Currently, one of the hottest sectors in the Sonic ecosystem is Shadow Exchange, whose native token $SHADOW has seen its market cap rise from around $5M to the current $31.84M within a week, an increase of over 500%. There are currently 457 liquidity pools on Shadow Exchange, with a 7-day trading volume of $557 million and a single-day peak trading volume of $171 million.

While other chains focus on the Meme market, continuously attracting attention with various sudden events, Sonic Labs is concentrating on the development of DeFi. Sonic has announced several new measures to incentivize DeFi projects within its ecosystem, resulting in a 500% increase in TVL on the Sonic chain over the past month. In just two months, Sonic has grown from $0 to over $500 million in TVL, with a net inflow of $110 million in external funds into Sonic, primarily from Solana, followed by Base and ETH. The DEX trading volume on Sonic has also surpassed the $1 billion mark.

Shadow Exchange is a native concentrated liquidity layer and exchange of Sonic. In the high-speed, low-cost EVM-compatible Layer 1 ecosystem of Sonic, Shadow Exchange, as one of its core trading protocols, has improved the traditional ve(3,3) model to an x(3,3) incentive model, attracting a large number of investors.

Sonic Related Reading: 《TVL Grows Fivefold in a Month, Is AC Planning to Make Sonic the New Base for DeFi Yields?》

Familiar (3,3), but with an x

The history of decentralized finance has been marked by repeated attempts to solve the "DEX Trilemma," which is how to coordinate the incentive mechanisms between traders, liquidity providers, and token holders. Although Andre Cronje's ve(3,3) model theoretically addresses this issue by balancing incentives among all participants, the long lock-up period creates a high-friction system that forces users to lock tokens to fairly participate in the incentive model.

Uniswap focuses on a simple two-party system: traders and liquidity providers (LPs). ve(3,3) improves this by appropriately adjusting incentives with the rights of token holders, but obtaining these incentives is unfair and heavily biased towards the protocol.

The x(3,3) model addresses these issues, allowing users to exit at any time and lifting lock-up restrictions through incentives. Users can participate in governance by staking platform tokens and vote on the emission weight of liquidity pools, with voters receiving a share of transaction fees and additional "bribe rewards," incentivizing long-term holders to deeply engage in ecosystem development. The diagram below clearly illustrates the entire DeFi model process:

The $SHADOW token is the most original token, freely exchangeable with other currencies, and can be exchanged 1:1 with the xSHADOW token, which is the core of the entire model. xSHADOW stakers can vote to directly allocate rewards to LPs while also earning 100% of protocol fees, voting rewards, and exit penalties through staking.

Regarding user exits, Shadow implements a unique player-to-player (PvP) re-basing mechanism, where exit penalties flow to xSHADOW stakers. When users exit their xSHADOW positions early, 100% of the confiscated tokens will proportionally flow to existing xSHADOW stakers based on their positions. In terms of token selection, users can claim the more liquid SHADOW to enjoy the default APY or the illiquid xSHADOW to enjoy double APY.

Users can convert xSHADOW to SHADOW at any time: immediate conversion (with a 50% penalty) or conversion within a user-selected vesting period (at a ratio, e.g., 3 months = 1:0.73 ratio). The longer the vesting period, the more favorable the conversion rate; a full 6-month vesting period allows for a 1:1 conversion with no penalties.

Voting Incentives

xSHADOW holders earn rewards by actively participating and voting. When holders vote in favor of liquidity through a scale, they will proportionally share all fees generated by that liquidity, as well as additional voting incentives provided by the protocol to attract participation. The main purpose of the xSHADOW token is to guide the distribution of issued token rewards towards increasing liquidity through voting, with that portion of token rewards distributed according to the total percentage of votes during that period. For example, if 100,000 xSHADOW is distributed in a single period and 10% of all votes are allocated to the SHADOW / USDC pair, that pair will receive 10,000 xSHADOW tokens, which will be linearly distributed to the liquidity providers of the relevant LP pair throughout the period.

Liquidity Staking

The design of Shadow aims to eliminate friction in the ve(3,3) model, with managing voting positions being one of the largest sources of friction. After xSHADOW undergoes liquidity staking, it can mint $x33, simplifying the process through automated voting and reward collection, while not interfering with the core mechanism of xSHADOW. The ratio of $x33:xSHADOW starts at 1.00:1.00, and as rewards from fees, voting incentives, and resets accumulate, this ratio will gradually lean towards $x33. At the end of each cycle, rewards from fees and voting incentives will be automatically sold to increase the $x33:xSHADOW ratio. While $x33 provides instant liquidity, it still cannot bypass the exit penalties of xSHADOW. As a liquid staking version of xSHADOW, the market price of $x33 will naturally reflect the instant exit fee structure and cannot be traded below the redemption value of xSHADOW.

Shadow adopts a unique player-to-player (PvP) approach, improving the traditional ve(3,3) anti-dilution model, aimed at both protecting xSHADOW holders from dilution and incentivizing them to maintain their positions and participate in the ongoing success of SHADOW. Stakers who stay longer in xSHADOW will earn more fees, voting incentives, user and emission exit rewards, while users can exit their positions at any time, ensuring rewards flow to those who value and continuously participate in it. This mechanism not only encourages avoiding premature exits but also ensures that remaining participants are rewarded for their loyalty and active engagement.

With the rapid growth of TVL on the Sonic chain (growing 13 times to $357 million from early 2025 to now) and endorsements from core developers like Andre Cronje, Shadow Exchange is expected to leverage ecological momentum to become a benchmark for the next generation of DeFi trading protocols. Shadow Exchange is not only a technical testing ground for the Sonic chain but also a forefront of DeFi governance and liquidity innovation, providing a new paradigm for traders, liquidity providers, and project parties.

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