Author: Penny

Currently, one of the hottest sectors in the Sonic ecosystem is Shadow Exchange, whose native token $SHADOW has seen its market value rise from around $5M to $31.84M in a week, an increase of more than 500%. Currently, there are 457 liquidity pools on Shadow Exchange, with a 7-day trading volume of $557 million and a single-day peak trading volume of $171 million.

While other chains are focusing on the Meme market and are constantly being attracted by various emergencies, Sonic Labs is focusing on the development of DeFi. Sonic has announced a number of new measures to incentivize DeFi projects in the ecosystem, which has also increased the TVL on the Sonic chain by 500% in the past month. In just two months, Sonic has achieved a TVL of more than $500 million from 0. A total of $110 million in external funds have flowed into Sonic on the chain, with Solana accounting for the majority, followed by Base and ETH. The DEX trading volume on Sonic has also exceeded the $1 billion mark.

Shadow Exchange is a Sonic native centralized liquidity layer and exchange. In the high-speed, low-cost EVM-compatible Layer 1 ecosystem of Sonic Chain, Shadow Exchange, as one of its core trading protocols, improves the traditional ve(3,3) model to the x(3,3) incentive model, attracting the attention of a large number of investors.

The familiar (3,3), but with an extra x

The history of decentralized finance has been marked by repeated attempts to solve the “DEX trilemma”, i.e. how to align incentives between traders, liquidity providers, and token holders. While Andre Cronje’s ve(3,3) model theoretically solves this problem by balancing incentives between all participants, the long lock-up period creates a high-friction system that forces users to lock up tokens in order to fairly participate in the incentive model.

Uniswap focuses on a simple two-party system: traders and liquidity providers (LPs). ve(3,3) improves on this by properly aligning incentives with the interests of token holders, but obtaining these incentives is unfair and heavily biased towards the protocol.

The x(3,3) model solves these problems. Users can exit at any time and can lift the lock-in restrictions through incentives. Users can participate in governance by staking platform tokens and vote on the emission weights of the liquidity pool. Voters can receive a share of the handling fees and additional "bribe rewards", which encourages long-term holders to deeply participate in ecological construction. The following figure clearly shows the entire Defi model process:

The $SHADOW token is the most primitive token and can be freely exchanged with other currencies. $SHADOW can be exchanged 1:1 with the xSHADOW token. The xSHADOW token is the core of the entire model. xSHADOW stakers can vote to allocate rewards directly to LP pairs. At the same time, they can also obtain 100% of the protocol fees, voting rewards and exit penalties through staking.

In terms of user exits, Shadow implements a unique player-vs-player (PvP) rebasing mechanism, where exit penalties flow to xSHADOW stakers, and when users exit their xSHADOW positions early, 100% of the confiscated tokens flow to existing xSHADOW stakers in proportion to their positions. In terms of token selection, you can claim liquid SHADOW and enjoy the default APY, or illiquid xSHADOW and enjoy 2x APY.

Users can convert xSHADOW to SHADOW at any time: immediately (with a 50% penalty) or during a vesting period of the user's choice (at a ratio of, for example, 3 months = 1:0.73). The longer the vesting period, the more favorable the conversion rate, with a 1:1 conversion possible after a full 6-month vesting period without any penalty.

Voting Incentives

xSHADOW holders are rewarded for active participation and voting. When a holder votes for liquidity through the scale, they will share in proportion to all fees generated by that liquidity, as well as additional voting incentives provided by the protocol to attract participation. The main purpose of the xSHADOW token is to direct the issued token rewards to increase liquidity through voting, which will be distributed in proportion to the total percentage of votes cast during the period. For example, 100,000 xSHADOW are distributed in a single period. If 10% of all votes are allocated to the SHADOW/USDC pair, then the pair will receive 10,000 xSHADOW tokens, which will be distributed linearly to the liquidity providers of the relevant LP pair throughout the period.

Liquidity Staking

Shadow is designed to remove friction from the ve(3,3) model, and managing voting positions is one of the largest sources of friction. xSHADOW can mint $x33 after liquidity staking, simplifying the process by automating voting and reward collection without interfering with the core mechanics of xSHADOW. The $x33:xSHADOW ratio starts at 1.00:1.00 and gradually tilts towards $x33 as rewards from fees, voting incentives, and resets accumulate. After each cycle, rewards from fees and voting incentives are automatically sold to increase the $x33:xSHADOW ratio. While $x33 provides instant liquidity, it still cannot get around the exit penalty of xSHADOW. As a liquid staking version of xSHADOW, the market price of $x33 will naturally reflect the instant exit fee structure and cannot be traded at a redemption value lower than xSHADOW.

Shadow takes a unique player-vs-player (PvP) approach that improves upon the traditional ve(3,3) anti-dilution model, designed to both protect xSHADOW holders from dilution and incentivize them to stay in position and participate in SHADOW's continued success. Stakers who stay in xSHADOW longer earn more fees, voting incentives, and user and emission exit rewards, and users can exit their holdings at any time, ensuring that rewards go to those who value it most and continue to participate in it. This mechanism not only encourages avoiding premature exits, but also ensures that remaining participants are rewarded for their loyalty and active participation.

With the rapid growth of Sonic Chain TVL (13 times to $357 million since the beginning of 2025) and the endorsement of core developers such as Andre Cronje, Shadow Exchange is expected to rely on ecological potential and become a benchmark for the next generation of DeFi trading protocols. Shadow Exchange is not only a technical testing ground for Sonic Chain, but also a frontier for DeFi governance and liquidity innovation, providing a new paradigm for traders, liquidity providers and project parties.