FLUID: A Misunderstood DEX Wrapped As a Lending Protocol

Executive Summary

1. ◆Current Price: $6.47
2. ◆Market Capitalization: $430m | FDV: $647m
   1. ◆Circ Supply: 39.4m | Max Supply: 1b (40% circ)
3. ◆Volume: ~$2m T30D Average Volume, mostly on Uniswap v3
4. ◆FLUID 12 Month PT: 
   1. ◆Base: $32.54 | 5.0x
   2. ◆Bull: $64.41 | 9.9x
   3. ◆Bear: $4.07 | 0.6x
5. ◆Recommendation: Bid FLUID across 7D TWAP executed on DEX Aggregators (Kyberswap) for best execution

Introduction: Fluid (formerly Instadapp) combines a lending protocol and a DEX on a unified liquidity layer. Its core innovation allows deposited collateral and borrowed debt to double as liquidity for trading – a concept known as “Smart Collateral” and “Smart Debt.” In practice, users can supply assets as collateral, borrow against them, and have both the collateral and the borrowed funds automatically provided as liquidity in Fluid’s DEX pools​. 

This means liquidity isn’t siloed: the same capital secures loans and facilitates trades, dramatically improving capital efficiency. This multi-use of capital allows Fluid DEX to generate up to $39 of liquidity per $1 of actual TVL under high leverage scenarios​ – an efficiency far beyond traditional AMMs. In one instance, Fluid enabled a ~$125M liquidity stablecoin pool effectively backed by $0 of net deposits - the entire pool was a user’s debt position.​ The new primitive also translates to better capital efficiency and fee generation potential per dollar locked. More recently, it has facilitated over 55% of stablecoin volumes across Ethereum, Arbitrum, Base and Polygon. If Ethereum is the chain for stablecoins, Fluid is the DEX for stablecoins.

Given its significant experience in DeFi middleware through Instadapp, Fluid’s design draws inspiration from the top DeFi protocols, including Uniswap v3’s concentrated liquidity to improve liquidation queues, Aave’s interest rate curves to balance borrowing liquidity, and Morpho’s vaults to segregate risk. By serving as the “liquidity layer” for multiple DeFi primitives, Fluid offers users better capital utilization - borrowers get lower net interest (since their debt earns fees) and LPs earn stacked yields (swap + lending interest). 

Fluid’s stepwise improvement in DeFi has not gone unnoticed - since the lending market went live in early 2024, it peaked at $1.5b in TVL a week ago and sits at $1.4b today. Fluid’s DEX product launched later in Nov ‘24 but gained traction much faster, consistently facilitating 20%+ of trading volume on Ethereum to only trail Uniswap marginally. 

Figure: Fluid’s Market Size ($2.8b in assets | $1.4b in debt, some of which are productive LPs)

Thesis Overview

• ◆Beta to DeFi & Stablecoin Sector
  • ◆Most retail investors like AAVE conceptually and liquid fund analysts like AAVE for their funds, but anecdotally, few own AAVE in their PA
  • ◆Consequently, mid-cap DeFi such as SYRUP and EUL have gained momentum as this demographic of investors attempts to chase larger returns and frontrun institutional flows that will inevitably invest down the risk curve
    • ◆Analogously, Fluid is to Uniswap what Euler/Syrup is to Aave
  • ◆Fundamental-focused verticals like DeFi have a higher chance of coming into focus again as market structure changed from trending to ranging, especially as memes and AI Agents that lack revenue metrics fall out of favor
  • ◆If Ethereum is the chain for stablecoins, FLUID is the app for stablecoins - the protocol has grown to facilitate 55% of stablecoin volumes across Ethereum, Arbitrum, Base, and Polygon

