Gelato Network: An Automation-Driven Web3 World
Gelato provides automation services for smart contracts, aiming to become the execution layer of Web 3.Author: Li Yuxuan
I. Key Points of the Research Report
Core Investment Logic
Gelato provides automation services for smart contracts, aiming to become the execution layer of Web 3. In the long term, the automation of smart contracts aligns with people's expectations for the future, and the industry is still in its early stages of development, giving Gelato a certain first-mover advantage. In the short term, the business logic of becoming an outsourced DevOps service provider in the crypto world is also feasible. Gelato has a first-mover advantage in its field, support from the developer community, and resources from VCs, and recently winning first place in BSC MVB3 has laid a solid foundation for its expansion in BSC. However, it also faces strong competition from formidable rivals—Chainlink Keepers.
Main Risks
We believe the risks faced by Gelato are as follows: the risk of overly strong competitors, difficulties in capturing token value, smart contract risks, and the risk of unsustainable competitive advantages. For details, see section 3.4 Project Risks.
II. Project Overview
Business Scope
Gelato Network is a decentralized bot network for Web 3 developers that supports the automatic execution of smart contracts on EVM-compatible blockchains. Currently supported public chains include Ethereum, Polygon, Fantom, Arbitrum, BSC, and Avalanche. The core service it provides can be simply described as "automatically executing operations on smart contracts after certain events occur." Currently, several main use cases of Gelato include:
- Providing limit order services for AMM (automated market maker) DEXs.
- Providing "liquidation protection" services for lending protocols.
- Automated management tool G-UNI for Uniswap V3 LPs.
Currently, Gelato's main services are provided to other project parties, and their services are generally integrated within other projects for user use. In addition, they also have Sorbet Finance, which directly targets DEX users (including limit order and G-UNI functionalities), and Cono Finance, which directly targets lending users.
Historical Development and Roadmap
As can be seen, Gelato Network is a project that launched early, and they have very close collaborations with mainstream EVM public chains and other DeFi projects. In the service they provide, "automatically executing operations on smart contracts after certain events occur," the triggering events on the same chain have already covered a wide range.
In terms of future development planning, Gelato's main focus is on expanding the range of triggering events, incorporating real-world off-chain events, cross-chain events, or events triggered by other WEB 2 applications into the scope of triggering events.
In 2022, Gelato plans to integrate off-chain triggering conditions (e.g., automatically purchasing $1,000 worth of ETH on the first day of each month) and achieve cross-chain automation between Ethereum's L1 and L2 (i.e., an event occurring on L1 automatically triggers an action on L2).
In 2023 and beyond, Gelato plans to achieve automation between WEB 2 and WEB 3 applications (e.g., automatically monitoring and buying ETH-related tokens when a certain animal is mentioned in a tweet by Elon Musk) and plans to be compatible with non-EVM public chains (e.g., an event on the SOL chain triggering an action on the ETH chain).
In addition, Gelato also plans to start incentivizing developers to use Gelato Network's features more through token rewards this year and to achieve the decentralization of the smart contract execution bot network as soon as possible (currently, all smart contract bots are still operated by the Gelato team, and other bots are not yet supported to join the Gelato network).
Business Details
Next, we will introduce Gelato's current main businesses.
AMM Limit Orders
In stocks, futures, foreign exchange, or traditional CEX, the main trading model is limit trading, so people are generally more familiar with limit orders than AMM trading.
The limit order service provided by Gelato can meet this demand. The logic of AMM limit orders can be simplified as: "If the price of token A (relative to token B) reaches a certain set threshold, then buy or sell token A."
The limit order function is the earliest automated feature implemented by Gelato. They first provided limit orders for Kyber and later expanded the limit order service to more DEX giants as DeFi developed. Currently, the DEXs that Gelato provides limit order services for include Uniswap on the ETH chain, Pancakeswap on the BSC chain, Quickswap on the Polygon chain, SpookySwap and SpiritSwap on the Fantom chain, and TraderJoe on the Avalanche chain. Among them, the limit order entry for Uniswap, Pancakeswap, and TraderJoe needs to be accessed through Gelato's Sorbet Finance, while Quickswap, SpookySwap, and SpiritSwap have directly integrated the limit order functionality on their official websites.
