Original Article Title: Why Fluid will kill Aave & Curve (or Uniswap)
Original Article Author: Foxi_xyz, Crypto Kol
Original Article Translation: zhouzhou, BlockBeats

Editor's Note: This article discusses how Fluid is disrupting the traditional DeFi model by combining lending and trading. Its dynamic debt mechanism not only allows borrowing to earn liquidity and transaction fees but also significantly increases capital utilization, with every $1 TVL able to create $39 liquidity. It also analyzes INST's potential, suggesting that with its strong growth and upcoming DEX launch, the price could rise to above $8, making it a project worth watching.

The following is the original content (reorganized for better readability):

Fluid's lending protocol has already sparked a frenzy: with a monthly growth rate of up to 3x, TVL reaching $800 million. However, lending is not a new concept in DeFi. The real game-changer is Fluid's upcoming decentralized exchange. Let's take a look at why this new type of DEX design could disrupt the market, whether the current valuation of INST is worth buying, and how much potential it holds for the future.

What is Fluid?

Fluid is a money market protocol launched by the Instadapp team, holding INST is equivalent to participating directly in Fluid's growth. It is similar to other money market protocols (such as Aave and Kamino) but with improvements in the liquidation mechanism. Lending itself is hardly innovating disruptively, but when Fluid combines lending with a DEX, it demonstrates new possibilities for the lending market, which is the key to Fluid's success.

Fluid may become the super DeFi of this cycle

Beyond Traditional Money Markets

To understand Fluid's potential, one must first understand the limitations of the current DeFi liquidity ecosystem: traditional money markets and DEXs are mutually exclusive, greatly limiting capital efficiency. These assets serve only one purpose—generating lending returns. Similarly, the liquidity provided to Uniswap and other DEXs can only earn transaction fees.

Traditional Lending Model

This fragmentation results in high user costs:

Low capital efficiency

Liquidity spread across different protocols

Fluid DEX: The Perfect Combination of Lending and Trading

Fluid DEX has redefined how DEXs work. Unlike traditional DEXs that focus solely on trading, Fluid DEX integrates the functionalities of a trading platform and a money market, potentially becoming the most capital-efficient DEX design in DeFi.

Core Innovation: Smart Collateral and Smart Debt

Smart Collateral (conventional function)
Users can use a liquidity pair (e.g., ETH/wstETH or ETH/WBTC) as collateral. The liquidity provider (LP) tokens serve as both collateral for borrowing and for earning trading fees from the DEX, a concept already present in various new-gen lending protocols.

Smart Debt (truly innovative)
This is the most revolutionary design feature of Fluid DEX. Traditional DeFi views debt as a pure liability, where users only pay interest after borrowing. However, Fluid flips this model by allowing debt positions to be used for providing liquidity and earning trading fees.

The key innovation lies in the automatic rebalancing of "smart debt" to provide liquidity in the DEX

Dynamic Debt Mechanism and Automatic Rebalancing

Unlike traditional borrowing with fixed assets, users borrow dynamic debt positions in Fluid. When a trader wishes to swap (e.g., USDC for USDT), the system does not rely on a traditional liquidity pool but automatically adjusts the borrower's debt structure (reducing USDC debt and increasing USDT debt). This debt rebalancing mechanism serves as a liquidity source for the DEX while enabling the borrower to earn trading fee rewards.

Automatic Rebalancing Example:

Borrowing 1000 USDC and 1000 USDT, then depositing them into Fluid DEX, someone exchanges 500 USDC for USDT:

 · Your USDC debt decreases to 500

 · Your USDT debt increases to 1500

 · You earn fee income from this transaction

· Total debt remains the same while generating revenue through trading activity.

High Capital Efficiency

The combination of Smart Collateral and Smart Debt achieves unprecedented capital efficiency. Through innovative design, Fluid can generate up to $39 in effective liquidity for every $1 of TVL. This is not a theoretical figure but a result of a carefully designed system:

1. High Loan-to-Value (LTV) ratio, with some assets up to 95%, thanks to an advanced liquidation mechanism.

2. Simultaneous utilization of collateral and debt as a liquidity source.

3. Automated risk management system, adjusting positions based on market conditions.

In a bull market, where the market seeks high leverage and high capital efficiency, this could further increase Fluid's TVL and fee income.

Valuation: Is It Worth Buying INST Now?

Source: Coingecko, Token Terminal, Defillama, and other sources

TVL/FDV Ratio Still Has Room to Grow

Fluid's FDV/TVL ratio is 0.78x compared to Aave's 0.19x, indicating significant room for growth. More importantly, Fluid has seen its TVL grow to $516 million without massive token incentives, demonstrating strong organic growth.

Strong Fee Generation Capability

Fluid generates approximately $15.95 million in revenue annually through its lending protocol, with a fee/FDV ratio of 3.98%, competitive with emerging lending protocols like Morpho and Euler. With the upcoming DEX launch, its revenue is expected to increase further:

· Normal Transaction Fee

· Additional Yield from Smart Debt

Overall, it is expected that the price of INST will reach at least $8.

Future Outlook: DEX Will Be Fluid's Killer App

Fluid has not relied on token incentives to drive growth, but has achieved an organic growth loop through efficient capital utilization:

Efficient Capital Utilization -> Lower Borrowing Costs -> Attract more TVL -> Increase DEX Liquidity -> More Transaction Fees -> Further Reduce Borrowing Costs

While Fluid's success in the borrowing field has been impressive, its upcoming DEX may be the true point of innovation. By redefining the relationship between borrowing and trading, Fluid is not only improving existing tools but also creating new possibilities for capital efficiency.

「Original Article Link」

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