ABCDE: Why do we invest in Gravity?

Written by: Lao Bai, Partner of Investment Research at ABCDE Capital

GRVT (Gravity) is a hybrid on-chain trading platform—Hybrid Exchange (Hex), combining the user experience of Cex with the capital security of Dex. Gravity will become the leading derivatives trading protocol on zkSync, standing alongside Arbitrum's GMX and Dydx, which originated from Starkex, and will launch its testnet in Q4.

ABCDE invested in Gravity during its seed round, along with other participating institutions such as Matrix Partners China, Delphi Digital, and C² Ventures.

1. The Path for On-Chain Derivatives

In the era of EtherDelta in 2017, the "awkwardness" of spot trading on-chain was evident. Despite waving the decentralized banner and shouting "Not your Key, not your Asset," 99.9% of trades still occurred on centralized exchanges.

Later, Uniswap emerged, revolutionizing the AMM paradigm. After several years of development, the trading volume of Dex relative to Cex in spot trading climbed from less than 1% to 10%-20%, establishing Uniswap and Curve as the dual oligarchs of the Dex landscape. New Dex platforms wishing to break into the spot trading arena may only find opportunities during the early days of a new chain.

In the derivatives space, compared to the red ocean of spot trading, it is still in a transition from blue ocean to red ocean, with on-chain derivatives trading accounting for only 1%-2% of centralized trading platforms, similar to the starting point of spot Dex during the DeFi Summer. Although GMX and DYDX seem to dominate like Uni+Curve, their dominance is not comparable. The recent releases of GMX V2 and DYDX V4 have shown no changes in either token price or trading volume.

So, the question arises: what is the direction for on-chain derivatives?

The fundamental reason why on-chain derivatives have been well-received but not widely adopted lies in their inability to provide a differentiated experience from Cex. Uniswap initially thrived on "permissionless forks" (commonly known as "meme coins") and liquidity mining, while Curve held an absolute advantage in ultra-low slippage for stablecoin trading, liquidity pools for tickets and staked assets (like stETH), and innovative veToken features—services and experiences that Cex cannot provide. However, derivatives Dex can only offer futures or options services for mainstream or blue-chip assets, failing to create true differentiation from Cex. Given that performance and liquidity experiences are inferior to Cex, ordinary users willing to switch from Cex to Dex are often few, except for Degens or whales who place extreme importance on security and capital autonomy.

In other words, users may come to the chain for functionalities unavailable on Cex, "incidentally" opting for decentralization. However, they will not abandon the performance and experience of Cex for the sake of "politically correct" decentralization.

So, let's consider a different approach: if we can enhance the security and autonomy of your assets through decentralized means without sacrificing the performance and experience of Cex, would users be tempted? Could this be the potential breakthrough for on-chain derivatives?

2. The FTX Collapse—A Timely Assist

Security issues have never received genuine attention—until the moment they occur.

No one expected that FTX, the world's second-ranked crypto trading platform, which might have the best overall trading experience, could collapse within days, entangling countless users and institutions with significant losses. The security issues of Cex finally caught users' attention, and "Not your Key, Not your Asset" sparked renewed discussion.

The derivatives field has finally welcomed a new paradigm—Hybrid Exchange (Hex).

3. Hybrid Trading Platform—Gravity

Overall, as a hybrid trading platform, Gravity's positioning leans more towards Cex. However, it has one core mechanism that differs from Cex—Self Custody Trading, which refers to the previously mentioned self-custody of funds. For Degens, it allows easy trading using Metamask or Wallet Connect, similar to DYDX or GMX. For new users familiar with Cex but not much with on-chain, Gravity offers a user-friendly experience akin to Web3Auth, allowing email registration to generate an MPC Wallet, eliminating the hassle of managing mnemonic phrases and private keys. This minimizes the entry barrier while ensuring the security of funds.

In contrast to common Dex platforms like DYDX and GMX, Gravity's differentiation is much more pronounced, with several key features:

· Trading Privacy—Current on-chain derivatives are mostly "transparent." Gravity uses Validium technology to ensure that each user's trades are invisible to other users on the chain.

· High-Performance Orderbook—An ultra-high-performance off-chain CLOB order matching system, capable of achieving 600KTPS and 2ms latency, essentially matching the trading experience of Cex.

· User Portfolio Management—The system provides a range of user panels and management functions often seen only on centralized derivatives trading platforms, including SPAN analysis, portfolio margining, and cross-market hedging.

· Simultaneous Offering of Options and Futures—Typically, on-chain derivatives options and futures are entirely different projects. Gravity, however, leans towards the Cex style by offering both options and futures contract trading, creating a one-stop platform for derivatives.

· Actively Embracing Regulation and Compliance—Strict KYC and AML (Anti-Money Laundering) support.

4. A Team Merging Professional Finance and Web3 Experience

In addition to the product itself, the team and market positioning were significant factors in our decision to invest in Gravity.

· The team comprises individuals from traditional "financial veterans" like Goldman Sachs and DBS Bank, as well as Crypto "native OGs" from Bybit and OKX.

· The team is rooted in South Korea and has a deep understanding of the Korean market, where trading enthusiasm is noticeably higher than in other countries. The product will initially radiate from the Korean market, making cold starts relatively easier.

· Gravity will launch on zk-Sync, which has recently been troubled by various meme coin rugs and a lack of original projects, urgently needing an innovative quality project to revitalize the entire ecosystem. GMX has succeeded on Arbitrum, and we see the potential for Gravity to lead the zk-Sync ecosystem.

· In the previous DeFi Summer, the focus was on spot trading, while on-chain derivatives were largely absent. In the next bull market, on-chain derivatives trading, especially innovative hybrid trading platforms that combine the advantages of Cex and Dex, will undoubtedly secure a place.

The team plans to launch the testnet in Q4 this year and the mainnet in Q1 next year. We eagerly anticipate the hybrid trading experience that Gravity will bring, taking over the baton from Dydx after its departure from Starkex, and becoming the "new Dydx" on Starkex, ushering in a new chapter for on-chain derivatives.