Instadapp

Investment Thesis

Given the rise in U.S. treasury yields (5.00% – 5.25% at the time of writing) and the suction of liquidity that ensued from risk assets, perhaps the most useful metric to gauge product-market fit at this stage of the bear market is Total Value Locked (TVL). Essentially, the consideration that is front and center in the minds of savvy investors is, ‘Would this investment or strategy yield better than 5% on a risk-adjusted basis?’

In our view, TVL is a direct reflection of that question – it is an investor’s expectation of return for locking their liquidity in a specific dApp. For reference, DeFi TVL plummeted 15% for the past 12 months as risk-free rates rose. Conversely, Instadapp TVL increased by 40% in the same period. In this piece, we explore the drivers of this, and more specifically, how a protocol with $25m market cap has managed to retain $2.2b in TVL (9th out of all DeFi apps per DeFiLlama).

Figure: Total DeFi TVL vs Instadapp TVL

Instadapp is a platform that aims to be the front page of DeFi, allowing users to interact with different dApps over multiple networks under one user-friendly interface, using what they call DeFi Smart Accounts (DSA). It does so by leveraging account extensions and upgradability, acting as a middleware that aggregates multiple DeFi protocols into one upgradable smart contract layer. Instadapp first launched with two products, ‘Instadapp Pro’ for heavy DeFi investors and ‘Instadapp Lite’ for passive users.

Instadapp Pro, as the name suggests, is catered to more sophisticated DeFi users and is integrated with the likes of MakerDAO, Compound (v2 and v3), Aave (v2 and v3), Uniswap, 1inch, Liquity, Euler Finance, Yearn Finance, Reflexer Finance, and more. It allows users to view their debt positions across integrated borrow lend platforms, simulate different strategies, refinance or move debt between protocols, and automate liquidation protection in times of stress. Instadapp Pro is the protocol’s flagship product, attracting ~$2b in TVL across the different integrated DeFi platforms mentioned above.

On the other hand, Instadapp Lite features iETH vaults, which are levered stETH vaults via a process called ‘looping.’ Essentially, users deposit stETH on Instadapp which is deposited as collateral on Aave/Compound/Morpho-Aave. The protocol then performs a flash loan^[1] to borrow stETH against their collateral to then deposit back into Aave/Compound/Morpho-Aave ad nauseum. This strategy has historically outperformed holding stETH by magnitudes, attracting $290m in stETH liquidity as a result.

Figure: iETHv2 vs stETH APR

To date, iETHv2 vaults have generated $327k in cumulative revenue to the protocol itself from a 20% performance fee, while the Pro product has generated ~$1m in cumulative fees from a minimum 5bps Flash Loan Aggregator (FLA) fee tier. To top it all off, Instadapp has managed to achieve this with almost no INST 1.28%  incentives whatsoever, apart from a short-lived yield farming program at launch. In other words, all of the revenues accrued so far constitute earnings, a stark difference from incentivized usage that is prevalent in other DeFi protocols today.

Figure: Instadapp Circulating Market Cap vs Revenue

In March, Instadapp launched their latest update, Avocado, which is a blockchain aggregator that lets users seamlessly interact with multiple wallets on multiple chains. Functionally, users have one wallet that displays the balances of all their wallets on all chains and are able to interact with multiple DeFi apps under one interface. In other words, anyone with a Metamask, Trust Wallet, or Coinbase Wallet account will be able to connect their EOA^[2] address to Avocado, from which they will get a new address that aggregates all of their web3 activity. So far, Avocado is integrated with Ethereum, Optimism, Arbitrum, Polygon, Avalanche, BNB Chain, Gnosis Chain, and Polygon’s zkEVM.

Figure: Avocado Back-end Infrastructure

As alluded to in the graphic above, Avocado connects to the underlying dapps on each supported chain via its own RPC^[3] and broadcaster network. The RPC network then finds an available broadcaster, which essentially sends the user’s transaction requests to the blockchain. Should the encrypted information encrypted match the user’s private key, the transaction is confirmed on-chain.

By having its own RPC and broadcaster network, Avocado serves as the middleman between the user, the dapps, and the underlying blockchains. Instadapp’s Avocado product also works synergistically with its flagship Pro product, as users can interact with integrated DeFi platforms using one Avocado wallet.

More importantly, Avocado abstracts away the concept of gas fees by having a USDC gas balance that gets drawn down, regardless of which network the user executes transactions on. This significantly improves the status quo of navigating on-chain, which entails keeping enough gas tokens on each wallet on each chain per user.

As the ‘front page of DeFi,’ Instadapp charges a 20% premium on all gas fees incurred on their platform. The protocol then shares half of this premium to integrated dApps to continually incentivize new and existing dApps to integrate with Instadapp. The other half currently goes to the protocol treasury, which has accumulated ~$64m in tokens thus far.

Upcoming Catalysts

Apart from three revenue-generating products, co-founder Somway Jain has alluded to one more impending launch, although he remains tight-lipped about it [1][2]. Moreover, while current revenues are routed towards the treasury, there are impending plans for a portion of revenues to be routed to INST 1.28%  holders by 2023.

