Team

The team behind Kwenta encapsulates the essence of decentralization. Comprising numerous individuals operating under pseudonyms, the diverse roles filled by the personnel are all pivotal to the protocol's management and development. Roles within the Kwenta's Discord team encompass admins, council members, core contributions, marketing, beta testing, and more.

This structure is profoundly rooted in the ethos of decentralization, whereby every individual has an opportunity to participate in various aspects of the project, including development, governance voting, and brainstorming, thereby actively shaping the future of Kwenta.

The democratization of involvement is one of Kwenta's unique characteristics. As a fully decentralized protocol, Kwenta's team composition is both fluid and open, encouraging participation from anyone. This approach fosters a vibrant and dynamic ecosystem driven by a global community of contributors, enhancing the robustness and resilience of the protocol. Thus, the team's track record is collectively nurtured by the diverse array of contributors, all of whom have a shared vested interest in the protocol's success.

Technology

Perpetual Futures on Kwenta

Kwenta uses an Automated Market Maker (AMM), which fills all orders at a skew-adjusted oracle price by leveraging the Synthetix liquidity pool.

Kwenta has a partnership with Synthetix, which provides the underlying protocol for managing liquidity and offering perpetual futures - or ‘perps’ - directly. Synthetix is working on evolving into a more versatile platform for hosting derivatives liquidity with Synthetix V3. This partnership allows Kwenta to focus on user experience and interface design, while Synthetix focuses on liquidity mechanisms.

Smart Margin v2

Kwenta's Smart Margin v2 (SMv2) revolutionizes the trading experience by offering advanced order types and a revamped futures UI / UX. It surpasses its competitors by improving transactional efficiency and supporting unique strategies.

SMv2 employs a "command" structure, breaking down multi-leg actions into individual commands for added flexibility and reducing downtime. It allows intricate strategies, from margin modification to submitting reduce-only limit orders.

The system also utilizes Gelato for conditional orders, which automates the execution of orders even under high network congestion, and allows traders to initiate a trade and place a stop-loss order in a single transaction.

SMv2 has expanded account authorization to include delegates, allowing them to trade on the account owner's behalf. Additionally, SMv2 integrates smoothly with external protocols like Aave, Uniswap, and Lyra, unlocking new possibilities like purchasing a call option via Lyra or transferring margin to Aave to generate yield.

With the increase in Total Value Locked (TVL), these innovations bring value to asset holders who participate in decision-making, positioning Kwenta as a launching pad for ecosystem innovation.

Trade Execution

Kwenta aims to provide a reliable execution rate but acknowledges that there can be occasional inconsistencies due to the decentralized infrastructure. They are actively working to improve reliability and explore options for additional scalability.

Use Case

Kwenta aims to solve several critical problems that plague the traditional trading and financial markets today, starting with lack of privacy, restrictive geographical limitations, and dependency on centralized entities. As a Decentralized Exchange (DEX) offering perpetual contracts, Kwenta brings the advantages of DEXs to derivative trading - a market with an enormous potential size.

The first problem Kwenta addresses is the lack of privacy and autonomy. Traditional trading platforms require extensive Know Your Customer (KYC) procedures, which not only take time, but also leave users' personal information vulnerable to breaches. However, Kwenta provides a platform on which traders can maintain their privacy and perform transactions without the need for KYC. Users have full control over their assets, trading directly from their Web 3.0 wallets without the need to entrust a centralized entity with their funds.

Secondly, Kwenta aims to break down the geographical barriers that are present in traditional financial markets. Centralized Exchanges (CEXs) often place restrictions based on users' locations, limiting participation and growth. However, Kwenta's decentralized nature allows anyone from any part of the world to trade without restriction, creating a truly global trading platform.

Kwenta's competitive advantage stems from its integration of the benefits of decentralization and the functionality of derivative trading. By offering decentralized perpetual contracts - a complex financial instrument that was previously only accessible through centralized platforms - Kwenta opens up the derivatives market to a broader audience. In addition, it benefits from the security and transparency offered by blockchain technology, and the platform's design allows it to bypass many of the limitations found in traditional financial systems.

The potential market size for Kwenta is vast, as it taps into the burgeoning DeFi ecosystem and the large derivatives market. Thus, Kwenta is ready to capture a significant portion of this market as traders continue to seek more efficient, transparent, and inclusive platforms.

