases accordingly.

V1 TVL trend, data source:

V2.1 TVL trend, data source:

Looking at Trader Joe's V1 and V2.1 data, you will find that V1 has been in a slow decline this year, while V2.1 has increased rapidly. The main source of the data increase is also the growth of Arbitrum's business volume.

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V2.1 TVL composition, data source:

Let's look at the token composition in V2.1TVL in detail, and we will find that in addition to the common mainstream tokens such as ETH, the tokens of White Lotus, a project that uses Trader Joe's order book as the liquidity order mechanism mentioned above, ranks first. Second, it accounts for 16.66% of the total liquidity.

3.2.2 Transaction Volume & Fee

Data Sources:

In terms of trading volume, Trader Joe’s reached a one-year high in late March this year when the market was relatively active (it was also the most active trading period after the Arbitrum airdrop at that time), and its weekly trading volume was 688 million US dollars at that time.

Data Sources:

But during the same time period when trading volume returned to new highs, Trader Joe's fee income was far below the fee income at the peak last year. The weekly fee income for the week at the end of March was 21,000 US dollars, less than 1/10 of the weekly fee income of 260,000 US dollars at the peak in June last year.

The reason for this is that since Trader Joe’s V2 went live in November last year to April this year, Joe’s has allocated all of the V2’s handling fees to LPs. It was not until the recent launch of V2. To Joe's pledger. In addition, the agreement income of different protocols such as Curve = 50%* handling fee, and the agreement income ratio of Trader Joe has many modes, among which:

V1: 0.05% for all transactions as protocol revenue

V2: No agreement fees are charged, all agreement fees are allocated to LP

V2.1: Different LB pools charge different rates of protocol fees, ranging from 0-25%. For example, in the JIMBO/ETH pool shown below, the basic fee rate is 0.8%, and the upper limit of the dynamic fee rate is 2.4875%. 25% as agreement fee

After the launch of V2.1, Trader Joe's agreement income/total handling fee ratio started to rise again after bottoming out in March this year (0.62%). Currently, agreement income as a whole accounts for 9.57% of the total handling fee.

Data source: /revenue-share

In order to have a general understanding of the protocol fee design of Trader Joe's V2.1, the author makes statistics and compares the protocol fee rates of several LB Pools with large transaction volume on the Trader Joe's chain, as follows:

Statistics time: 2023.5.26

From the above table, we can see that the current negotiated rate pricing strategy adopted by Trader Joe is:

• Focus on the development of the Arbitrum market, and adopt the strategy of reducing or exempting the agreement fee
• Mainstream stablecoins basically adopt a free strategy, only earning business data (transaction volume and TVL) and not making money
• BNBchain business is basically negligible, so fees are charged normally
• Charge higher fees for new projects, especially those designed based on LB mechanism (such as JIMBO and LOTUS)

3.2.3 Active users

Data Sources:

Since the deployment of V2.1, the number of active users of Trader Joe has increased significantly, reaching a new high since the birth of the protocol. Recently, the number of daily active addresses is 18,000, and the number of weekly active addresses exceeds 80,000 (Defillama data is 110,000). The number is nearly 200,000. The continuous growth of C-end users should be attributed to Trader Joe's good product interaction experience.

3.3 Project Competition Landscape

From the current point of view, Trader Joe takes Avalanche as its main business base and focuses on the business expansion of Arbitrum, which will also be its main source of business growth in the future. We'll focus on Trader Joe's market share on Avalanche and Arbitrum.

3.3.1 Avalanche

Avalanche was one of the fastest-growing L1s in the last bull market, but during the bear market, its market share in both TVL and transaction volume continued to decline. The TVL accounted for 9.8% in the peak period fell to the current 1.51%. The volume ratio dropped from 9.84% to the current 1.19%.

Avalanche transaction volume market share, data source: /chains

On Avalanche, Trader Joe was established and developed earlier, and has obvious advantages in both TVL and transaction volume.

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Data source: Defillama, PS: The calculation of the proportion is based on the total amount of the top 5

Statistics time: 2023.5.26

It is worth noting that in March this year, the University of Michigan Blockchain Association, a governance member of avalanche labs and Uniswap, initiated a proposal to deploy V3 to Avalanche, which was passed on March 19. According to the estimate at the time, The deployment time takes about 5 weeks, which also means that Uniswap V3 should soon land on Avalanche, bringing direct competitive pressure to Trader Joe.

3.3.2 Arbitration

Arbitrum is the fastest-growing L2 ecosystem in the past year, second only to BNBchain and Ethereum in terms of TVL and transaction volume (excluding Tron). A more active ecology also means more intense competition. There are many DEX projects on Arbitrum, including Uniswap V3, Curve, and Balancer, which were deployed across chains earlier, as well as native DEXs such as Camelot, Chronos, and Ramses.