• ◆Misunderstood as Just Another Lending Protocol
  • ◆Whenever Fluid gets floated amongst liquid funds, one of the first questions I frequently receive is ‘Isn’t Fluid another lending protocol? Why not just long EUL/SYRUP?’
  • ◆Fluid is technically superior to Euler as users can not only lend their LP as collateral, but also denominate their debt positions as LPs, all whilst being able to withdraw a single asset (from the LP-denominated debt) to be productively used elsewhere or to loop
  • ◆More importantly, Fluid is designed in such a way that the liquidity deposited into the protocol goes into their ‘Liquidity Layer’ which can be used to power new primitives
    • ◆This is in contrast to segregated liquidity venues for specific use cases - today Uni v2 pools still facilitate a significant share of Uniswap volumes with v4 largely unused
  • ◆The team has proven their ability to innovate and adapt to market demands, starting with Instadapp and Avocado Wallet last cycle, to ETH Lite Vaults that is still the most popular leveraged ETH looping vault today, and to DEX
• ◆Improving Fundamentals Not Reflected in Price
  • ◆In 9 months, Fluid has risen to become the second most used DEX on Ethereum, with the potential to unseat Uniswap as the dominant DEX in all of DeFi with its expansion to Solana with Jupiter
  • ◆The protocol has achieved this by prioritizing B2B integrations with other aggregators. Instead of owning distribution and the front end for users to perform swaps directly on the platform, it owns the liquidity created via Smart Collateral and Smart Debt.
  • ◆On Jan 1st, Uniswap facilitated 81% of trading volume on Ethereum, while Fluid facilitated 1.8%. On August 3rd, that split became 26% | 55%
• ◆Impending Value Accrual Switch
  • ◆Today, 25% of trading fees on correlated pairs are charged as revenues, with 10% to be charged on trading fees on volatile pairs soon
    • ◆For conservatism, we have assumed 10% of 10bps on all trading volumes as revenue to the token
  • ◆According to this governance proposal, once Fluid achieves $10m in annualized revenue, up to 100% of earnings will be allocated to buybacks 
    • ◆The team has guided towards late Q3 as the timeline to kickstart buybacks
  • ◆The buybacks follow the CF AMM model (x*y=k), where buybacks are dynamically adjusted based on FLUID’s FDV 
    • ◆When prices are high, smaller percentage of revenues is used for buybacks
    • ◆When prices are low, a higher percentage of revenues is used for buybacks

Extended Catalyst Path

• ◆DEX Lite (ETA: early August)
  • ◆Controlled by governance, DEX Lite is a protocol that borrows uncollateralized from the Fluid Liquidity Layer to facilitate trading via bare-bones LPs with lower gas costs
  • ◆These LPs primarily cater to MEV flow that are low in fees but high in volume, accounting for nearly half of onchain trading volume according to some estimates, and is estimated by the team to contribute an additional $200-300m in daily volume   
    • ◆Current Fluid LP pools are ~25% higher in gas costs than Uniswap/Ekubo pools, rendering their growth in market share thus far even more impressive
  • ◆DEX Lite has been rolled out with Kyber and Velora (formerly Paraswap), with more aggregators to follow
  • ◆Borrowed positions accrue borrow interest to the protocol, further benefiting tokenholders
    • ◆As these LPs are gas optimized and bare bones, however, DEX Lite is positioned to take market share from a volumes perspective with marginal increases in revenues
• ◆Expanding Beyond EVM by Partnering with Demonstrated Leaders (ETA: mid August)
  • ◆While Fluid’s recent dominance has been on Ethereum, the protocol launched on Arbitrum, Polygon, and Base, and has some encouraging traction even with a limited number of initial pools
  • ◆The protocol is partnering with Jupiter by powering the technology behind Jupiter’s impending borrow/lend protocol, JupLend, with economics split 50/50 between both protocols
  • ◆Once JupLend is up and running with single asset collateral and debt, the teams plan to launch Smart Collateral and Smart Debts on Solana later this year, marking the entry of DEX protocol into Solana 
• ◆Fluid DEX v2 (ETA: early September)
  • ◆v2 of Fluid DEX, which allows for custom range liquidity (DEX v1 and Uni v3 range orders) for both Smart Collateral and Smart Debt positions, is slated to launch in early September
  • ◆The Fluid Liquidity Layer and DEX v2 will unlock a wider range of use cases such as option payoffs and other custom structured products, most of which are still being explored today
  • ◆DEX v2 will also enable Fluid to take market share of volume on non-correlated pairs, something that is unaccounted for in the product today since the only volatile pair on Fluid today is ETH-USDC
• ◆Revenue Switch (ETA: September)
  • ◆Once Fluid reaches $10m in annualized revenues, up to 100% of earnings will be allocated to buybacks
• ◆Permissionless Asset Listings and Higher Risk Limits
  • ◆Currently, Fluid has only integrated megacaps onto its Smart Collateral and Smart Debt products, with most if not all of their vaults being full due to the stepwise improvement in yields
  • ◆As the new primitive gets battle tested with time, the team will onramp more volatile asset types and increase risk limits, inadvertently increasing the take rate for the protocol as well 
• ◆Exchange Listings
  • ◆While Fluid has had a compelling growth case, many investors are turned away by its low liquidity dynamic - $1.7m traded in the past day for a $253m market cap token
  • ◆The team plans to address this by allocating 2% of tokens for exchange listings and 2% for market-making

