Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.
TL;DR
In recent posts, we have highlighted several dynamics playing out in digital asset markets, specifically on the supply side: the proliferation of chains and projects, problematic airdrop campaigns and steep (often absurd) valuations, all against the backdrop of eye-watering volatility. There are a few main corollaries that follow: a) it is impossible to keep up with every new chain and project launching, b) there is incredibly high trading activity taking place, the locus of which moves between ecosystems very rapidly, and c) identifying fundamentally strong projects with great teams and tokenomic designs is incredibly important - and rare.
This post highlights an example of how one digital asset-native team was able to rapidly identify these opportunities and build innovative products to capture that value while truly aligning interests of the protocol, community and ecosystems in which they operate.
HoudiniSwap – simple cross-asset, cross-ecosystem swaps
Setting the stage: the legacy system
Imagine you, a knowledgeable investor, hold shares of the VOO ETF in Vanguard but want to purchase the new BTC ETFs from Fidelity. Easy right? Just instantly swap VOO for FBTC and you’re done, voila! Wait, not quite – you have to first sell your VOO shares into cash, wait two days for that to settle, and then buy the BTC ETFs.
Unfortunately, you find out that Vanguard has decided they do not want to allow their clients to buy BTC ETFs although they are SEC-approved investments. So instead, you decide to open a new Fidelity account in order to buy it there. How would one go about doing that?
Well, most of the time it goes like this: sell the shares on Vanguard into cash, wait two business days for that to settle (hopefully it’s not an evening or weekend), withdraw that cash to a bank account, wait another day or two, fund the new Fidelity account, wait another day or two, and then buy the BTC ETF. Perhaps you are sophisticated and want to transfer your VOO ETF in-kind directly to Fidelity, then sell into cash, wait two days, and then buy the BTC ETF. That works too – if you wait 5 to 7 business days for that transfer to go through if initiated online, or up to 2-4 weeks if done by paper. But there’s a catch! Fidelity doesn’t actually support Vanguard’s VOO ETF, so you cannot do that even if you wanted to. But even if you were able, you would still have to sell that ETF into cash, wait two days, and then purchase the BTC ETF.
Any way you cut it, that is a long and miserable process to swap between two assets on two different platforms. But that is unfortunately how the current system works – completely siloed products, ecosystems, and T+2 settlement, taking days to execute a simple trade that in the year 2024 should be completely possible online, instantly, and permissionlessly (not only if Vanguard decides it is okay).
Blockchains already provide a massive improvement over legacy systems
Internet-native value transfer platforms, i.e. smart contract platforms like Ethereum and Solana, have already solved much of this: near-instant asset swaps without needing to manually bridge through cash. Automated market makers (AMMs) and aggregators such as Uniswap and Jupiter facilitate over $100B in cross-asset swaps annually, executed and settled within 12 seconds and 0.5 seconds, respectively. For the majority of trades, one can just trade in and out of a single pool, exchanging those assets directly. For larger trades, trading assets with less liquidity, or looking for absolute best execution, the composability and internet-native nature of digital assets shine. Advanced algorithms can split and route a single trade through multiple different backend liquidity sources or other assets, ultimately delivering the desired asset to your wallet in a single transaction. This is all atomic, meaning even if there are 4 hops and 3 protocols involved, it happens within a single block – 12 seconds on Ethereum, or 0.5 seconds on Solana. All the user sees are a single outgoing transaction of their old asset and incoming transaction of their new asset.
Source: Example of $1000 trade routes on Jupiter, dynamically adjusting for best execution (snapshots taken ~2 minutes apart)
To compare that to legacy systems: that is equivalent of trading a Vanguard VOO ETF for a Vanguard VDE Energy ETF, but algorithmically splitting portions of that trade through VWOB (Emerging Markets Government Bond ETF) and WMT and CAT (shares of Walmart and Caterpillar), saving 50 bps on the trade, all with a single transaction and executed and settled in less than 1 second. Incomprehensible through traditional rails when one puts it that way.
But what about swapping into that BTC ETF on Fidelity, that is, trading cross-platform? In digital assets, that is the equivalent of trading cross-chain, e.g. Ethereum to Solana. For a number of reasons – different virtual machines and programming languages (EVM vs. SVM vs. Script), different asset standards, bridging inefficiencies, disparate communities, etc. – this has largely remained unsolved. Perhaps until now.
HoudiniSwap is solving the cross-ecosystem swap problem
HoudiniSwap is a cross-chain liquidity aggregation platform that enables cross-chain swaps between any asset on any integrated chain, currently supporting over 4,000 assets. Combinatorially, that means one can swap between any 1 of 8 million pairs of assets with a single transaction. In practical terms, one can trade directly from USDC on Base (EVM L2 on OP Stack) into JTO on Solana (non-EVM L1) with a single click. Even more impressive, one could swap USDC on Base directly for native Bitcoin.
Source: HoudiniSwap
It is nearly impossible to overstate how much of a step-change improvement this is from the current status quo (swap-bridge-wait-swap).