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Data source: Defillama, PS: The calculation of the proportion is based on the total amount of the top 8

Statistics time: 2023.5.26

Although Trader Joe's currently ranks low on Arbitrum's liquidity, the following stats are worth noting:

• Capital efficiency (VOL/TVL) is very high: it is the highest among the top eight DEXs, even much higher than Uniswap V3, which also uses centralized liquidity

• Except for Chronos, which was launched in early May, Trader Joe is the only Dex whose TVL has increased significantly month-on-month in the past month, and this growth trend has continued for nearly 6 months

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Data Sources:

Trader Joe's Arbitrum TVL growth trend, data source:

The driving force of Trader Joe's TVL growth on Arbitrum, I think, is mainly:

• The introduction of the LB mechanism is more friendly to LPs, and the gradual increase and mutual reinforcement of market-making funds + trading volume
• The emergence of new assets has aroused users' enthusiasm for market making and trading (see the three red circles in the above picture for details), and Trader Joe's LB mechanism has better attracted and undertaken this part of funds and users

Among them, the first point is the basic disk of growth, and the second point, as an event-driven factor, promotes the pulse-like growth of Trader Joe LB products. The three red circles in the above figure are three driving events, all of which promote the rapid increase of Trader Joe's TVL and trading volume, but the logic behind them is slightly different:

a.ARB airdrop event

ARB’s airdrop on March 24 this year created a large amount of on-chain transaction volume, and the early expectation of this transaction volume also triggered a large number of users to participate in the market-making of ARB tokens, with different motivations, both promising Those who obtain service fee income through market making also hope to sell ARB or buy bottom ARB through the variant DCA average cost method while obtaining service fees through market making (for logic details, see: 2.1.1-C. Liquidity order book scene). On the one hand, Trade Joe has a more convenient market-making and pending order product experience than Uni V3, and has introduced more LPs; on the other hand, it has also increased its own Liquidity Book Rewards Program (liquidity order book reward program) The capital investment made ARB’s transaction price more dense and dynamic market-making funds appeared, which greatly reduced the transaction slippage, which allowed Trader Joe’s LB Pool to have a transaction volume exceeding Uniswap V3 in ARB-ETH transactions (This in turn boosts the LP's market-making APR).

One week after the ARB airdrop (Epoch3), Trader Joe provided 175,000 JOE token rewards for ARB’s LB market-making LP

* The liquidity order book reward plan is a dynamic reward plan for LPs by Trader Joe, which is similar to a flexible marketing activity. The author will introduce it in the token model section.

b.LOTUS and JIMBO release

LOTUS has been introduced in the previous article. It is a Ponzi DeFi project based on Trader Joe for token issuance and price stabilization. JIMBO is an improved version of Fork based on LOTUS (there are two versions, and the transaction volume ranks first in the figure below. is the V2 version). On the one hand, these two products have brought huge TVL growth to LB (because the ETH and bottom funds it raised are kept in LB), on the other hand, they also created a large trading volume and Fee income. As shown in the figure below, on May 25, the 24-hour trading volume of JIMBO reached 20 million US dollars, and the liquidity reached 16 million US dollars, while the current liquidity of LOTUS still has 13 million US dollars.

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Image Source:

The Ponzi attributes of LOTUS and JIMBO may determine the limited life cycle of the project. The transaction volume around such projects is often pulsed and lacks good sustainability.

For example, the LB Pool of JIMBO V2 had a single-day transaction volume of 18 million US dollars after the project was launched, and quickly dropped to 2.7 million US dollars the next day.

Nevertheless, their interesting attempts based on Trader Joe's LB mechanism and good fundraising results may lead to more projects building their own liquidity based on LB or designing more imaginative gameplay, thus bringing Trader Joe More TVL and transaction volume, but the sustainability of the incremental transactions and liquidity created by these new projects remains to be seen.

3.4 Token Model Analysis

3.4.1 The total amount of tokens, distribution and release speed

Trader Joe's token is JOE, the total amount is capped at 500 million pieces, and it will be unlocked in 30 months. The distribution ratio of JOE tokens is as follows:

According to the official unlocking conditions, as of May 27 this year, the amount of unlocked tokens out of the 500 million total should be about 488 million:

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Data Sources:

However, according to the official circulating supply data, the actual amount of tokens in circulation is about 340 million, and other unlocked and uncirculated JOEs are basically in a pledged state.

It is worth mentioning that, unlike most other DEX or DeFi projects that still maintain high incentive emissions, Trader Joe’s normal liquidity incentive emissions are already very low. Currently, the daily emission of JOE tokens is only 850 pieces (worth about $300), which is close to 0. After deducting the tiny emissions incentive, Trader Joe's has posted positive profits for five consecutive weeks.