Above: Spookyswap's limit order page (with Gelato branding exposure)
From a technical perspective, the limit order function is not difficult to implement. Aggregated trading platforms like 1inch and Matcha, as well as Sushiswap (on Polygon), all provide limit order services. However, for DEXs, implementing this function can be relatively cumbersome and requires a certain amount of development and maintenance costs. For Gelato, after perfecting its limit order function, the marginal cost of providing services to other DEXs is not high, making such collaborations easy to carry out.
This collaboration results in a win-win for all three parties: users gain access to a limit order function that can be used for free; DEXs have a decentralized and hassle-free way to meet user demands; and Gelato gains brand exposure and a certain degree of user acquisition. From their recent movements, Gelato is actively providing limit order services to leading AMM DEXs on various EVM chains, which can establish good relationships with these chains and lay the groundwork for deeper collaborations such as cross-chain automation in the future. On the other hand, they also hope to quickly tap into the traffic on various chains through DEXs.
Lending Liquidation-Free Service
The logic of the lending liquidation-free service can be simplified as: "If the price of the collateral falls below a certain threshold, sell part of the collateral to repay the debt." Generally speaking, lending protocols have a liquidation threshold, meaning that when the ratio of collateral to debt falls below a certain value (e.g., 110%), liquidation will be triggered. The service provided by Gelato requires users to set a threshold (greater than the liquidation threshold of the lending protocol). When the ratio of the user's collateral to debt falls below the user-set threshold, part of the collateral is sold to repay the debt, thereby retaining as much collateral as possible for the user.
Liquidation is a necessary part of all lending or margin-related businesses, and it usually occurs when the collateral falls below the required collateral level. Overall, both lending users and lending protocols do not wish for liquidation to occur, which gives the liquidation-free service its value:
For lending users, liquidation is obviously undesirable, mainly because it comes with a certain percentage of liquidation penalties, resulting in a net loss of assets.
For lending protocols, timely liquidation is neutral because it maintains the overall security of the protocol. However, if liquidation is not timely, it may lead to severe debt pressure on the protocol and pessimistic sentiment towards it, as seen during the "Black Thursday" incident experienced by Maker on March 12. On the other hand, from a long-term development perspective, lending users are the foundation of lending protocols. The volatility of the crypto market is already very intense, and frequent liquidations on top of that will fundamentally reduce all users' willingness to participate in lending, thereby decreasing the income of lending protocols in the long run. Therefore, although liquidation income is an important revenue source for all lending protocols, they prefer that liquidation events occur as controllably as possible in the long run.
In addition, Gelato's collaboration with Instadapp on vault automation achieves better liquidation protection through the flow of assets/debts between protocols. The logic is as follows:
When a user's ETH-A vault approaches the liquidation line, the vault automation function will, while ensuring safety, migrate both assets and debts to other vaults with lower collateral rates (including Maker's ETH-B vault, Aave, and Compound) through flash loans, thereby maximizing the safety of the user's collateral without changing the collateral and debt.
Theoretically, the combination of "automatically selling collateral" and "vault automation" would create the ideal scenario for lending automation without liquidation. That is, when the health factor of an individual's collateral drops below a threshold:
● When there are other lending protocols with lower collateral requirements (which usually also have higher interest rates), switch to the one with lower collateral requirements first;
● When none exist, sell collateral to repay debt according to the set parameters, ensuring the safety of the remaining collateral.
Of course, achieving this ideal scenario requires users to authorize multiple protocols, and it may be relatively difficult to achieve without relying on Instadapp DSL (DeFi Smart Layer).
Position Management Tool G-UNI for Uniswap V3
The release of Uniswap V3 has provided LPs with fine-tuned operational space, but users often encounter liquidity issues. These users include ordinary LP farmers looking to earn trading fees and project teams aiming to better incentivize their token liquidity.
The logic of G-UNI provided by Gelato can be simplified as: "If the token price strays far from the set threshold, rebalance the LP to near the current trading price and periodically reinvest the earnings."
The benefits of using G-UNI include:
● Always rebalancing the LP position around the current market price, maintaining capital efficiency. This is particularly important for project teams aiming to enhance token liquidity.
