Evolutionary Logic and Ecological Value of the DeFi 2.0 Era Analyzed through IXO Protocol

Author: 0xSheldon Produced by: ThePrimedia

Introduction

In 2022, there were widespread discussions in the market about DeFi2.0, which we also discussed before. Compared to the trading structure of CEX, in a static development scenario, the DeFi market theoretically still had about 13 times the trading volume growth potential at that time. This market capacity was enough to give rise to more advanced DeFi projects. However, over the past two years, market progress has been slow, the DeFi2.0 narrative has faded away, and the market performance of DeFi projects has been disappointing. Not only have they underperformed their fundamentals and bitcoin, but they have even lagged behind some basic infrastructure sectors.

Upon analysis, we believe the reason is that the previous stage of DeFi was merely the financialization of the zero-sum game familiar to traditional financial speculation. On one hand, compared to the capital allocation function of traditional finance, DeFi has achieved little in the past; on the other hand, DeFi’s role and function in the crypto world have been superficial, failing to find its place in the construction of the crypto world’s economic system.

This article will take IXO Protocol as an example, using its model and practical sample to explore the above two issues.

01 Capital Optimization

The IXO Protocol model aims to improve market trading volume and liquidity depth to ensure that token providers can raise the capital they need.

There are three roles in the IXO Protocol: project party (token provider), investor (trader), and guarantor:

Token provider: Refers to the fundraiser issuing tokens on the IXO platform, issuing guaranteed assets and raising funds.

Trader (investor): Purchases crypto assets issued by project parties in the market and can resell tokens to guarantors to reduce risk. If the token price rises, the investor can sell the tokens and receive 50% of the profits, with the other 50% going to the guarantor.

Guarantor: Provides credit endorsement for assets issued by the project party. When the token price rises, the guarantor can receive 50% of the investor’s profit share. If the guaranteed price falls, the guarantor needs to repurchase the investor’s token shares at a certain proportional price.

It can be seen that in the IXO Protocol, the project party, investor, and guarantor form a ternary game system. In this system, each participant has their own interests and goals, and reputation acts as an incentive mechanism that promotes cooperation among the three parties, increasing the stability and efficiency of the entire system. Through the accumulation and distribution of reputation, the IXO protocol encourages more participants to take on the role of guarantor, which helps to form a healthier and more active ecosystem. The active participation of guarantors not only reduces the risk of the entire system but also promotes the effective flow of funds and rational allocation of resources.

In this model, compared to direct trading on cryptocurrency exchanges and DEXs, the IXO protocol better addresses pain points such as liquidity, investment risk, trust, and incentive mechanisms:

Insufficient liquidity

Traditional decentralized exchanges (DEXs), due to the use of the automated market maker (AMM) model, result in liquidity being concentrated on popular assets, while long-tail assets suffer from severe liquidity shortages. The IXO protocol introduces a guarantor mechanism that can provide liquidity guarantees for any asset, thereby greatly improving trading depth and liquidity.

High investment risk

On traditional exchanges, investors must bear the risk of asset price fluctuations entirely on their own. In the IXO protocol, guarantors provide partial or full price guarantees for trades, making investor risk controllable and giving them more confidence to trade. For fully guaranteed assets, investors do not have to worry about any capital loss.

Lack of trust

The cryptocurrency market generally suffers from a trust crisis, making it difficult for investors to judge the credibility of project parties and opinion leaders. In IXO, guarantors need to stake their own funds, and only truly trustworthy projects and KOLs can receive high-level guarantee support. This kind of security based on real funds is the most efficient and safest.

Lack of incentive mechanisms

DEXs lack effective incentives for participants to contribute to the ecosystem. The IXO protocol combines guarantee returns with social credit, providing both economic and non-economic incentives for guarantors. Guarantors can gain reputation, which further enhances their social value.

Based on this, it is evident that IXOProtocol is designed to provide cross-cycle financial guarantees for project parties. In the traditional financial market, this is reminiscent of Microstrategy, which leveraged bitcoin’s trust mechanism to upgrade the financing and investment strategies of Wall Street listed companies.

02 Reputation Value

IXO Protocol is a decentralized exchange (DEX) with a guarantee-insurance mechanism. Its core theory is based on behavioral economics—mental accounting—proposed by economist Daniel Bernoulli in 1738. IXO introduces this concept and SocialFi into insurance trading, allowing community KOLs to guarantee assets recognized by the community, bear the risk of price fluctuations, and gain reputation and a 50% profit share. On the IXO platform, trading depth is redefined: if an asset is 100% guaranteed, it means users incur no loss when purchasing the asset, which is difficult to achieve on DEXs and CEXs.

This new DeFi protocol, IXO Protocol, proposes an innovative guarantee-insurance-based crypto asset trading model, which is expected to solve persistent issues in the current crypto market such as lack of trust, rampant fraud, and high investment risk. However, the success of the entire protocol depends on the integrity and strength of the guarantors. If the amount of collateral provided by guarantors is insufficient to cover a large number of investors, its guarantee function will be greatly diminished. Therefore, building a high-credit-value guarantor system will be crucial for the protocol’s development. But in this game system of project party, investor, and guarantor, does the guarantor seem to bear more risk while earning only a small profit?

Of course, the answer is no. In the IXO protocol, investors bear a minimum of 0% risk (full guarantee), receive 50% of the profit, and gain 0% reputation. Guarantors bear up to 100% of the risk, receive 100% of the guaranteed tokens or 50% of the profit from token appreciation, and gain 100% reputation.

Profit: Guarantors share 50% of the appreciation in token value.

Financing income: Able to share 5% of the fundraising amount from assets issued by the project party as income.

Reputation: Guarantors provide guarantees for assets sold by the project party and receive 100% social reputation. This accumulation of reputation can be regarded as an accumulation of social capital, which can bring more cooperation opportunities, higher social status, and further opportunities for value realization to the guarantor.

In the IXO protocol, the concept of reputation is given new meaning and function. Here, reputation is no longer just an accounting concept in the acquisition process, but becomes an incentive mechanism that encourages participants to take on the role of guarantor in the system. Guarantors provide guarantees for fundraisers in the IXO protocol, and this act of guaranteeing itself is a manifestation of trust. When a guarantor successfully helps a fundraiser obtain funds and the fundraiser achieves their profit target, the guarantor will receive reputation as a reward.

The reputation gained by guarantors can not only be directly converted into economic benefits but also enhance their status and credibility within the system, increasing their chances of earning more profits in future transactions. This accumulation of reputation can be regarded as an accumulation of social capital, which can bring more cooperation opportunities and higher social status to the guarantor.

The value of reputation is also a very important concept in the traditional world, but as reputation enters the crypto world through DeFi protocols, its value is no longer limited to a single project.

Conclusion:

In summary, using the IXO Protocol model and practical sample to analyze the issues raised at the beginning—if IXOProtocol can be successfully implemented, then DeFi will play a role in the development of Web3 projects equivalent to the capital optimization and allocation function of traditional finance; the practice of combining IXO protocol and SocialFi will integrate the reputation of DID into the construction of the crypto world’s economic system, which will strengthen DeFi’s position in the crypto ecosystem—it will no longer be just a zero-sum financial game.

But this is only a small step in the post-DeFi2.0 era. The construction of a crypto world economic order centered on DeFi has only just begun.