Competition

Kwenta operates within a competitive landscape that includes both CEXs and DEXs offering derivatives trading. However, it is crucial to differentiate between its direct and indirect competitors.

Indirect competitors include centralized exchanges such as Binance and Bybit, which offer similar derivative trading options. However, after the collapse of FTX, the trust in centralized exchanges has significantly diminished, pushing many traders to the relative safety and autonomy of decentralized platforms. Therefore, while these CEXs technically offer similar services, their appeal has been tainted, and they do not pose a direct threat to Kwenta.

The direct competition for Kwenta lies within other perpetual DEXs in the DeFi space. These platforms share the no-KYC feature with Kwenta, leveling the playing field. However, several differentiating factors come into play, such as user interface and user experience (UI / UX), range and categories of tradable assets, trading fees, liquidity, funding rates, and leverage options.

In terms of UI / UX, Kwenta has excelled, offering a seamless user experience that is comparable to centralized platforms. Its partnership with Synthetix has allowed it to focus on enhancing the UI / UX while Synthetix manages liquidity. This symbiotic relationship not only simplifies processes but also provides a competitive edge to Kwenta.

Another notable advantage of Kwenta is its low trading fees. The platform underwent a significant upgrade - the Optimism Bedrock update on June 6, 2023 - which significantly improved this aspect.

In a bid to further differentiate itself, Kwenta has also developed tools such as an Aggregation Terminal. This tool allows traders to simulate trades on Kwenta and compare outcomes with other platforms, currently with GMX. This initiative serves to inform traders about potential opportunities and differences each protocol offers. With plans to incorporate more DEXs for comparison in the future, this tool underscores Kwenta's commitment to transparency and user empowerment.

Here is a list of all of Kwenta’s main competitors.

Tokenomics

In general, every token in circulation has either been purchased, generated through inflation, or has been utilized to stimulate product usage. KWENTA tokens offer additional benefits. They can be staked to receive inflationary and trading rewards, which are then locked for a period of one year.

A unique feature of this model is the burn-to-vest-early penalty system. This begins with a penalty of 90% and gradually diminishes to zero over the course of a year. Should this option be exercised, any tokens that remain unvested are sent back to the treasury, with the remaining tokens becoming freely liquid.

KWENTA was set to launch with an initial token supply of 313,373, and the first week saw a robust weekly emission of 14,463.37 KWENTA. However, over the span of four years, these emissions will gradually taper off to approximately 200 KWENTA per week, representing an annual yield of 1%. At the end of this four-year period, the total token supply is projected to stand at 1,009,409.43 KWENTA.

Kwenta Inflation

Token Utility

The KWENTA token plays a crucial role within the Kwenta exchange, serving two primary functions: governance and a rewards mechanism.

1. Governance: KWENTA holders participate in decision-making processes within the platform. Currently, Kwenta operates on a council-centric basis, where token holders vote approximately twice a year during epochs to elect council members
2. Rewards Mechanism: Participants who stake their KWENTA stand to benefit from inflationary rewards. Furthermore, the system has been designed to incentivize active participation, granting additional rewards to staked wallets that exhibit trading activity. This strategy aligns with Kwenta's mission to prioritize its active users in the decision-making process. It is important to note, however, that staking is exclusively available on the Optimism Network

Token Unlocks

The KWENTA tokens under escrow are set to unlock linearly over a period of one year. This structure introduces a gradual release of tokens into the market until November, preventing a sudden influx that could potentially disrupt market stability.

However, the protocol also offers flexibility to token holders by allowing them to claim their escrowed tokens ahead of the unlock schedule. This comes with an early vesting penalty that starts at 90% at the commencement of the escrow period and decreases linearly over the year. This means that a holder who opts to claim their tokens early will face a penalty, the severity of which depends on how early they choose to vest. This penalty could be 50%, 30%, or even 10%, depending on the time elapsed from the escrow start date. The option to vest early provides flexibility to the token holders, while the penalty serves as a mechanism to discourage mass early unlocks, thus ensuring a stable token supply.

As the vesting penalty drops to 0% after 365 days, the first holders who have their KWENTA escrowed will be able to vest their tokens without any penalty in around November 2023. November may well be a long way off yet, but it, and the next months immediately following, could well have a major impact on the KWENTA token’s volatility.