● Automatically reinvesting the fees earned from Uniswap V3 back into Uniswap to achieve compound interest.
● Under the mechanism of G-UNI, at any time, the same amount of G-UNI LP always corresponds to the same amount of two tokens, meaning that the G-UNI LP held by users is a homogeneous ERC-20 token (the LP in Uniswap v3 remains non-homogeneous, but the LP issued by G-UNI is homogeneous), thus achieving the re-homogenization of Uniswap v3 LP, making it easier to integrate with other protocols.
Currently, G-UNI's users include: Instadapp, Zerion, Rari Capital, Fei Protocol, Float Protocol, and others. G-UNI currently has a TVL of around $130 million, accounting for 3.1% of Uniswap V3's total TVL, higher than other Uniswap V3 position management tools.
It is particularly noteworthy that Maker supported using G-UNI's DAI-USDC LP as collateral on September 21 of this year, marking the first Uniswap V3 LP supported by Maker, which also indicates Maker's recognition of G-UNI.
In addition to the three main application scenarios mentioned above, Gelato is also used in many other scenarios, such as:
● The stablecoin protocol Qidao on Polygon uses Gelato for automatic yield reinvestment.
● The aggregation protocol Bprotocol uses Gelato for arbitrage trading.
● The NFT fragmentation protocol Unicly uses Gelato to distribute staking rewards.
● The fund management protocol Parcel uses Gelato to pay DAO members' salaries.
And so on.
Gelato Ops
The above functions are customized scenarios created by the Gelato team for cooperating project parties. Gelato Ops, launched on November 18, allows developers to create automated execution rules for any contract for free (until the end of 2021), enabling individual developers to leverage Gelato's bot network to create use cases for automated contract execution.
Currently, Gelato Ops supports three triggering conditions for contracts without parameter requirements: scheduled execution, execution upon availability, and execution triggered by actions of other smart contracts. For contracts with parameter requirements, it supports two triggering conditions: preset parameters and reading parameters from other contracts, which can broadly cover the triggering conditions of on-chain smart contracts.
Gelato Ops task creation page, source: https://app.gelato.network/new-task
Currently, Gelato Ops supports six chains: ETH, Polygon, Fantom, Arbitrum, BSC, and Avalanche. Users have created over 200 tasks, with the most active users coming from the Polygon chain. Currently, the number of task executions on Polygon exceeds 4,000 times per day.
Source: https://dune.xyz/Marcov/Gelato-Network
Team Background
The two co-founders of Gelato, Hilmar Orth and Luis Schliesske, are both developers, and the core functions of the Gelato product were initially written by them. They have been close friends since college and have continued to work together. Before Gelato, they co-founded a startup focused on helping large European companies explore new business models using smart contracts. They later participated in a series of hackathons, including ETHParis, ETHBerlin, ETHCapeTown, and the Kyber DeFi Hackathon, achieving good results and influence. It was also through this that they were able to secure grants from Gnosis and MetaCartel and establish Gelato Network.
According to official information, the core team of Gelato consists of 12 people. In addition to the two founders, there are five developers, two product managers, two growth managers, and one community manager. Additionally, according to job recruitment websites, Gelato is also hiring for BD managers, BD directors, marketing directors, and front-end and back-end developers.
Overall, Gelato is a medium-sized crypto team with a reasonable personnel configuration, and from the recruitment situation, the team shows a strong willingness to continue expanding in BD and marketing.
Investment Background
Gelato has gone through three rounds of fundraising, including two private rounds and one public round. The specifics are as follows:
The seed round occurred in September 2020, raising $1.2 million, with investors including IOSG, Galaxy Digital, D1 VC, The LAO, Ming Ng, MetaCartel, and Christopher Jentzsch. The token cost for this round was $0.019.
In September 2021, Gelato announced a $11 million fundraising, with investors including Dragonfly, Parafi, IDEO, Nascent, and Stani Kulechov (founder of Aave). The token cost for this round was $0.2971.
The public offering also took place in September 2021, raising $5 million, with the cost also being $0.2971.
Overall, the team's investment background is solid, and at this stage, the team is relatively well-funded.
