Shadow Exchange

Shadow Exchange is a Sonic-native concentrated liquidity DEX built on the x(3,3) incentive model. It offers deep liquidity with minimal slippage for traders, while liquidity providers can maximize returns through concentrated liquidity ranges and competitive farming. The protocol eliminates traditional lock-ups through flexible exit mechanisms and liquid staking derivatives.

Shadow Exchange generates yield through several connected methods.

Trading fees: When traders use the concentrated liquidity pools (where liquidity is focused in specific price ranges), they pay fees. All of these protocol fees go to people who stake xSHADOW tokens and vote on where to direct new token emissions. The fee rate adjusts automatically based on market conditions, ranging from 0.05% to 5%.

Vote incentives: Other protocols can offer extra token rewards to attract votes for their liquidity pools. These extra rewards are distributed to xSHADOW voters who support those pools.

Exit rebase mechanism: If a user exits their xSHADOW position early, they face a penalty. They can either exit instantly with a 50% penalty, or choose a gradual vesting period with proportional penalties. All SHADOW tokens forfeited in these penalties are streamed to the remaining xSHADOW stakers. This protects them from dilution and provides additional yield.

MEV revenue: The protocol's privileged infrastructure captures arbitrage profits (a form of Maximal Extractable Value). These profits also flow to xSHADOW holders.

Liquid staking via $x33: This is an automated service that handles voting and compounds earnings from fees, vote incentives, and rebases. Over time, the ratio of $x33 to xSHADOW increases, meaning each $x33 token represents a growing share of the underlying rewards.

Autovaults: These are automated strategies that convert various rewards into preferred assets, like S or USDC.

The system operates on weekly cycles called epochs. During each epoch, xSHADOW stakers vote to direct new SHADOW token emissions to specific liquidity pools. Emissions are distributed proportionally to the voting weight each pool receives.

Fee distribution can be configured per liquidity pool gauge. The default setup is:

• For pools with a gauge: 100% of fees go to xSHADOW stakers.
• For pools without a gauge: 95% of fees go to liquidity providers, and 5% go to the protocol.