Revenue

At present, Kwenta's revenue stream is predominantly sourced from an incentive scheme in association with Synthetix. Launched only two months ago, the Volume Source Fee Program has already been rewarding Kwenta with a 5% SNX rebate from fees accrued by Perps V2, adding 144,000 SNX to the DAO's coffers so far. These earnings are presently stored in the treasury and are poised for deployment pending a proposal for their use by the DAO.

While protocol fees paid to Synthetix do not directly benefit Kwenta, they serve as an indicator of the value derived from the Kwenta integration, demonstrating the thriving synergy between the two platforms. The partnership has proven its worth, with promising initial outcomes seen in the Synthetix protocol fee generation. Since the launch of Perps v2 in December 2022, the protocol has yielded nearly 9 million USD in fees, with over 4 million USD generated in March alone.

These positive early returns from the fee sharing program pave the way for what Kwenta anticipate will be a more lasting and self-sustaining scheme as Synthetix transitions into v3. The results underscore the robustness of the Kwenta-Synthetix partnership and hold promising prospects for the future.

Liquidity

Kwenta's liquidity is provided by the Synthetix protocol, which has a large and liquid market for synthetic assets, so traders on Kwenta can easily enter and exit positions, and they are less likely to experience slippage. Kwenta uses a shared debt pool to provide liquidity for all of its markets, meaning that traders can always find someone to take the other side of their trade, regardless of the market. Kwenta's liquidity is one of its strongest features. That, along with the shared debt pool, make it a great place to trade perpetual futures and options.

While Kwenta's liquidity is generally good, there are some potential risks to be aware of. One risk is that the Synthetix protocol could experience a liquidity crisis. This could happen if there is a large sell-off of synthetic assets, or if the protocol is hacked. If this were to happen, it could lead to liquidity problems on Kwenta.

Another risk is that Kwenta could become too popular. If the exchange experienced a large influx of new users, it could strain the exchange's liquidity, which could in turn lead to increased slippage and difficulty in entering and exiting positions.

Partnerships

Kwenta has strategically aligned itself with significant partners in the DeFi and broader crypto industry, enhancing its credibility and utility within the market. Notable partnerships include those with Synthetix, Aelin, Thales, Optimism, Hop, Chainlink, Horizons, and ImmuneFi, among others.

These partnerships span a diverse range of functionalities within the crypto sphere, and are critical in enhancing Kwenta's operational efficiency, scalability, security, and market reach. Each individual collaboration reinforces Kwenta's commitment to providing a comprehensive, user-centric, and efficient decentralized trading platform, fostering innovation within the DeFi space.

Investors

Kwenta's approach to its token issuance was unique in the sense that it did not engage in traditional fundraising mechanisms such as private sales or early investments from Venture Capitalist (VC) funds, and there were no opportunities for early or angel investors to acquire tokens at a preferential price prior to public release. The protocol, true to its decentralization ethos, instead chose to ensure an egalitarian token distribution strategy, giving each participant an equal opportunity to acquire tokens upon public launch. This approach not only ensures broad and fair distribution, but also significantly mitigates the risks associated with potential market manipulation, which is often associated with concentrated token ownership.

Road Map

Kwenta Roadmap Q3/Q4

Staking V2

The Kwenta staking protocol is poised for an upgrade. Early-vest penalties will be split equally between the treasury and the staking system. A mechanism for transferring escrow is also on the horizon.

TWAP Perps

TWAP Perps, modeled after Synthetix Perps V2, utilizes Uniswap liquidity. This paves the way for increased fee pressure, a wider asset range, multi-chain expansion, higher OI caps, the offering of quanto positions (perps in a base currency), new value capture methods for the protocol, and the much-anticipated atomicity - or the composability of perps.

All liquidity will be completely native with sights set on evaluating the Synthetix V3 model once it is live, which will enable derivatives protocols to host liquidity on Synthetix. Although Synthetix Perps V2 will remain Kwenta's flagship product and primary focus, TWAP Perps offers valuable experimentation in owning more of the stack. A testnet competition will soon be launching on Arbitrum.

Synthetix V3: Enhanced Liquidity Management

This upgrade offers a more balanced solution for liquidity management, enabling anyone developing derivatives liquidity to leverage powerful infrastructure, thereby boosting operations.

