As a hot star in the Solana ecosystem, Jupiter has quickly established a foothold in the DeFi field since its launch. However, without a solid economic model and stable token price, it could easily fall into a death spiral, which could have fatal consequences for Jupiter itself. This article is sourced from the Web3 Research Institute by the author Go2Mars, and has been compiled and written by PANews.
Table of Contents:
Three Core Functions of Jup
Core Function Module 1: Liquidity Aggregator
Core Function Module 2: Limit Orders
Core Function Module 3: DCA Investment
Other Ecosystem Modules of Jup
Upstream Incubator: Jupiter Labs
Derivatives Protocol: Jupiter Perpetual
LST Stablecoin Protocol XYZ
Returning to the Jup Economic Model
Reflections on the Prosperity of the Jup Ecosystem
In the past two weeks, with the booming Solana network, the price of Jupiter’s token $JUP in the secondary market has followed Solana’s pace and almost doubled. The research on Jupiter and $JUP in the market is mostly from a secondary perspective. Behind the impressive market performance, apart from excellent marketing and community, it also relies on its excellent product design. Therefore, today we will analyze Jupiter’s product design from a product perspective.
Three Core Functions of Jup
The key to Jupiter’s product receiving attention lies in its three core functions: liquidity aggregator, limit orders, and DCA (Dollar-Cost Averaging) investment.
Core Function Module 1: Liquidity Aggregator
Jupiter’s liquidity aggregator technology is one of its core competitive advantages. In the traditional DEX model, the liquidity pools of each exchange are isolated. When users exchange assets, they often need to search for the best trading pool themselves to get the optimal trading price. This not only consumes time and effort but also makes it difficult to guarantee the best execution of trades due to fragmented liquidity.
Jupiter’s liquidity aggregator technology can cross multiple liquidity pools within the Solana ecosystem and automatically find and aggregate the best liquidity resources through algorithms, providing users with an all-in-one solution for the best trading path.
Before making a trade, users can choose to modify parameters such as transaction fees, slippage tolerance, and whether to use direct routing. This means that users can obtain the best trading price and lowest slippage across the entire ecosystem in one interface, improving the efficiency and cost-effectiveness of asset exchanges. Jupiter’s trade aggregation is based on its backend smart routing technology.
On the backend, Jupiter monitors and analyzes the market’s trading data, including price, depth, slippage, and other dimensions, in real-time through complex algorithms. Based on this data, the smart routing algorithm can dynamically choose the best trading route for each transaction, even in highly volatile market conditions, to ensure the success rate and cost efficiency of user transactions. Specifically, once Jupiter obtains market data, its multi-path search algorithm will start looking for the best trading route.
This process involves complex calculations because it not only considers direct trading pairs but also analyzes whether better trading prices can be obtained through a series of intermediate token conversions. For example, if a user wants to exchange token A for token C, the smart routing algorithm will consider not only the direct A→C trading route but also possible intermediate routes such as A→B→C or A→B→D→C, in order to find the lowest-cost trading solution.
Although the technology behind smart routing is very complex, Jupiter is committed to providing users with a simple and user-friendly trading experience. The operation of smart routing is completely transparent to users, and users only need to input the tokens and quantities they want to exchange, and the rest of the work is automatically completed by smart routing.
This design maximizes the ease of use for users, allowing even those without a deep technical background to easily engage in trading.
Core Function Module 2: Limit Orders
Jupiter provides traders with limit order functionality, effectively avoiding the cost increase and slippage issues caused by price fluctuations during trades, while also avoiding MEV (Miner Extractable Value) issues. With limit orders, users can have their orders partially filled and obtain the corresponding tokens.
When placing a trade, users can choose the order duration, exchange price, and quantity to execute their trading strategy more accurately. The protocol collaborates with Birdeye and TradingView, where Birdeye provides on-chain price data for tokens, and Jupiter uses TradingView’s technology to display chart data. This functionality makes Jupiter’s user experience more similar to centralized exchanges.
Core Function Module 3: DCA Investment
Dollar-Cost Averaging (DCA) is an investment strategy where investors spread their purchases over specific time intervals to average the cost of buying into a preset price range. This method helps investors reduce the risk of investing at a single price point.
In Jupiter, users can engage in DCA investment by setting the purchase frequency (with a minimum frequency of minutes and a maximum frequency of monthly), purchase price range, total time period, and assets they wish to purchase. After initiating the DCA investment, users’ tokens will be transferred to the relevant account and transactions will be automatically executed based on the default price range and trading frequency.
Once the DCA investment period ends, the tokens are automatically transferred back to the user’s wallet, and the protocol charges a fee of one thousandth for the DCA service. The controllable cost price, low fees, and fully custodial trading process make DCA a good choice for traders to accumulate assets during bear markets.
However, in bull markets, this mechanism may receive less attention, and the overall demand for this feature is still relatively small.
