A few months back, the trenches were hit with a devastating event triggered by the Gen-Z SBF, Hayden Davis. His LIBRA rug was the final extraction event to cap off a plethora of other memecoin rugs.

That was the last nail in the coffin for the vast majority of the basement-dwelling trench frequenters who believed they could memecoin their way to a private island off the coast of Fiji.

However, as the on-chain economy suffered a painful death, Sonic was a beacon of hope.

As Solana and Ethereum L2s faced a mass exodus, Sonic, which launched in late December, started gradually growing.

Protocols were being deployed, and users were slowly taking notice. Fast-forward to today, it’s one of the most attractive chains in the crypto ecosystem.

While inflows have been fluctuating, the chain’s TVL has continuously been increasing. At press time, it was seen hovering around the $1 billion threshold.

Within this growing ecosystem, there is one stand-out performer from the rest, and that’s Shadow Exchange.

A quick primer

Shadow is a concentrated liquidity decentralized exchange (DEX) on the Sonic network. It uses the concentrated liquidity mechanism, popularized by Uniswap, to manage liquidity on the exchange.

In short, it’s an exchange that will process your transactions quickly and ensure that liquidity is provided to the exchange in the most efficient way possible.

Shadow has been absolutely dominating on Sonic since it’s been live.

It is averaging 50%-60% of the Sonic network’s DEX volume.

It recently edged out Aerodrome on the 7-day holder revenue front, and also climbed up to the second spot in DEX rankings for holder revenue.

Sonic has a program called the FeeM program, where protocols get back 90% of the gas fees generated by the activity on its platform.

Shadow currently holds the second spot on Sonic, accounting for 74.1% fee dominance for gauges and over 80% fee dominance for all pools on the network.

The burst of activity on Shadow has earned them the third spot for total active liquidity points, earning a whopping 88k+ Sonic gems, thanks to their concentrated liquidity positions.  

Now, it’s important to understand why Shadow Exchange is so popular. Yes, it’s a very efficient DEX, but they also have a well-designed tokenomic structure to back it.

The design is fairly intricate, but let me give you my smooth-brained breakdown of how it works.

SHADOW is the native token of the exchange. SHADOW can be staked for xSHADOW.

Owning xSHADOW locks you in for a vesting period, during which you will face a penalty if you try to swap back to SHADOW early.

But there are two very big reasons to own xSHADOW:

• Direct emissions to liquidity pools through voting
• 100% of the protocol fee is redistributed to xSHADOW holders

Considering that the exchange has generated close to $9 million in fees since launch, while the current market cap for Shadow sits at $11.6 million, it seems like a pretty sweet deal.

Things get taken a step further with x33.

X33 is a liquid-staked version of xSHADOW. Users can use their xSHADOW holding to mint x33 on the Sonic interface.

The implementation of the x(3,3) mechanism is a game-changer.

There is a lot of dead voting power in other DEXes that have adopted this ve(3,3) mechanism. People lock their tokens for a long time, but because there’s no proper exit mechanism, most of the voting power ends up in the hands of inactive users.

However, the introduction of x33 ensures that tokens flow to participants who are active. Eventually, ownership of voting power should naturally concentrate in the hands of those who value it the most.

The benefit of holding x33 beyond its liquidity is that it gives users access to:

• Algorithmic voting
• Auto-compounding
• Zero fees
• Rebase claims, and
• Price protection

Combine the intricate tokenomics with a highly efficient DEX earning the most fees on Sonic and the fact that Sonic is running a HUGE airdrop program, and you’ll see that Shadow Exchange is the perfect breeding ground to really juice some yields in an otherwise drab market.

So today, we’ll run you through strategies to maximize your yield on Shadow Exchange.

If you’re new to DeFi, we’ll start by getting you acquainted with the platform.

However, if you’re somewhat DeFi-native, then you might want to skip this part and head straight into the “yield strategies” tab on the right-hand side.

User guide to Shadow

How to trade

Once you’re on the Shadow Exchange app, you can connect your wallet by clicking on the top right of your screen.

Once connected, click on the trade panel at the top of your screen.