Delegated Trading: New Trading Mechanism

A trading mechanism that can enable profit sharing for copy trading or script trading alongside the Kwenta SDK.

DAO 2.0: Evolving DAO Framework

Kwenta’s new DAO framework is aimed at augmenting the autonomy of the DAO system while preserving the agility of a council-centric model (currently in R&D). Formal proposals will be discussed in Q3, with an implementation plan slated for Q4. The direction of the DAO will rely on Kwenta’s community governance, with Core Contributors facilitating the process.

Referral Program: Attract New Traders

An upcoming feature is the referral program, which will enable Kwenta supporters to gain from promoting the exchange. A variety of promotional opportunities will arise from the program, so potential users should stay tuned for this KIP (Kwenta Improvement Proposals).

Market Potential

In an era characterized by an ever-growing reliance on digital platforms and decentralization, the demand for DeFi solutions has seen exponential growth. Within this space, perpetual decentralized exchanges such as Kwenta have the potential to drastically reshape the landscape of financial markets.

Perpetual contracts, or "perpetuals," are financial derivatives, similar to futures contracts, but without an expiry date. This allows traders to hold positions for as long as they want, providing more flexibility compared to traditional futures contracts. The disruption of traditional financial services by blockchain technology further widens the scope for potential market penetration.

Perpetual DEXs have significant advantages over their centralized counterparts, which could lead to widespread user adoption. Features like the absence of KYC procedures, the potential for greater financial inclusion, lower risk of funds being stolen, and the absence of geographical restrictions make DEXs attractive. The growing trend towards decentralization is likely to further propel this demand, attracting a broad spectrum of users ranging from retail investors to institutions.

In terms of revenue generation, DEXs like Kwenta earn from trading fees that users pay when executing trades. Given the size and volume of the derivatives market, even a small penetration could lead to substantial revenues. Furthermore, the scope of assets that can be traded is virtually limitless, ranging from cryptocurrencies to commodities to forex, thereby creating multiple revenue streams.

The introduction of blockchain and DeFi into traditional finance is revolutionizing how we approach financial services. As regulations evolve and awareness and education around DeFi increases, the adoption of perpetual DEXs is expected to rise exponentially, driving significant market potential for Kwenta and other perpetual DEXs.

Data-Driven / Chart Analysis Section of the dApp / Blockchain Report

On-chain metrics

Total Volume in 2023

Recently, Kwenta achieved a noteworthy milestone, surpassing 12 billion USD in total trading volume since the start of 2023. This trend of high volume has been much more pronounced since March, where an impressive surge in daily volumes can be observed, with peak days approaching nearly 500 million USD. This substantial increase indicates a growing interest in Kwenta's platform, potentially signaling higher market demand for decentralized trading solutions.

Daily Traders in 2023

The number of traders on Kwenta has been on an upward trajectory since the start of the year, signifying a broader market acceptance and adoption of the platform. However, it is worth noting that the daily active user count has experienced a slight downtrend since April. This could be indicative of various factors, including market conditions and competitive dynamics.

Daily Trades in 2023

The platform maintains relative stability, with an average of approximately 1,500 trades executed per day. This stable daily activity suggests that, despite market fluctuations, Kwenta's user base remains active and engaged in regular trading operations.

Daily Cumulative Fees in 2023

Accumulated daily fees since the start of 2023 have reached an impressive sum in excess of 8 million USD. This substantial amount reflects Kwenta's growing traction and robust revenue streams, which can be particularly observed from March onward.

KWENTA Market Cap in 2023

The market capitalization of KWENTA reached its all-time high on April 16, 2023. Since this peak, a noticeable downtrend has emerged, which can be primarily attributable to the limited utility offered by the governance token. This has, in turn, curtailed the motivation for investors to hold onto their positions.

There are also inflationary rewards in place from staking, a Kwenta rewards event for trading, and the first token holders who have their Kwenta escrowed will be able to vest their tokens without any fees from around November of this year. All of these incentives have had an impact on the Kwenta token price and its overall market capitalization. The upcoming Staking V2 update in Q3, which is expected to make the token more useful, will add yet another reason for new potential investors to join.

