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DYdX is a decentralized perpetual contracts exchange based on the Ethereum Layer 2 protocol-Starkware. Users do not need to pay Gas fee in dYdX transactions, only when deposit and withdrawal. DYdX is different from general AMM(Automated Market Maker) DEXs because it adopts the order book model. In August, dYdX derivatives volume reached $9.8 billion.
For anyone unfamiliar with the field, StarkWare’s zkSTARKS technology is a form of ZK-Rollup. It significantly improves transaction settlement capabilities, while still building its security on the underlying Ethereum blockchain. DYdX’s governance token DYDX is officially in circulation at Bingbon.
The development company of dYdX was founded in 2017, and the dYdX platform was launched in 2019 by former Uber software engineer Antonio Juliano and his team. Their experience with the DEX platform and unique expertise in derivatives and lending, makes the dYdX project one of the most successful platforms in decentralized margin exchanges, currently locking in more than $135 million.
Dydx has received substantial financial support from prominent capital since its inception, largely from its team background of former employees at well-known businesses. According to the data, there are currently at least 23 people on the dYdX team, eight of whom are software engineers. The founder of dYdX has experience in software development and working in the blockchain industry, and experience in founding decentralized projects. From past performance, dYdX has done well operational. DYdX’s team composition is able to support its project development.
DYdX had previously raised multiple rounds of funding totaling more than $95 million, but there is no ICO funding. Supporters behind the project include a16z, 3AC, Paradigm, Polychain Capital and angel investor Brian Armstrong. Each round of financing is supported by well-known investors in the industry, which means the project development is fully funded. Under its token allocation scheme, 27.73% of the tokens, or 277 million tokens, are owned by investors, with an average valuation of about $300 million. The average DYDX cost for investors is $0.31. Part of the market attention dYdX has received comes from its strong institutional investor background. At the same time, it is also a part of its current track leader composition.
On August 3, 2021, dYdX announced the launch of the governance token DYDX, and made airdrops on addresses that had previously interacted on the platform. Governance tokens totaled 1 billion and 7.5 percent of them are airdrops, meaning that users receive 75 million DYDX airdrop rewards.
DYDX will see 1 billion tokens in inflation at 2% in five years. At the beginning, however, only 55 million tokens would hit the market (5.5%). The first holders of circulating tokens included airdrop recipients (early users before August 2021), and traders and liquidity providers who used dYdX in August.
The total number of DYDX token is 1 billion, which will be allocated within five years, and will open the maximum 2% inflation per year through governance mechanisms in five years. The project stipulates that inflation must be implemented through governance proposals. Starting on July 14, 2026, community governance can determine the DYDX casting maximum as well as the maximum inflation rate per year. The team said in the document that, although the token allocation rules are determined, the DYDX holder can modify the rules through community governance mechanisms.
Locked DYDX tokens will be allocated to investors, existing teams and future employees, advisers and will unlock on schedule. However, during the lockup period, the holders can propose or vote with the locked tokens. 250 million DYDX will be allocated to users trading over the dYdX Layer 2 protocol. Each epoch cycle (28 days) will be allocated 3,835,616 DYDX tokens. The goal is to motivate all traders to use the dYdX Layer 2 protocol and to accelerate market liquidity and overall product use.
DYDX has two roles, one as an ecological governance token for the protocol and the second as a discount on transaction fees available to holders. The value of DYDX is mainly reflected in community governance and fee discounts, and its long-term value still needs to be supported by the development status of the project.
According to the governance rules published by the project, the number of Epoch rounds of trading mining and liquidity mining can be modified by the community to a certain extent, and other token allocation rules can also be changed. Passing the proposal requires a vote, requiring the voter to be the holder. At the same time, the lock warehouse part of the DYDX, although not circulating, can be used to vote. That means both teams and investors can currently vote and easily change the rules.
As the cryptocurrency market continues to mature, derivatives already surpassed the spot trading market in the first half of 2021. The DeFi sector exploded in the first quarter of 2021, nearly doubling the supply of stablecoin on the Ethereum chain. DEX volume increased 2.5 times and total borrowing increased 3-fold. DEX native tokens account for about 50% of the total market value of the DeFi sector. More than a year ago, the rise of Uniswap triggered a wave of DEX emergence. But since then, most protocols have been impersonators of Uniswap, with serious product homogenization and lack of market competitiveness. Some of the protocols were even hacked when changing the code. Therefore, the future competition in the DEX market may depend more on product quality and innovation.
1.Order book mode and decentralized engagement mode is competitive. In decentralized derivatives, there are not many exchanges that can provide perpetual contracts, and dYdX has obvious advantages. Compared with centralized exchanges, dYdX can avoid many potential moral risks without having to worry about platform evil, private misappropriation of user assets, and running away. Moreover, dYdX transactions do not require KYC, only needing an Ethereum wallet to start transactions, eliminating the cumbersome authentication steps.