Product Overview

• ◆Lending Protocol
  • ◆A simple Lend and Earn protocol for users to get long-term sustainable yields, integrated with borrowers from the Vault protocol below
  • ◆Liquidity deposited in this protocol is then utilized in the Liquidity Layer across the entire Fluid Ecosystem
  • ◆Simplified UX to offer long-term yield opportunities by integrating more partner protocols over time

• ◆Vault Protocol
  • ◆Fluid advancements in liquidations and utilization enables the protocol to offer the highest LTV in the market up to 95% LTV on assets like ETH
  • ◆The Vault protocol is built upon the Fulid liquidity layer. Vault implements a highly efficient liquidation mechanism that prevents individual position liquidations by consolidating them into groups (ticks), significantly reducing the risk of bad debts in volatile market conditions.
    • ◆This enables positions at risk in a given tick to be liquidated in a single transaction, a significant improvement in design choice relative to competition. This also allows for the higher LTVs stated above
  • ◆The protocol only liquidates the amount necessary to bring the account back to a healthy state, which reduces the market impact and potential cascading liquidations common in other protocols
    • ◆Fluid allows traders on integrated DEX aggregators to liquidate positions at close to no cost as they are taking the opposite side of the liquidation trade.
  • ◆Fluid introduces new primitives in Smart Debt and Smart Collateral, allowing users to utilize their debt as liquidity for trading purposes
  • ◆Essentially, productive assets in the form of liquidity pools can be created by debt positions without additional TVL, and are sticky insofar as these debt positions remain open
  • ◆Smart Debt present as LP position on the DEX protocol, but users can withdraw individual assets to then be used elsewhere, all whilst earnings trading fees from the LP

• ◆DEX Protocol
  • ◆Fluid DEX has been taking so much market share in trading volumes because it facilitates best execution, primarily dependent on these three factors
    • ◆Liquidity depth
    • ◆Gas costs
    • ◆Fee tiers
  • ◆The DEX protocol essentially sources liquidity from Smart Collateral and Smart Debt in its ancillary Vault protocol

• ◆ETH Lite Vault
  • ◆One of the protocol’s legacy products before rebranding as Fluid, the ETH Lite vault generates one of the highest leveraged yields for ETH depositors, generating anywhere between 4-15% over the last 3 years
  • ◆Despite having <10% of Fluid’s current TVL, the ETH Lite vault currently generates ~50% of the protocol’s TTM revenue 
  • ◆The team has indicated intentions to build out Stablecoin Lite vaults in the future, but for conservatism we have omitted it from our projections as its deployment is further out and to factor in execution risk

Model

To project out return scenarios, we examine the three business lines that Fluid has (by order of magnitude), namely Fluid DEX, Fluid Lending, and Fluid Lite.

Today, Fluid applies various take rates to its different businesses, in line with industry comps. The lending protocol has an 80bps take rate, while the DEX protocol has a 1bps take rate (10% of fees to LPs, which are 10bps of trading volume on aggregate), and their Lite protocol has 160bps. 