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Trader Joe Profit Chart, Source:

This does not mean that Trader Joe no longer incentivizes liquidity, but that the team adopts a phased, short-cycle, and flexible regulation incentive method around the LB mechanism, that is, "Liquidity Book Rewards Program (Liquidity Book Rewards Program) ", the incentive objects of this plan are LPs who make market in a specific LB Pool (for example, during the ARB airdrop period, the incentive pools are ARB-ETH and ARB-USDC). Different from the regular liquidity incentive scheme, this scheme has the following characteristics:

• Adopting the point-to-point PK system, the calculation object of points is not liquidity or trading volume, but "the market-making fee obtained by LP during the activity", which means that LP needs to provide sufficient liquidity in order to obtain rewards. At the same time, it is necessary to adjust the liquidity range in a timely and dynamic manner, so that one's own liquidity can be as close as possible to the price range with intensive transactions
• Do not engage in sunshine, users want to get rewards, they need to ensure that their transaction fees capture more than 1% of the total pool, and then they can participate in the distribution of rewards
• The cycle is short, with weeks as the unit of activity, so that the plan can be flexibly and continuously adjusted according to market changes and hot spots, and continuously reduce the "cost-effectiveness ratio" of subsidies

In my opinion, this is a token incentive scheme based on a centralized liquidity mechanism that better balances liquidity and trading volume.

3.4.2 Token use cases

The Trader Joe team explored JOE use cases in multiple dimensions, including:

• Pledge dividends: Pledge JOE for dividends, which can be withdrawn at any time. The source of dividends is 0.05% of the transaction volume of V1 AMM, and the agreement fee sharing of V2.1 LB pool. In the early days, the pledge certificate of JOE was xJOE, the dividend token was JOE, and later changed to sJOE, and the dividend asset was USDC. Pledge dividends are currently the main pledge use of JOE.
• Pledge acceleration: Pledge JOE to get veJOE, which is also available at any time. veJOE is used to accelerate (Boost) the mining income of LP of V1 AMM. The amount of veJOE is related to two factors: 1. The amount of pledged JOE; 2. The amount of pledged veJOE Accumulative time. Accumulative time refers to the time when the pledged JOE is not taken out. The longer the time, the more veJOE corresponding to the pledged JOE, and the higher the reward acceleration. However, once withdrawn, veJOE will be cleared. However, when V1 AMM has fallen behind, the liquidity rewards for V1 AMM are already very meager, and veJOE is basically just a formality.
• Lanuchpad Quota: Pledge JOE to obtain rJOE, and rJOE corresponds to the investment quota for participation in launchpad. However, the rJOE mechanism has been canceled in January 2023.
• Participation in governance: Although JOE is the governance token of the project, the current governance authority of the project is very limited. The basic parameters of LB Pool are configured centrally by the team.

To sum up, the current main use of JOE tokens is to pledge dividends.

On the whole, the current design ideas of JOE's token economic model are: 1. Actively empower the economic capabilities of tokens, so that they can capture the main business cash flow of the project, or as a participation condition for core functions; 2. Low governance decentralization: The current product development route and product parameters are still controlled by the team. Although the team has made many attempts on JOE's economic model and value capture, it is still a simple pledge dividend model without too complicated design, which may not be a bad thing.

3.5 Risks

In addition to common industry risks such as smart contract security risks, regulation, and slow development of encrypted businesses, Trader Joe's biggest risk comes from the increasingly fierce competitive environment of Dexs.

On the one side of the Aavalanche network, the ecological growth of Aavalanche itself has stagnated and shrunk, which directly limits the growth of Trader Joe's trading volume. On the other hand, Uniswap V3 is about to be deployed to Aavalanche, which may further divert Trader Joe's trading volume.

On the Arbitrum network side, although Trader Joe’s liquidity and user volume are growing rapidly, hidden worries still exist:

• At present, low or zero fee rates are adopted for LB of many mainstream tokens. The fierce competition environment may limit the ability of subsequent platforms to charge and increase rates
• Both liquidity and transaction volume growth are driven by short-term events or projects with a strong Ponzi mechanism. It is doubtful whether long-term business retention and growth can be maintained. Especially the transaction volume. After the peak transaction volume brought about by the ARB airdrop, LOTUS and JIMBO releases, we all quickly observed a decline in transaction volume and transaction share.

On the BNBchain side, the current business progress is not smooth, and the growth of BNBchain itself has been very slow.

4. Preliminary value assessment

4.1 Five core issues

What operating cycle is the project in? Is it a mature stage, or an early and middle stage of development?