Daily Developers & Cumulative Code Commits

The development team behind Kwenta continues to exhibit consistent activity, demonstrating a dedicated and daily commitment to the refinement and enhancement of the protocol.

Technical Section of the dApp & Blockchain Report

Smart Contract Audit

Documentation Quality, Protocol Transparency & Codebase Assessment

Kwenta, as a decentralized exchange, operates with an open-source codebase, the quality of which can be scrutinized publicly on platforms such as GitHub. This open-source model enables the collective inspection of code quality, fostering a system of peer review and collective problem-solving.

Detailed documentation accompanies Kwenta's operations, providing comprehensive insight into the platform's functionalities. This documentation serves as a resource, elucidating aspects from trading mechanisms to tokenomics, which assists in understanding the workings of the platform.

Transparency is another aspect of Kwenta's operation, as evidenced by the availability of its codebase and documentation. In addition, the project maintains open channels of communication via platforms such as Discord and Twitter, thus keeping the user community informed.

Blockchain Network

Kwenta operates on the Optimism blockchain, a layer-2 scaling solution for the Ethereum network. The Optimism blockchain is known for its stability and scalability, making it an ideal choice for the project.

Optimism employs Optimistic Rollups, a protocol that offers fast and secure transactions while maintaining a strong level of decentralization. This is a significant advantage in terms of scalability as it allows a high volume of transactions to be processed per second, significantly more than could be achieved on the Ethereum mainnet alone. As such, it offers a smooth and efficient user experience with lower transaction fees, a key consideration for a decentralized exchange like Kwenta.

However, it is important to note that as a layer-2 solution, Optimism relies on the underlying security of the Ethereum network. If there were to be security issues with Ethereum, Optimism would indirectly be affected. That said, Ethereum is one of the most secure and widely adopted blockchain networks, which instills a degree of confidence.

Interoperability

Interoperability, the ability of a project to communicate and transact across different blockchain networks, is a crucial aspect of contemporary blockchain technology. It allows the leveraging of unique benefits from multiple blockchain networks, creating a more integrated and efficient ecosystem.

In the case of Kwenta, the protocol runs primarily on Optimism, a layer-2 scaling solution for the Ethereum network. This implies that Kwenta inherently possesses interoperability with Ethereum and other Ethereum-based projects. Moreover, it opens the door for potential future integrations with other Ethereum-compatible projects, further expanding its reach and versatility.

In terms of broader cross-chain compatibility, Kwenta's partnerships play a critical role. For instance, the partnership with Chainlink, a decentralized oracle network, allows Kwenta to access secure and reliable price feeds from various networks, indirectly enhancing its interoperability.

Furthermore, the role of layer-2 solutions like Optimism should not be underestimated in discussions of interoperability. As these solutions evolve, bridges are being built to other blockchains, potentially broadening Kwenta's capacity to interact with various networks.

Acknowledging the growing diversity and potential of various blockchain platforms, Kwenta has plans to expand perpetual DEX offers beyond its current Optimism blockchain. A prominent example of this planned expansion is the integration with Arbitrum, another innovative layer-2 solution, known for its efficient scalability and interoperability features. Such a move not only exemplifies Kwenta's commitment to staying at the forefront of the DeFi landscape, but also signifies its intent to provide users with versatile and robust trading experiences across multiple blockchain networks in the future.

Security Measures

Kwenta has maintained a clear security record with no instances of successful exploits recorded in its history.

In addition, Kwenta has recently formed a strategic collaboration with ImmuneFi, launching a comprehensive bug bounty program which began on May 23, 2023. The initiative targets the detection and resolution of potential vulnerabilities in Kwenta's smart margin solidity contracts.

Bug bounty programs such as this are vital to a project's long-term security and robustness, especially within the Web 3.0 environment. Kwenta's security strategy highlights robust smart contract development, stringent security audits, and continuous monitoring and response. By enlisting ethical hackers, ImmuneFi simplifies the process of bug identification and verification, thereby enhancing Kwenta's platform security.

Here is more info about Kwenta's ImmuneFi Bug Bounty.

Decentralization

Kwenta stands out as one of the most profoundly decentralized exchange platforms within the DeFi landscape today.

A well-defined governance framework is fundamental for Kwenta, enabling the community to seamlessly maintain and enhance the protocol. As part of this endeavor, the Elite Council is scheduled to cast their votes on a system, as delineated in this proposal. This system will prescribe the roles and processes that the Kwenta community will utilize in its operations.