III. Business Analysis
Industry Space and Development Prospects
From the classification of the crypto world, the smart contract automation business that Gelato engages in falls under the category of infrastructure/middleware.
Specifically, Gelato provides services for the automatic execution of smart contracts, summarized as "automatically executing operations on smart contracts after certain events occur." We can look at this from both short-term and long-term perspectives:
In the short term, Gelato has a clear business logic, which is to become an outsourced service provider for Web 3 DevOps.
In the Web 3 world, there are many functions that need to be triggered regularly or under specific conditions, such as periodic reinvestment of earnings, regular salary payments, liquidity rebalancing, and so on. Before the emergence of service providers like Gelato, project teams wanting to automate these actions would need to establish a complete set of bot programs to trigger the execution of smart contracts, which requires a significant amount of time. A large portion of this work is repetitive from a higher perspective: all limit order functions are essentially the same, whether for Uniswap or Quickswap; the governance token liquidity needs of Fei Protocol and Float Protocol also aim to maintain the current price's trading depth as much as possible.
From this perspective, developers can outsource their web3 DevOps needs, allowing them to focus on building core products without reinventing the wheel. Additionally, outsourcing to a specialized service provider like Gelato can reduce the risk of single points of failure for the project team.
For Gelato, as long as the core logic of the product is relatively well-developed, the marginal cost of serving multiple project teams is significantly lower than the cost of the project teams doing it themselves, making this business logic viable.
In fact, Gelato's two main competitors, Keeper.network and Chainlink Keepers, are also primarily targeting this market.
In terms of long-term vision, Gelato hopes to become the execution layer of Web 3, connecting more triggering events, including real-world off-chain events, cross-chain events, and events from the Web 2 world, thereby realizing the vision of making smart contracts smarter.
In the current WEB 2 world, the service provided by IFTTT (ifttt.com), established in 2010, is precisely what Gelato ultimately hopes to achieve in WEB 3. IFTTT stands for "If this, then that," and its core function is also "automatically executing operation B after event A occurs." For example, popular functions include "if someone tweets, sync to my TG/Discord," "notify me if it gets cold," or connecting with smart devices to achieve automation like "turn on the lights when I get home and turn them off when I leave" or "close the garage door after the car leaves."
According to Crunchbase data, IFTTT has raised a total of $62.5 million over four rounds, including a $7 million Series A led by a16z in 2012, as well as $30 million and $24 million raised in 2014 and 2018, respectively. This also reflects the capital's recognition of this model in the Web 2 space.
Therefore, in the long run, when Gelato establishes a complete smart contract automation bot network and ensures the robustness of the smart contract execution system, Gelato can start focusing on "triggers":
● Incorporating more real-world behaviors into the triggers of smart contracts while maintaining decentralization in this process.
● Including behaviors from other chains into the triggers of smart contracts.
● Integrating behaviors from Web 2 applications into the triggers of smart contracts through notifications or interfaces.
Moreover, leveraging the existing Gelato Ops, along with effective incentives, can incorporate more developers' trigger ideas into the entire automated smart contract system. At that point, Gelato could truly make smart contracts intelligent. Smart contracts in the Web 3 world could respond in real-time to events occurring in the real world and the Web 2 world, and Gelato could become the bridge between the real world, Web 2 APIs, and Web 3 smart contracts.
In summary, whether from Gelato's practices in Web3 or the situation of its Web 2 "competitor" IFTTT, the industry Gelato is in is still in its early stages of development, with vast prospects and numerous possibilities.
Competitive Analysis
Currently, many protocols provide services that overlap with those offered by Gelato, such as limit order services provided by aggregated trading platforms like 1inch and Matcha, as well as Sushiswap. Similarly, Visor, Charm, and Yin are also providing Uniswap V3 LP management services, but we believe these do not constitute direct competition with Gelato. This is because the "smart contract automation services" provided by these protocols are merely means to serve their main business (trading or asset management), while providing "smart contract automation services" is Gelato's primary goal.
The true competitors from a business logic perspective are Keeper.network (KP3R) and Chainlink.
Keeper.network operates in a crowdsourced manner: each user can post contract execution jobs, and developers can take on tasks after bonding a certain amount of KP3R. Completing the tasks allows them to earn rewards set by the job poster. Currently, there are a total of 46 jobs on Keeper.network, a significant portion of which are jobs for yEARN, Hegic, and KP3R itself, still bearing a noticeable Andre Cronje imprint.