Right after, this is the interface you will see:

To place a trade:

• Select the asset you would like to purchase in the bottom panel and the asset you would like to use to purchase in the top panel.

Once that is done, scroll a little lower, and you will see the following:

Ensure that you are satisfied with the quoted price and the slippage that the exchange is showing, and then click on “Swap.”

Sign and approve the transaction in your wallet, and voila, you have successfully made a trade on Shadow.

How to provide liquidity

To provide liquidity, navigate to the panel at the top of your screen. You’ll see a “liquidity” option.

Once you click on it, you will see the following interface:

This is essentially where you can find all the liquidity pools available on Sonic.

You can either scroll and look for an interesting one, or you can use the search panel if you know exactly what you're looking for.

For the sake of this article, let’s say you’re interested in the S/USDC.e pool, and you click on “Deposit.”

This is what you will see:

As we said earlier, Shadow is a concentrated liquidity DEX, so the first thing you will see is the choice of what range you would like to provide liquidity in.

You can either choose the preset range types below with the four options or manually input your custom range.

Once your range is selected, you can scroll lower to see this.

On the right-hand side of the screen, you will find all the important information about the liquidity pool you are interacting with.

On the left-hand side, you input the amount of each token you would like to deposit and then simply click on “Deposit.”

Congratulations, you are now a certified yield farmooooor.

But what’s next? How do you really make the most out of the Shadow experience after you provide liquidity?

Well, let’s take a look.

SHADOW, xSHADOW, and x33

To participate in the rewards mechanisms, go to the panel at the top of your screen and hover over the “xSHADOW” drop-down list, and you’ll see the following options:

By clicking on “Enter/Exit,” you will convert your SHADOW to either xSHADOW or x33.

There are two general options for staking:

• Staking xSHADOW allows you to vote on gauges, but manually.
• Staking x33 means you get a liquid staked version of xSHADOW, which gives you benefits such as automated voting.

It’s very similar to the liquidity-providing interface. Simply select the pool you would like to vote for and click on it.

From there, your xSHADOW balance will reflect the amount you are allowed to vote, and all you have to do is approve your transaction.

Bang! You’re now a Shadow savant.

So what’s next?

Well, you now know how to use the platform, and the only logical next step is to show you some strategies that will simplify the process of earning some nice juicy yield through Shadow.

Yield strategies

Basic

Let’s begin with an easy one. This is likely the most popular strategy employed, but it is still effective for earning a high yield while just doing the basics.

This is just a basic liquidity provider position:

• Get an equal amount of two tokens for a relatively popular pool, for example, S/USDC.e or S/Shadow.
• Go to the liquidity provision interface.
• If you are depositing your tokens into the S/USDC.e pool (a concentrated liquidity pool), proceed to set either a relatively wider range so you don’t have to readjust your position constantly, or a tighter range where you have to monitor your position continually.

(Concentrated liquidity positions can’t be staked.)

N/B: As seen in the image above, the narrow range type accumulates a higher APR, while passive and wide range types have a lower APR than the narrow range type.

This is because tighter ranges (narrow range) concentrate liquidity within a smaller price band, making it more likely to be used in trades and therefore earn more fees.

In contrast, wider or passive ranges spread liquidity over a broader area, reducing the chances of being actively utilized and lowering the fee earnings, and consequently, the APR.

• Once executed, proceed to mint the position NFT.
• However, if you deposit your tokens into the S/Shadow pool, a volatile legacy liquidity pool, you must proceed to stake your LP receipt to earn xSHADOW rewards.
• You can either hold your xSHADOW rewards to earn fees and vote on gauges, or you can stake it for x33, which will allow you to sell or LP it on top of earning the x33 benefits.

This is a simple and highly effective strategy.

By providing liquidity in a narrow or wide range, you can earn between 60% and 120% APR. You will also be eligible for Sonic airdrop points with a boost and earn rewards through xSHADOW.

A neat little trifecta to keep earning some cash money.

Internal compounding

Looping is arguably one of the most popular strategies for active yield farmers.

For those who don’t know, it’s the process of providing liquidity, then using the rewards from providing that liquidity to add to your initial position and keep growing your initial liquidity position through this feedback loop of churning rewards.