Having a lucid framework will propel Kwenta’s governance towards operation, arming the community with the necessary tools to realize intended outcomes. This includes a set path for proposing novel features, a mechanism for rewarding DAO participants, and an effective strategy for managing day-to-day operations.

Kwenta Governance

Adhering to a democratic model, Kwenta's governance incorporates several semi-independent bodies, all possessing unique objectives and operational procedures. This ensures a harmonious blend of autonomy and structured coordination within the ecosystem.

Upgrades and Forks

Kwenta, being an open-source protocol, can be forked and upgraded as necessary, providing a pathway for continuous enhancement and potential adaptation in response to the changing needs of its users. The project has been clear about its intent to expand onto other networks, highlighting its commitment to remaining technologically versatile and scalable.

Kwenta exhibits a strong capacity for implementing protocol upgrades and incorporating new technologies, which bodes well for its adaptability within the dynamic DeFi ecosystem.

Risks

Technical Risks:

1. Smart Contract Vulnerabilities: Despite rigorous auditing and testing, smart contracts may still contain bugs or vulnerabilities that could be exploited. Although Kwenta has taken steps to mitigate this risk by partnering with ImmuneFi to establish a bug bounty program, this risk can never be fully eliminated
2. Scaling and Performance Risks: Kwenta's performance is tied to that of the Optimism layer-2 solution and the Ethereum blockchain. Network congestion, particularly on Ethereum, can lead to increased transaction costs and slower processing times
3. Liquidity Risks: As a decentralized exchange, Kwenta relies on the liquidity provided by its users. If the platform experiences a sudden influx of users or a significant increase in trading volume, it could strain the platform's liquidity, potentially leading to increased slippage and difficulty with executing trades

Regulatory Risks:

1. Regulatory Uncertainty: Cryptocurrencies and DeFi platforms operate in a legal gray area in many jurisdictions. Regulatory changes could impact Kwenta's operations or the ability of users to access the platform. It is also possible that certain jurisdictions could ban or restrict access to DeFi platforms like Kwenta
2. KYC / AML Risks: As a platform that does not require KYC procedures, Kwenta could face regulatory scrutiny for potential misuse in terms of money laundering or other illicit activities
3. Compliance Risks: As the cryptocurrency regulatory environment evolves, new compliance standards may emerge that could impact Kwenta's operations or development

Investment Strategy & Conclusion

There are several potential investment strategies that can be considered when investing in Kwenta.

Investment Strategy - Long-Term

While the future of decentralized finance and decentralized exchanges presents promising growth potential, a long-term investment strategy in Kwenta requires careful consideration of the inherent risks and challenges.

The platform anticipates expanding its suite of services and user base, which may lead to an appreciation in the value of the KWENTA token. However, it is worth noting the scheduled token unlocks which are set to occur from November, 2023. These could increase the token supply in the market, which might exert a downward pressure on its price.

Additionally, Kwenta's tokenomics for the next period has an inflationary environment, which could potentially devalue the token. Investors should consider these factors when formulating their investment strategy.

If investors do decide to opt for this long-term strategy, they don't need to hold their tokens necessarily; they can stake them or use them to provide liquidity, for which they will earn additional rewards.

This strategy is underpinned by the expectation that Kwenta will solidify its position as a leading player in the perpetual DEX landscape in the long run. This is largely due to its deep liquidity provided by Synthetix, an exceptional user interface and experience, and the promise of added token utility. However, this scenario may take more than a year to materialize, implying a long-term commitment on the part of the investors before they realize profits.

Investment Strategy - Active Trading

Kwenta's fee structure, efficient interface, and diverse array of derivative products set an appealing stage for active trading strategies. By adopting this method, investors could potentially capitalize on price volatility.

Moreover, Kwenta provides opportunities for supplementary profit generation through hedging and funding mechanisms. These financial strategies allow investors to mitigate risk and potentially amplify their earnings in fluctuating market conditions. Therefore, active trading could be a compelling strategy for investors who can commit the necessary time and resources to continuous market engagement.

Nonetheless, this strategy demands a high level of market knowledge, risk management, and commitment, given the fast-paced nature of trading and the potential for substantial capital losses.