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Ellipsis Labs today announced $20 million in Series A funding, led by Paradigm with participation from Electric Capital.
The company’s debut product, a decentralized exchange called Phoenix, went live in February 2023, with its public-facing user interface launching last August. The funding will accelerate its efforts to “create a new financial ecosystem that offers competitive financial products on top of high-throughput blockchains,” the company said in a statement, while merging DeFi‘s accessibility and transparency, with the efficiency of traditional markets.
A decentralized exchange is a peer-to-peer marketplace where crypto traders make transactions directly, without their funds traveling through an intermediary custodian, but currently lack the liquidity to rival centralized competitors, like Coinbase, Binance or Kraken.
Phoenix is the fifth largest decentralized exchange, ranked by trading volume in the past 24 hours, according to data from DefiLlama, with hundreds of dollars in daily trading volume. The exchange’s on-chain limit order book allows market makers to compete on quality of liquidity, the company said in a statement.
After meeting in middle school, Ellipsis Labs’ cofounders Eugene Chen and Jarry Xiao pursued careers in high-frequency trading. They started Phoenix after spotting an issue in DeFi that they wanted to solve: protocols, which ensure there is on-chain liquidity at all times, can not compete with centralized exchanges in terms of the depth and spread.
“We think there’s a path to building DeFi products that are comparable— then significantly better—than what exists on centralized venues,” says Chen.
Phoenix’s key focus has been not to offer external incentives (extra tokens) to market makers for providing liquidity—the opportunities on the exchange is what should attract them, Chen told Fortune.
“Most of the time, if you deposit money into an automated market maker (AMM), you’re going to end up losing money. And so the way these AMMs are able to track liquidity, oftentimes, it’s through incentives to make it profitable,” says Chen. But it’s not a sustainable system, he says, as this requires a constant inflow of external capital to make the system run. Proving the system exchange is self-sufficient is “the most important thing” the company is focused on, Chen said.
The raise, closed early this year, is being used to grow the engineering team and to continue the innovation of on-chain, financial primitives, he added.
The team decided to build the exchange on top of Solana due to requirements of active liquidity, says Chen. “The blockchain needs to run really, really fast, so it needs to have very high throughput, and the fees need to be very low,” he says. That’s because every time a liquidity provider places or cancels a limit order, they take on the blockchain’s gas fees.
“We’ve known and respected Eugene and Jarry for several years, and we’re excited to formally partner with some of the most ambitious and principled builders in DeFi,” Matt Huang, co-founder and managing partner of Paradigm, told Fortune in a statement.
