Currently in the Sonic ecosystem, one of the hottest sectors is Shadow Exchange, whose native token $SHADOW has seen its market capitalization increase from around $5 million to the current $31.84 million, a rise of over 500% in a week. Shadow Exchange currently has 457 liquidity pools, with a 7-day trading volume of $557 million and a single-day high of $171 million.

While other chains have been focused on the MEME market, which has been constantly attracting attention due to various events, Sonic Labs has been focused on the development of DeFi. Sonic has announced several new measures to incentivize DeFi projects in the ecosystem, which has also led to a 500% increase in Sonic's TVL in the past month. In just two months, Sonic has grown from 0 to over $500 million in TVL, with $110 million in net external capital inflows, the majority of which came from Solana, followed by Base and ETH. The DEX trading volume on Sonic has also exceeded $1 billion.

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

Sonic-related reading: TVL increased five-fold in a month, is AC Guo going to make Sonic a new DeFi yield hub?

Familiar (3,3), but with an x

The history of decentralized finance has always been marked by repeated attempts to solve the "DEX trilemma", i.e., how to coordinate the incentive mechanisms between traders, liquidity providers, and token holders. Although Andre Cronje's ve(3,3) model theoretically solved this problem by balancing the incentives of all participants, the long-term lock-up period created a high-friction system that forced users to lock up tokens 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 appropriately adjusting the incentive measures and the rights of token holders, but obtaining these incentives is unfair and heavily biased towards the protocol.

The x(3,3) model solves these problems, allowing users to exit at any time and removing the lock-up constraints through incentives. Users can participate in governance by staking platform tokens and vote on the emission weights of liquidity pools, and voters can receive fee sharing and additional "bribery rewards" to incentivize long-term token holders to deeply participate in ecosystem building. The diagram below clearly shows the entire DeFi model flow:

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

In terms of user exit, Shadow has implemented a unique player-versus-player (PvP) re-basing mechanism, where the exit penalty will flow to the xSHADOW stakers, and when a user prematurely exits their xSHADOW position, 100% of the forfeited tokens will flow to the existing xSHADOW stakers in proportion to their positions. In terms of token selection, users can claim SHADOW with good liquidity to enjoy the default APY, or non-liquid xSHADOW to enjoy 2x APY.

Users can convert xSHADOW to SHADOW at any time: immediate conversion (50% penalty) or conversion within the user-selected vesting period (on a ratio basis, e.g., 3 months = 1:0.73). The longer the vesting period, the more favorable the conversion rate, and after the full 6-month vesting period, a 1:1 conversion can be achieved with no penalty.

Voting Incentives

xSHADOW holders receive rewards by actively participating and voting. When holders vote on the curve to support liquidity, they will share proportionally in all fees generated by that liquidity, as well as additional voting incentives provided by the protocol to attract participation. The primary purpose of the xSHADOW token is to guide the distributed token rewards through voting to increase liquidity, with the token rewards being distributed proportionally to the total percentage of votes in that cycle. For example, if 100,000 xSHADOW are distributed in a single period, and 10% of all votes are allocated to the SHADOW / USDC pair, that pair will receive 10,000 xSHADOW tokens, which will be linearly distributed to the liquidity providers of that LP pair over the entire period.

Liquidity Staking

Shadow's design is to eliminate the friction in the ve(3,3) model, with managing voting positions being one of the biggest sources of friction. After staking liquidity in xSHADOW, users can mint $x33, which simplifies the process of automated voting and reward claiming without interfering with the core xSHADOW mechanism. The $x33:xSHADOW ratio starts at 1.00:1.00 and gradually tends towards $x33 as rewards from fees, voting incentives, and resets accumulate. At the end of each cycle, the rewards from fees and voting incentives will be automatically sold to increase the $x33:xSHADOW ratio. Although $x33 provides instant liquidity, it cannot escape the exit penalty of xSHADOW. As a liquid staking version of xSHADOW, the market price of $x33 will naturally reflect the immediate exit fee structure and cannot trade below the redemption value of xSHADOW.

Shadow has adopted a unique player-versus-player (PvP) approach, improving on the traditional ve(3,3) anti-dilution model, aiming to both protect xSHADOW holders from dilution and incentivize them to maintain their positions and participate in the continued success of SHADOW. Stakers who stay longer in xSHADOW will earn more fees, voting incentives, user and emission exit rewards, and users can exit their positions at any time to ensure rewards flow to those who value and continue to participate. This mechanism not only encourages avoiding premature exits, but also ensures that the remaining participants are rewarded for their loyalty and active participation.

With the rapid growth of Sonic chain's TVL (13-fold increase from early 2025 to $357 million) and the endorsement of core developers like Andre Cronje, Shadow Exchange is expected to leverage the ecosystem momentum and become a benchmark for the next generation of DeFi trading protocols. Shadow Exchange is not only a technical testbed for the Sonic chain, but also a frontline of DeFi governance and liquidity innovation, providing a new paradigm for traders, liquidity providers, and project parties.

Welcome to join the official BlockBeats community:

Telegram subscription group: https://t.me/theblockbeats

Telegram discussion group: https://t.me/BlockBeats_App

Twitter official account: https://twitter.com/BlockBeatsAsia