What truly makes this unique is that Houdini is entirely VM-agnostic, meaning it supports chains using EVM, SVM or other environments such as Bitcoin, Cosmos, NEAR, or Polkadot. Though young, it is growing rapidly. Houdini has facilitated almost $600M volume to date and is currently on pace to execute nearly $700M annually based on past 30D levels (though this rate too has been growing rapidly - $1B+ annualized volume is likely coming soon). How big is the problem Houdini is addressing? Digital asset users are currently bridging $5-10B daily across chains:
Source: Artemis.xyz – note this is not exhaustive of all cross-chain protocols
Under the hood, Houdini leverages integrations across the leading decentralized cross-chain liquidity protocols in the industry including Wormhole, Axelar and Thorchain and aggregators such as Paraswap, providing access to 80 distinct chains.
More uniquely, the platform also offers an option to do this privately. One of the defining features of blockchains is that they are public ledgers – anybody can view the details of any transaction and the balance of any account at any time. Sometimes, however, a user may wish to not publicly broadcast their entire transaction to the public, such as a hedge fund entering or exiting positions, or somebody expressing a view on Polymarket about an upcoming election. Much like other aggregators route simple swaps through other liquidity sources on the same chain, Houdini can direct trades through non-custodial centralized exchanges that randomly select a layer 1 chain through which to route the transaction to another exchange, providing completely confidential trade and bridging execution.
The best part is that this is all done compliantly, as the team implements strict AML standards (e.g. OFAC screens) and integrated exchanges on the backend all have their own AML programs in place to detect illicit traffic. The team regularly tests these programs and has dropped exchanges in the past that fail to meet their standards. Out of more than 100 reviewed, only roughly 10% have passed their requirements and are onboarded. Each exchange stores transaction information and can work with investigators or regulators to aid in transaction tracing. This is important. Other privacy tools, such as anonymizing software ‘mixers’ like Tornado cash, have come under enforcement by regulators on the grounds that they are primarily used for illicit activity. Houdini’s entirely non-custodial implementation addresses that head on, putting compliance first.
To date, most trading of digital assets has been limited to, well, just digital assets. But with the strong trend towards increased tokenization of “real world” assets such as Blackrock’s $527M BUIDL money market fund on Ethereum, Ondo’s and Midas’ tokenized treasury products, Nayms’ tokenized insurance products, Ethena’s tokenized basis trade product, and Swarm’s tokenized equities, the reality in which we have instant cross-ecosystem, cross-asset swaps of tokenized ‘real world’ assets is coming into view. There are major regulatory and legal hurdles to cross before this is a reality and is assuredly a multi-year endeavor to make happen, but the foundations of this vastly more efficient future are being laid now, with Houdini emerging as one of the leading examples.
Tokenomics
Aligning the interests of the developers, the users, and the ecosystems in which they operate is vitally important to project success. Houdini addresses this in an admirable way. First and foremost, the entire economics of the project are publicly trackable via dashboard. One can see exactly how much trading volume, revenues, users, buybacks and token emissions are flowing through the protocol at any time; digging through obscure financials, 3rd party aggregation platforms or waiting for team updates are unnecessary.
Source: dune.com via @whale_hunter
The team places a strong emphasis on putting the community first (we’ve stressed how important this is for digital assets in previous posts). 50% of revenue generated ($2.9M to date, historically averaging ~50bps on volume, likely converging towards 20-30bps at maturity) goes to programmatically buying back the token from the market via bot (akin to a sitting TWAP open market stock buyback program), and those bought back are redistributed with the stakers of the token that are committed to supporting the project. At current levels, this is earning community members ~40% yield on their staked tokens, further buoyed by the consistent weekly burn of tokens accrued from previous buybacks and early-withdrawal penalties (~8% of total token supply). As the protocol grows, the community prospers alongside it. To further this connection, the founder (former investment banker) hosts an AMA session every Monday during which he highlights development and engages with users and tokenholders.
Source: dune.com via @whale_hunter
Supply side growth is an easy sell to prospective ecosystems and exchanges. Houdini provides a valuable service to the new layer 1s and layer 2s that are constantly deploying by providing access to liquidity across every other integrated chain. Individual exchanges or projects with liquidity on those exchanges are also highly motivated to onboard their platform to Houdini in order to access new users from other ecosystems and grow their own communities.
We have highlighted in other posts some of the major pitfalls that many projects fall into: launching with only a small portion of tokens actually circulating in the market, restricting liquidity, and ultimately inflating the project’s “fully diluted value” to unrealistic levels. Houdini has approached this the right way – all tokens are fully vested and in the market. Some are locked in the treasury to be used to fund growth and a portion enables liquidity on decentralized AMMs. Otherwise, there is no hidden inflation or massive insider unlocks over the coming months to heavily dilute any recent marginal buyers or capitalize on the existing community. In short, they have gone about designing their tokenomics correctly – a rare occurrence in the market recently.
Conclusion
Ironically, Houdini’s focus on compliance and doing things the right way may have proven to be a headwind in the early stages of its development. However, their unique approach to solving a major pain point still plaguing the industry has found strong product market fit and their new path towards enabling simple cross-chain swaps is a step-change improvement in the status quo. The momentum behind the project is building, proving that if you enshrine the ethos of digital assets as a foundational principle of your project, success will follow.
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