2.DYdX has an advantage over other DEX. In terms of business models, dYdX cannot be simply defined as DEX, because the data on its lending services is also very impressive. In 2020, its loan pool had accumulated $17.4 billion in loans. Only comparing the trading business, the order book model of the dYdX not only has richer service types than the AMM DEX on the market, but also has the closest use experience to the traditional CEX, such as spot trading, margin trading, contract trading all supporting market price, price limit, stop loss and other settings. DYdX’s development team believes that order books have a lot of successful experience in the history of cryptocurrency transactions. Traditional market makers are also more used to using this model. In addition, compared with CEX, dYdX’s “off-chain + on-chain settlement” design solves the security and transparency problems, and also ensures high performance and response speed, enough to support greater user traffic.
DYdX products currently have five: perpetual contracts, margin trading, leveraged trading, spot trading, and lending. Among them, the Version 2 of the perpetual contract is a new product built on the Layer 2 network. Margin trading, leveraged trading, spot trading and lending, are the products described in the whitepaper, erected on Ethereum Layer 1.
In 2020, all products had record trading volumes, with cumulative trading volumes of $2.5 billion, up 40-fold from $63 million in 2019. Lower transaction costs, simple operating systems, better user interface and user experience, enhanced security and more attractive trading products will continue to drive dYdX to gain market share from centralized exchanges, and in 2021 dYdX plans to launch various crypto markets with the ultimate goal of flat with the major centralized exchanges in the head of the field.
According to statistics, the size of traditional financial derivatives can reach more than 10 times that of the global GDP and continue to grow high. In the future, the decentralized derivatives market has huge investment opportunities and long-term investment value, and will guide the pattern of the whole industry. In the next few years, traders will continue to move from the risk of centralized exchange to the decentralized exchange, the driving force is the decentralized exchange on its yet to improve the product experience and all kinds of target wealth effect, or the combination of DeFi protocol, and negative events of the centralized exchanges.
DYdX’s move to airdrop 75 million tokens on more than 36,000 historical users has led the entire blockchain industry to focus on the decentralized derivatives sector. At the same time, both dYdX’s value and volume are firmly in the absolute leading position in the DeFi derivatives field. As the leader of derivatives trading, for the aftermarket performance of dYdX, it also needs to be verified by the market.
With a long launch time and a strong comparative value in product mechanism and operational data, only Perpetual Protocol can currently compare with dYdX. At present, there have been several seed players on the decentralized futures exchange track, but it has not been developed on a large scale. The most traded item now is around $700 million per day for the last two weeks of dYdX. However, it needs to wait for the end of the crazy period of high profit of trading mining, so that dYdX’s performance data can have reference value.
Perpetual Protocol is a type of AMM futures DEX, offering a perpetual contract product. It continues to develop vAMM pricing methods in the AMM format. In the Version 1, Perp separates pricing from settlement and removes the market maker role, realizing a simple market structure of long-short games, with an average daily trading volume of about $100 million, which is currently second on the track in terms of data volume.
But in the long term, Perp could build strengths in the long-tail market. Its V3 launch may also have new improvements in institutional and operational improvements. The continuous launch of projects such as Vega Protocol may also bring about changes in market share. It remains to be seen whether dYdX’s current high market share and high transaction volume can last, and whether other projects can explode in the exponential transaction volume growth that the entire track of futures DEX still holds.
1.DYdx supports few trading pairs. Regardless of spot, lending or derivatives business, excluding stablecoin trading pairs, dYdX only provides spot and leveraged trading services of 23 crypto assets, which fails to fully meet the diversified investment needs of users. It is also difficult to compete with other platforms. At present, its spot business cannot compete with Uniswap, and its lending business lags far behind the head lending platforms such as Compound. So if it can continue to work in the derivatives business, there may be some opportunities in the future.
2.There is a centralized risk. DYdX operation is centralized. There may be similar centralized risk. First of all, the dYdX’s market makers are mainly centralized market makers, and many market makers are the investors of the project. In the process of market making, if the market maker cannot return the loan of the mobile staking pool in time, it may lead to the loss of the liquidity provider, and it is possible to manipulate market prices, fixed warehouse explosion and other common market makers to make bad risks in centralized exchanges. Secondly, at present, the DYDX token allocation is determined by the project which are “cleaning transactions” and cancel the transaction mining reward, which may lead to the loss of mining costs of traders.
3.It may face security and failure risk. Due to the dark forest properties of DeFi world and the software itself, dYdX and its Layer 2 network may have security and failure risks, including, but not limited to, the risk of managed fund loss, attack of exchange or transaction loss risks caused by Layer 2 network failure, security risk, etc.
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