Source: https://keep3r.network/keep3r
Chainlink officially launched Chainlink Keepers on the mainnet in August this year, which is a product that could compete directly with Gelato. The goal of Chainlink Keepers is also to achieve smart contract automation, and the use cases that Chainlink Keepers can currently realize are completely consistent with those of Gelato.
We believe that the Web 3 DevOps outsourcing space is not technology-driven but more product-driven and resource-driven.
From a product perspective, Gelato has been in this space longer and offers a richer variety of products. Additionally, they are more focused on this business and are more likely to customize certain features for project teams. In this regard, KP3R is limited by its founders and team not actively expanding this business, resulting in relatively slow progress. Although Chainlink's product has been launched for a shorter time, it has already covered a wide range of use cases in the DeFi field.
From a resource perspective, Gelato has a good developer community influence, investment background, and rapid public chain expansion speed, while KP3R has the support of the Andreessen Horowitz (a16z) network. However, since this is a developer-targeted business, Chainlink has a clear advantage in this regard, as its oracle and VRF (verifiable random function) services naturally reach more developers. This is evident from the partnerships established by Chainlink Keepers shortly after its launch with DeFi protocols like Aave, Synthetix, Bancor, and Alchemix.
In addition, compared to Chainlink and KP3R, Gelato has an implicit relative advantage in that its token rewards will be more concentrated on the smart contract automation business. KP3R's token is currently fully circulated, and there are no plans for new token issuance, which will affect its expansion of use cases in smart contract automation. Chainlink, on the other hand, has other core businesses (such as oracles) that prevent its token rewards from being concentrated on the smart contract automation business.
Moreover, the KP3R team's focus does not currently seem to be on expanding the smart contract automation business, and the level of commitment from the founder has always been in doubt, which is also an X factor in its development.
Of course, the entire space is still in its early stages of development and has not reached a level where internal competition is necessary. However, in the long run, from a business model perspective, Chainlink Keepers will form a comprehensive competitive relationship with Gelato, which is not favorable for Gelato, which is currently in its early development stage. Whether it can better incentivize developers and users through tokens to form a certain first-mover advantage and network effect may be a decisive factor for Gelato.
Token Model
Token Distribution
The governance token of Gelato Network, $GEL, has a total supply of 420,690,000 tokens, distributed as follows:
● 50% allocated for community development.
● 4% allocated for the public offering conducted in September this year, of which 1.68% is locked for 6 months.
● 21% allocated for private investors, with half of the tokens released in September 2022 and the other half in September 2023.
● 25% allocated for the team, with 15% for the current team and 10% for future teams. Team tokens will be released 25% after a one-year lock-up, with the remaining portion released linearly over three years.
Currently, the circulating supply is around 9.77 million tokens (almost all from the public offering).
Token Use Cases
The native token $GEL of Gelato primarily has two use cases: governance and staking (not yet launched).
Staking means that if developers want to become bots in the network (thus earning token rewards from system inflation and user payments), they need to stake a certain amount of $GEL tokens. They can earn rewards for good performance and face penalties for poor performance. However, currently, Gelato's network bots are not open to ordinary users, and no further details have been disclosed regarding this.
From the token use cases, it can be seen that Gelato does not intend to link any revenue with the $GEL token.
Project Risks
We believe the risks of the project are ranked in descending order of importance as follows:
Risk of Overly Strong Competitors
Chainlink Keepers is Gelato's main competitor. Chainlink has a stronger brand compared to Gelato, more essential developer outreach channels, richer on-chain and off-chain synchronization experience, more abundant team funding reserves, and can bundle sales effects with oracle and VRF services. It will not be easy for Gelato to win in competition with Chainlink Keepers.
Risk of Difficulty in Capturing Token Value
Gelato's similar product in the Web 2 world—IFTTT—has gone through a painful commercialization process, ultimately determining that its revenue model mainly comes from enterprise users, still existing in a form more akin to enterprise service outsourcing, which means difficulties in customization and scaling effects. According to Growjo data, IFTTT's expected revenue in 2021 was only $8.6 million, which is not impressive for an app with nearly 20 million active users and 1 billion monthly calls.