The Dexs track where Trader Joe is located seems to have matured, and Trader Joe's business form and products have also matured.

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

The track where Trader Joe is located is facing fierce competition, and each Dex currently has no obvious competitive advantage, including Trader Joe of course. But Trader Joe still has more obvious strengths, including:

1. Possess a team with excellent tenacity, delivery ability, innovation ability and operation ability;

2. Excellent product experience.

Investors and entrepreneurs are eager to participate in a track with solid barriers and strong natural monopoly, but the reality is that there are very few such tracks in the Web3 field. In an industry with insufficient barriers, the way for all teams to survive is to continue to strive for operating efficiency, the so-called "running a marathon at a sprint speed". The "operational efficiency" here includes some "major events", such as the design and correction of strategies based on the market environment, the innovation of core mechanisms and products, as well as small daily community operations, development work execution, and delivery speed. From the current point of view, Trader Joe is a tough team with very good operating efficiency in the Dexs blood sea competition.

**Is the long-term investment logic of the project clear? Is it in line with the general trend of the industry? **

The Dexs track is still the lowest infrastructure in the Web3 business world, and the track with the largest amount of funds and users. With the warming of the industry cycle, the long-term valuation of the track is still expected to rebound from the current bottom.

**What are the main variables in the operation of the project? Is this factor easy to quantify and measure? **

It's a tough competitive situation for Dex. At the quantitative level, we can track and observe the data on the project’s liquidity, transaction volume, and profit level to confirm changes in its market share. On the qualitative level, whether there are more new projects issuing and configuring liquidity based on Trader Joe's LB is a very important business observation point.

**How will the project be managed and governed? How is the DAO level? **

At present, the project has only opened up very limited governance authority, and it is still far away from community-based governance.

4.2 Valuation level

We use the vertical and horizontal comparative valuation method to observe the current valuation level of Trader Joe. The comparative valuation indicators used are the cost multiple PF (fee refers to the total cost of the transaction) and the revenue multiple PS (revenue refers to the agreement income). Due to the strong cyclicality of Dex, the reference value of the vertical valuation is not high, it is only used as an observation, and the horizontal valuation comparison is more comparable.

Vertical Valuation Level

The figure below shows the trend of Trader Joe's circulating market capitalization and fee multiple (PF). We can find that the valuation level and market capitalization level of Dex are very cyclical, similar to securities companies in the traditional financial field.

*PF value, time span: 2021.8-2023.5, data source: *

It is specifically reflected in the bull market cycle: the market trading volume is active, and the transaction fee is rising rapidly. Although the market value is also rising at the same time, the growth rate of the trading volume is significantly higher than the rising speed of the market value, which is finally reflected in the decline of PF, and the same is true for PS.

*PS value, time span: 2021.8-2023.5, data source: *

In the bear market, the transaction volume and protocol income shrank rapidly. Although the market value also fell simultaneously, the decline was slower than the decline in income, which was finally reflected in the rapid increase in fees and income multiples.

Horizontal Valuation Comparison

Among the many DEXs, we excluded projects such as Curve, Balancer, and Velodrome that also operate liquidity trading business in addition to trading, and chose Uniswap, Pancakeswap, Sushiswap, and Quickswap, which have more similar business models, to compare with Trader Joe.

• *

Data source: supply market value from Coingecko, fees and income from Tokenterminal, data time 2023.5.28

PS: The supply market value refers to the total market value of unlocked and released tokens, including the total amount of tokens that are unlocked but not yet in circulation, tokens in pledge and free circulation.

From the comparison of the above data, it can be seen that whether it is cost multiples, revenue multiples or profit multiples, the current market has given a relatively high valuation to Joe. This valuation premium relative to the market peers may come from the fact that Trader Joe's optimism about the resilience and innovative ability of the core team may be the expectation for the future development of the LB mechanism, and different people have different opinions.

4.3 Summary

Trader Joe's core strengths lie in its tenacity, excellent delivery capabilities and innovative core team. Good product experience and innovation in liquidity order books have led to rapid user growth. Arbitrum is currently the main engine of its business growth.

However, the fierce competition in the Dexs track continues, which means that each project in the track has no strong bargaining power for traders and liquidity providers, and most projects are operating at a loss or with small profits. This kind of market The competitive situation is difficult to improve in a short time. However, due to the dual cyclicality of the encryption market and the Dexs track, projects represented by Trader Joe are still expected to outperform the market.

Reference content

Midaswap: Joe V2: Maybe what the unfinished "Uniswap V4" should look like

Trader Joe Documentation:

Liquidity Book documentation:

Market capitalization data:

Liquidity, trading volume data:

Token unlock data: