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An In-Depth Analysis of Fluid: The New DeFi Player Disrupting Aave and Curve

Original Title: 《Why Fluid will kill Aave & Curve （or Uniswap）》

Author: Foxi_xyz, Crypto KOL

Translator: zhouzhou, BlockBeats

Editor’s Note: This article discusses how Fluid combines lending and trading to disrupt the traditional DeFi model. Its dynamic debt mechanism not only allows borrowed funds to act as liquidity and earn transaction fees but also significantly improves capital efficiency—each dollar of TVL can generate $39 in liquidity. It also analyzes the potential of INST, suggesting that with strong growth and its upcoming DEX, the price might exceed $8, making it a project worth watching.

Below is the content of the original article (with some adjustments for better readability):

What is Fluid?

Fluid is a money market protocol launched by the Instadapp team. Holding INST is equivalent to directly participating in Fluid’s growth. It is similar to other money market protocols (e.g., Aave and Kamino) but features improved liquidation mechanisms. While lending itself is rarely groundbreaking, Fluid’s combination of lending with a DEX unlocks new possibilities in the lending market, which is the key to Fluid’s success.

Surpassing Traditional Money Markets

To understand Fluid’s potential, one must first grasp the limitations of the current DeFi liquidity ecosystem: traditional money markets and DEXs operate independently, significantly limiting capital efficiency. These assets serve only one purpose—generating lending yields. Similarly, liquidity provided to DEXs like Uniswap can only earn trading fees.

This fragmentation leads to high user costs due to:

  • Low capital efficiency
  • Liquidity spread across various protocols

Fluid DEX: The Perfect Fusion of Lending and Trading

Fluid DEX redefines how DEXs operate. Unlike traditional DEXs that focus solely on trading, Fluid DEX combines the functions of trading platforms and money markets. This could make it the most capital-efficient DEX design in DeFi.

Core Innovations: Smart Collateral & Smart Debt

Smart Collateral (A Conventional Feature)

Users can use liquidity pairs (e.g., ETH/wstETH or ETH/WBTC) as collateral. LP tokens simultaneously serve as lending collateral and earn trading fees from the DEX. This feature is already reflected in many new lending protocols.

Smart Debt (A Revolutionary Innovation)

This is the most groundbreaking feature of Fluid DEX. Traditional DeFi treats debt purely as a liability; users borrow and only need to pay interest. Fluid, however, flips this paradigm by allowing debt positions to be used as liquidity and earn trading fees.

Dynamic Debt Mechanism & Automatic Rebalancing

Unlike traditional fixed assets, Fluid enables users to borrow dynamic debt positions. When a trader swaps tokens (e.g., USDC for USDT), the system doesn’t rely on traditional liquidity pools but instead adjusts borrowers' debt structures (e.g., reducing USDC debt and increasing USDT debt). This debt rebalancing mechanism serves as a liquidity source for the DEX while generating trading fee income for borrowers.

Example of Automatic Rebalancing:

  • Borrow 1,000 USDC and 1,000 USDT and deposit them into Fluid DEX.
  • If someone swaps 500 USDC for USDT:
    • Your USDC debt decreases to 500.
    • Your USDT debt increases to 1,500.
    • You earn fees from the transaction.
    • Total debt remains unchanged while generating income from trading activities.

Unprecedented Capital Efficiency

The combination of Smart Collateral and Smart Debt achieves unprecedented capital efficiency. Through its innovative design, Fluid can generate up to $39 in effective liquidity for every $1 of TVL. This is achieved through the following mechanisms:

  • High Loan-to-Value (LTV) ratios, up to 95% for some assets, enabled by advanced liquidation mechanisms.
  • Utilizing both collateral and debt as liquidity sources.
  • Automated risk management systems that adjust positions based on market conditions.

In bull markets, where high leverage and capital efficiency are in demand, this could further increase Fluid’s TVL and fee revenue.

Valuation: Is INST Worth Buying Now?

TVL/FDV Multiples Have Room for Growth

Fluid’s FDV/TVL ratio is 0.78x, which is significantly higher than Aave’s 0.19x, indicating room for improvement. More importantly, Fluid’s TVL has organically grown to $516M without substantial token incentives, demonstrating robust organic growth.

Strong Revenue Generation Potential

Fluid’s lending protocol generates about $15.95M annually, with a fee/FDV ratio of 3.98%. Compared to emerging lending protocols like Morpho and Euler, it remains competitive. With its upcoming DEX, revenues are expected to grow further through:

  • Regular trading fees
  • Additional revenue from Smart Debt

Overall, INST’s price is projected to reach at least $8.

Looking Ahead: The DEX as Fluid’s Killer App

Fluid relies not on token incentives but on efficient capital utilization to create a self-reinforcing growth loop:

Efficient Capital Utilization → Lower Borrowing Costs → Attract More TVL → Increase DEX Liquidity → More Trading Fees → Further Lower Borrowing Costs

While Fluid’s success in the lending space is impressive, its upcoming DEX could be the true innovation. By redefining the relationship between lending and trading, Fluid is not merely improving existing tools but is creating new possibilities for capital efficiency.

This article was sourced from Foresight News:

https://foresightnews.pro/article/detail/71946

By AIC Team, November 25, 2024