Due to the similarity in product forms, Gelato is likely to encounter this issue in its subsequent product promotion. Additionally, Gelato does not intend to link protocol revenue with the token in its token use case planning.
Smart Contract Risks
The services provided by Gelato require direct access to users' funds. Although Gelato's related contracts have been audited by Certik, smart contract risks are unavoidable. The G-UNI risk issue that occurred on December 12 also proves this point.
Risk of Unsustainable Competitive Advantages
As mentioned earlier, the Web 3 DevOps industry does not have very high barriers to entry, and it is not difficult for outsiders to enter this industry. Both project teams and end users are only sensitive to functionality and have no loyalty to the service providers offering those functionalities. Therefore, Gelato's current competitive advantages may not be sustainable.
IV. Preliminary Value Assessment
Five Core Questions
What stage is the project in its business cycle? Is it in the maturity stage or the early to mid-development stage?
The project has a relatively long development history, with a clear product path and several core products that are relatively stable; however, in terms of its planning, the current products are still only a small part of its overall plan, placing it in the early stages of development.
Does the project have a solid competitive advantage? Where does this competitive advantage come from?
The project's competitive advantage comes from its first-mover advantage in the field, support from the Ethereum developer community, and resource support from VCs (including potential support from Binance after recently winning the BSC MVB3).
Is the project's medium to long-term investment logic clear? Does it align with industry trends?
Automation tools for smart contracts have use cases across all smart contract public chains. Among the top ten crypto projects, ETH, BNB (BSC), SOL, ADA, DOT, and LUNA are all smart contract public chains, and Gelato has collaborated with the top five EVM public chains by TVL. From a longer-term perspective, the significance of smart contract automation aligns with people's visions for the future. In summary, the project aligns with the major trends in industry development.
What are the main variable factors in the project's operations? Are these factors easy to quantify and measure?
In the short term, as a primarily B2B project, Gelato's main operational variables come from its ability to effectively bring developers into the Gelato ecosystem. This can be measured by observing Gelato's collaboration movements with other project parties and monitoring the activity of the Gelato bot network.
In the long term, its operational variables come from the implementation of cross-chain triggers and off-chain triggers, as well as its ability to effectively attract users and find monetization paths.
What is the project's management and governance model? What is the level of its DAO?
The project is governed by a DAO, with the first governance proposal voting starting on December 1. It is too early to assess the level of the DAO.
Valuation
Until the end of 2021, Gelato's products do not charge any fees, which is related to the project's early stage. Moreover, since the project is currently developing across multiple chains in parallel, there has not yet been a comprehensive statistic on the total number of network calls, making it impossible for us to simulate revenue and profit. Therefore, we will not conduct P/E and P/S valuations for the project itself.
In terms of horizontal comparison, among Gelato's competitors, KP3R's core use case is currently to obtain protocol revenue from Fixedforex, which is unrelated to Gelato's business. Meanwhile, Chainlink Keepers has just launched, and many data points are unavailable, so we cannot accurately compare Gelato's horizontal valuation.
Here, we only list the fully circulated market capitalization and circulating market capitalization of the above three protocols for comparison.
Data as of December 11, 00:40 (GMT+8), source: Coingecko
Conclusion
Gelato provides automation services for smart contracts, aiming to become the execution layer of Web 3. In the long term, the automation of smart contracts aligns with people's expectations for the future, and the industry is still in its early stages of development, giving Gelato a certain first-mover advantage. In the short term, the business logic of becoming an outsourced DevOps service provider in the crypto world is also feasible. Gelato has a first-mover advantage in its field, support from the developer community, and resources from VCs, and recently winning first place in BSC MVB3 has laid a solid foundation for its expansion in BSC. However, it also faces strong competition from formidable rivals—Chainlink Keepers.
V. References
https://thedefiant.io/the-defi-future-is-automated/
https://docs.Gelato.network/
https://medium.com/gelato-network/gel-token-sale-date-and-whitelist-opening-fc697c814662
Token market cap data: https://www.coingecko.com/
Protocol TVL data: https://defillama.com/home