On Shadow, you can do something like this:

• Take two tokens of similar value, such as S and stS (Stake Sonic).
• On Shadow, deposit your tokens and provide liquidity in either the wide or narrow range.
• Stake the LP token you receive to earn xSHADOW rewards.
• Keep half of the xSHADOW rewards that you receive as xSHADOW, and use the other half to buy more S and stS tokens.
• Use the additional S and stS tokens you acquired to add to your initial position and earn even more xSHADOW rewards.
• With the xSHADOW you have now accumulated, you can vote on pool gauges that benefit you or liquid stake it for x33.
• Simply keep looping this process, and you should be golden.

This compounding strategy accomplishes a lot of things. For starters, you will highly boost your Sonic points rewards for the eventual airdrop. Secondly, you will earn roughly between 5%-25% APR from your LP position, which has very minimal impermanent loss risk.

Lastly, you earn xSHADOW rewards, the benefits of xSHADOW, and the x33 incentives.

If you want to take it a step further and be extra safe, you can use an exchange like Hyperliquid or Vertex to open a 1x short on S to keep your position delta-neutral.

A position like this requires minimal monitoring, and if you’re savvy enough to set up a bot, you won’t have to continuously perform all the converting, voting, and claiming actions.

Under-utilized pool power play

The benefit of having a voting mechanism like the one available through xSHADOW is that you have control over where emissions go. This presents unique opportunities.

Here’s an example of a strategy you can employ:

• Acquire a large amount of SHADOW.
• You can either buy in the open market, borrow it, or earn through rewards from other pools.
• Once you have this SHADOW, convert it for the maximum amount of vesting time and receive xSHADOW.
• Next, you identify a pool with relatively low competition, but not so low that it is rarely used.
• Provide liquidity within a tight range in this pool.
• Use your sizable amount of xSHADOW to vote for the pool that you’re in and direct SHADOW emissions toward it.
• If successful, the pool's rewards should spike, and you can earn a significant amount of xSHADOW rewards.
• You can use your rewards for other strategies or simply keep repeating this one. The choice is yours.

This strategy is a little harder because it takes time to find the correct pool. Even after finding the correct pool, impermanent loss is a major concern.

However, it still could be worth it because you are set to earn a good amount of Sonic points and a decent APR since you will provide liquidity in an underutilized pool, and you can heavily boost your SHADOW rewards.

External protocols

As we know, DeFi’s best feature is its composability. You can layer the capabilities of multiple protocols together to create an elegant yield-generating strategy, and it is no different with Shadow.

Here’s an example of how you combine Shadow with the likes of Silo Finance to create a neat yield-generating strategy.

Leveraged looping with Silo Finance:

• Take your S tokens and deposit it on Silo Finance.
• Borrow USDC against your S and go to Shadow.
• Use the borrowed USDC and remaining S tokens to provide liquidity in the S/USDC pool for a higher APR.  
• You can take your rewards and either go down the holding xSHADOW route or convert your rewards into more S after liquid staking your xSHADOW for x33.
• Take your S to Silo Finance and repeat the process multiple times with a level of leverage that satisfies your risk appetite.
• You can indeed juice up your yields like this, but you’ve got to monitor your liquidation risk.

You get boosted Sonic points from both protocols in addition to the juicy boosted APRs from your leveraged looping strategy.

As most of you may know, this is barely scratching the surface, and the possibilities are endless, but this should give you a pretty good starting point.

Concluding thoughts

Whether you’re a player with an appetite for the low-hanging fruit or a chad with the necessary ammunition to harvest tangible yields,  Shadow presents a unique opportunity for both players, simultaneously.

The team is absolutely brilliant and will continue to ship top-notch features.

As Sonic keeps growing, Shadow is showing all the signs of maintaining that #1 spot for the foreseeable future. With that comes some really good money-making opportunities.

So all I have to say is, “Come along for the ride, and don’t get left in the shadows.”


‍Thanks to the Shadow team for unlocking this article. All of our research and references are based on public information available in documents, etc., and are presented by blocmates for constructive discussion and analysis. To read more about our editorial policy and disclosures at blocmates, head here.