On the DEX business, our base case assumes Fluid does ~60% of Uniswap’s TTM volume on Ethereum ($12t) and our bull case assumes Fluid facilitates ~100% of that. We assumed 25% and 40% market share for DEX trading volumes on Solana, on which economics are split evenly with Jupiter. At the 1bp take rate, the DEX business generates $117m in revenues for our base case and $192m in our bull case.

On the lending side, our base case sees Fluid getting ~15% of Aave’s TVL today, or 8% of total lending TVL on Ethereum, while our bull case assumes closer to ~23% of Aave’s TVL and 10% of total Ethereum lending TVL. Via JupLend, Fluid’s lending business is assumed to capture 30% and 35% of total lending TVL. At 80bps take, this generates $40m and $60m in revenues for our base and upside cases. 

On Lite, we assumed a modest growth rate in line with where we think ETH prices will end up in ‘26, and the same take rate. All this yields $163m in total revenues in our base case and $257m in our upside case. Conservatively assuming 20x and 25x multiples (relative to comps and historicals), we arrive at $3.3b FDV (5x) and $6.4b FDV (10x).

Tokenomics

The $FLUID token is the governance and value accrual token for the Fluid ecosystem. As mentioned above, the rebrand of the Instadapp to Fluid protocol also entailed a 1:1 INST to FLUID conversion with no dilution​. There are 100 million FLUID tokens total and the entirety of tokens have vested. 60% of tokens are circulating, while the remainder is held largely by the treasury. 

Team

Instadapp was originally cofounded by twins Sowmay and Samyak Jain, before rebranding to Fluid Protocol in October 2023. Sowmay Jain played a pivotal role in shaping Fluid’s vision but has recently transitioned to an advisory capacity to focus on his new AI startup, BhindiAI. In parallel, DeFi Made Here (DMH), a well-known DeFi educator and influencer, joined the Fluid team full-time in April 2024 after contributing to the protocol, helping to accelerate growth and adoption leading into the launch of Fluid DEX v1 and v2.

From our conversations with the team, we have full faith in their current lean structure (15 core, 25 total) and the team’s earnesty to return value to shareholders. This is bolstered by the fact that, unlike most other token rebrands, the team consciously decided against diluting existing tokenholders as they still had considerable runway when rebranding from Instadapp to Fluid.

Risks

• ◆Smart Contract Bugs 
  • ◆Mitigant: Automated Limits
    • ◆Fluid employs Automated Limits that expand continuously per block, restricting the maximum withdrawal and borrowing within any 12-hour period. This mechanism, known as Expand Percentage, is available on the Stats page. Automated Limits protect the protocol from sudden black swan events, making it highly unlikely for all liquidity to exit Fluid in a short period. For instance, it would take approximately four days for all liquidity to exit.
    • ◆Starting from Instadapp, the Fluid team has also built 4 major protocols over the last 4 years with dozens of audits and not a single vulnerability incident
  • ◆Mitigant: Audits from Statemind, MixBytes [1][2], Cantina, and a ImmuneFi Bounty
• ◆Price Oracle Bugs
  • ◆Mitigant: Fluid utilizes multiple price oracles, including Chainlink and Uniswap TWAP (Time Weighted Average Price) checks, to verify prices during transactions. This dual-check system minimizes the risk of price manipulation, ensuring more reliable and secure operations.
• ◆Undercollaterized fToken
  • ◆As a liquidity layer, all protocols built on Fluid draw liquidity from the same pool. Excessive access to liquidity or significant asset devaluation can affect the liquidity layer, causing depositors to become under-collateralized. 
  • ◆Mitigant: This is managed by governance and how much each protocol can tap into the liquidity layer, if an asset becomes undercollaterized or an asset is frozen it may impacts all asset holders until the specific vault or protocol's debt is neutralized, returning the fToken to parity.
• ◆Liquidation Risks
  • ◆Cascading liquidations can cause bad debt
  • ◆Mitigant: Fluid's advanced liquidation mechanism ensures the cheapest and most gas efficient liquidations. Thousands of positions can be liquidated in one transaction, allowing the protocol to liquidate debt quickly and effectively. This efficiency enables Fluid to offer higher Loan-to-Value (LTV) ratios for user assets.