To estimate staking yields, we first ascertain the circulating supply of INST on 31 Dec 2023, which is ~24m. We then further assume price stays constant at $1.40, 20% of circulating supply is staked then, all treasury revenues are routed towards token holders (turning on the fee switch), and Avocado contributes to 50% of current annual revenue. The projected staking APY from these assumptions is 9.5%, which is competitive with other single-sided staking rates.

Figure: INST Staking Yields Sensitized Against Avocado’s Uplift in Annualized Revenue and % of Circulating Supply Staked

We further venture into why this staking yield is material and may mitigate liquidity in the ‘Risk’ section below.

Liquidity & Entry Suggestions

Instadapp’s current liquidity is deep ($5.2m liquidity for $25.3m circulating market cap), paired with ETH, and hosted primarily on Uniswap v3 over two pools, with the main pool (1% fee tier) hosting 5.2m while the second pool (0.3% fee tier) hosting $656k in liquidity. As opposed to v2 pools, v3 pools operate on a range basis, allowing liquidity providers to select price ranges across which they would provide liquidity instead of across the whole range (0 → ∞) per the Constant Product AMM^[4]. We further outline why liquidity perhaps pose as the biggest risk to the Instadapp thesis in the ‘Risk’ section below.

Figure: INST Entry Suggestion

From a technical perspective, INST looks to have broken out of its $1.00 – $1.20 previous range breakdown in Aug 2022. Given the team’s outlook on Q3 ‘23 and funding round prices elaborated on below, we believe the same $1.00 – $1.20 range to be an attractive one for medium-term accumulation.

Tokenomics and Funding Rounds

Like many other DeFi tokens, INST is the governance and utility token of Instadapp. It has a max supply of 100m INST and has so far emitted 17m of that. At the current price of $1.42, this implies a market cap of $25m and an FDV of $142m.

The INST allocation follows the breakdown below:

• 55% (55,000,000 INST) to Instadapp community members.
• 23.79% (23,794,114 INST) to current team members with 4-year vesting.
• 12.07% (12,078,714 INST) to investors with 4-year vesting.
• 7.85% (7,851,941 INST) for future team members and ecosystem partnerships.
• 1.27% (1,275,231 INST) to advisors with 4-year vesting.

Figure: INST Emission Schedule

It is worth noting that the allocation towards community members, future team members and ecosystem partnerships does not have vesting schedule as they are unallocated yet.

Instadapp has had two funding rounds to date. Their $2.4m seed round in 2019 was led by Pantera Capital, with participation from Coinbase Ventures, IDEO Colab, Robot Ventures and a network of angels including Naval Ravikant and Balaji Srinivasan. They then raised $10m in June ‘21, led by Standard Ventures and counts DeFi Alliance, Longhash Ventures, and Andre Cronje as investors.

These two funding rounds have SAFT agreements totaling ~12% of total supply, with an average buy price of $1. At ~$1.40, the valuation at which public investors can accumulate INST ($25m mcap | $143m FDV) is an attractive one in our view, especially given the lack of lockups relative to the private round investors.

Risks

Upon closer inspection, almost all of Instadapp’s liquidity is provided by this whale. The entity is providing liquidity between 0.0007 INST/ETH to 0.002 INST/ETH. Additionally, the range of Uni v3 liquidity by said whale is nearing its lower end. In other words, should INST price exit the range, it would expeditiously decrease to 0 with some sell pressure.

Figure: ETH/INST Liquidity Range

Specifically, the pool has ~335ETH (~$635k) in net selling pressure before it exits the range. While liquidity risk for INST is material, we believe this risk is mitigated by the fact that the user behind this wallet has been accumulating and compounding INST since its inception and has $1b of tokens in their wallet. This whale is rumored to be 7 Siblings, an entity that was almost liquidated for $600m in 2021.

Figure: ETH/INST Liquidity provided by 0x28a

Moreover, this liquidity risk is reduced by the feasibility of single-sided staking yields highlighted in ‘Upcoming Catalysts’ above, should the fee switch get turned on. In simple terms, instead of selling tokens to realize gains, token holders and liquidity providers can do so by staking their tokens for real yield. This route is even more compelling given that the revenue generated by tokens is not incentivized by inflation, rendering less tokens to be sold into said liquidity. Depending on how creative the team gets, the protocol can also necessitate revenue sharing to be made available to liquidity providers as well, although our scenario analysis above only accounts for single-sided staking.

Bottom Line

For fundamental investors, we believe INST represents a crypto project that has found product-market fit even in the bear markets. The protocol has launched multiple products that are synergistic and cater to both casual and heavy DeFi users, focusing foremost on great user experience. However, investors need to consider liquidity risk and the risk that revenue sharing launch can be delayed, rendering INST another governance and utility token.

^[1] A flash loan is a type of loan in the decentralized finance (DeFi) ecosystem that allows users to borrow assets without having to provide collateral or a credit score. This type of loan has to be paid back within the same blockchain transaction block.

^[2] An Externally-Owned Account (EOA) is a wallet controlled by anyone with the corresponding private keys. This is in contrast to a Contract Account, which is a smart contract deployed to the network and controlled by code.

^[3] A remote procedure call (RPC) is a network programming model or interprocess communication technique that is used for point-to-point communications between software applications.

^[4] Constant Product AMM follows x*y=k, where x and y are quantity of assets in the liquidity pool, and k is the constant coefficient. X and y rebalance to maintain a constant coefficient k whenever there are changes in the quantity of assets in the liquidity pool.