Other Ecosystem Modules of Jup
Upstream Incubator: Jupiter Labs
Jupiter Labs is an independent laboratory operating separately from Jupiter, and it will operate independently in the future, focusing on driving innovative projects. Jupiter users and community members enjoy certain privileges, including priority access and token incentives. Currently, Jupiter Labs is focusing on two major project areas: perpetual contracts and the LSD stablecoin.
Derivatives Protocol: Jupiter Perpetual
Jupiter Perpetual is a derivatives protocol launched by Jupiter Labs, similar to GMX V1, and it has entered the practical usage phase. The protocol defines two main participants: liquidity providers and traders. Liquidity providers contribute funds to the pool, which are converted into a basket of tokens, mainly including BTC, ETH, SOL, USDC, and USDT, with SOL and USDC having higher weights and being the main trading objects.
When traders engage in leveraged trading, they use the tokens in the pool to establish leveraged positions, without worrying about trading slippage. They only need to pay transaction fees and borrowing fees based on token utilization rates. Liquidity providers receive 70% of the trading fees and all borrowing fees but also bear the risk of traders’ profits and token depreciation.
LST Stablecoin Protocol XYZ
This project has not been launched yet. The protocol is similar to Lybra V1, allowing users to mint interest-bearing stablecoin SUSD by collateralizing SOL. The income generated through LST staking will be distributed to SUSD holders and governance tokens. The special feature is that when the LST yield is higher than the SOL borrowing rate, a leveraged arbitrage strategy will be adopted to maximize returns.
In addition, the protocol introduces a redemption mechanism to maintain the stability of SUSD’s price, although this may affect borrowers’ positions, especially during market volatility. To mitigate this issue, the protocol may adopt a strategy of redeeming SUSD with governance tokens within a small price range. When the price of SUSD is between $0.95 and $1, the protocol may use SUSD redemption using governance tokens to reduce the frequency of borrower redemptions.
However, this approach may lead to the majority of redemptions being done with governance tokens if the price continues to stay below $1, resulting in significant token issuance.
Returning to the Jup Economic Model
The JUP token is the governance token in the Jupiter ecosystem, allowing token holders to vote on crucial ecosystem decisions, including project launches, dispute lists, and grants.
The Jupiter team has committed to strictly following the roadmap for token distribution, and any transfer of tokens from cold wallets requires a six-month notice. The initial circulating supply has been adjusted to 1.35 billion, and future circulation will be managed through a multi-signature wallet by the community, ensuring the healthy development of the Jupiter ecosystem.
Reflections on the Prosperity of the Jup Ecosystem
Compared to other DEXs in the Solana ecosystem, Jupiter has demonstrated its advantages in trading efficiency and user experience. Although projects like Raydium, Orca, and Serpent are also competing for market share, Jupiter still aggregates over 50% of the trading volume on Solana, making it the true underlying liquidity protocol on the Solana network.
However, with limited space for further growth in trading volume, Jupiter has chosen to expand horizontally in the DeFi sector, broadening its business scope as a long-term strategy. Jupiter Start is the main direction for Jupiter’s expansion.
Currently, Jupiter Start only offers introduction, education, and pre-launch features. The core feature of Jupiter Start, LFG Launchpad, has not been launched yet, but the first round of launchpad voting was initiated on March 7. The top three projects in the ranking are Zeus Network (cross-chain communication), SharkyFi (NFT lending protocol), and UpRock (DePIN). Jupiter has a large user base and strong traffic effects. Considering its own resource advantages, the projects launched by Jupiter may have higher quality.
Additionally, the introduction of the financial innovation product incubation platform Jupiter Labs fills the gap in related projects on Solana and still has great potential with the support of Jupiter. This project demonstrates in-depth exploration in the field of financial derivatives and stablecoins, aiming to bring new momentum to the DeFi sector in the Solana ecosystem. However, these innovations bring additional risks, such as protocol risks and oracle quotation risks, which need to be balanced through the construction of a sound economic model, appropriate incentive mechanisms, and dynamic redemption strategies to maintain system stability.
As a hot star in the Solana ecosystem, Jupiter has firmly established itself in the DeFi field despite its recent launch. Its user-centric product design philosophy, comprehensive and innovative product features, and smooth trading experience have successfully gained users’ trust, making it the largest DEX in terms of trading volume on the Solana network.
In addition, the Jupiter team strives to break through the limitations of traditional DEXs imposed by blockchain development issues and actively explore broader development opportunities. This gives Jupiter the potential to grow to become a major player in the industry.
However, the potential problem that arises is that when exploring derivatives and stablecoins, both as an incubator and a self-developed product, they will face greater risks. The nature of these financial products, which achieve high returns through leverage, can easily lead to a death spiral if there is no solid economic model and stable token price to support them. This could have fatal consequences for Jupiter itself.