Summary: dYdX is a decentralized perpetual exchange using its own Layer 2 rollup for higher throughput and lower minimum order sizes. It offers up to 20x leverage and an array of tradable assets. Revenue from trading fees goes to the company behind the exchange, dYdX Trading Inc. The platform also offers yield earning opportunities through trading rewards paid out in the form of DYDX tokens.
The DYDX token grants holders governance rights, including the ability to propose and vote on changes to the protocol. Looking ahead, dYdX plans to launch its V4 product offering, which involves a new blockchain called dYdX Chain based on the Cosmos SDK and Tendermint PoS consensus protocol.
What is DYDX?
dYdX is a decentralised perpetual exchange built on a Layer 2 (L2) rollup, offering high throughput and small order sizes. This unique L2, using zero-knowledge proof tech in collaboration with Starkware, acts as a smart contract on Ethereum. The platform allows trading of perpetual futures, essentially leveraged bets on asset prices, with features including up to 20x leverage, cross- or isolated-margin, and an order book model.
What Networks is dYdX Available on?
As explained above, dYdX is housed on its own custom built ZK rollup. This specific ZK rollup (StarkEx) uses zkSTARKs — STARK proofs for data integrity (posting back to L1), with on-chain data-availability to ensure a fully non-custodial protocol.
What Assets are Tradable on dYdX?
On dYdX assets fall into two groups based on the leverage offered on their contracts:
- 20x leverage = BTC & ETH
- 10x leverage = LINK, AAVE, UNI, SOL, SUSHI, YFI, 1INCH, AVAX, DOGE, SNX, CRV and many more…
dYdX implemented maker (limit orders placed on the order book) and taker (market orders taking from the order book) trading fees back in March 2020. Unfortunately, the totality of this revenue is absorbed by the company behind the exchange, dYdX Trading Inc. The fee structure can be seen below, along with the discounts associated with the amount of DYDX (governance token) held.
Volume on the exchange, and therefore the fees generated have been declining since the start of the bear market. Fees peaked in Oct 2021, with a staggering $24.1M taken as protocol revenue in a single week. Last week, that number sat at just $1.1M. Despite the lack of connection between the DYDX token and protocol revenue, the two metrics have followed each other very closely — as shown on the chart below, with fees as green bars and fully diluted valuation (FDV) as a purple line.
How can I earn Yield on dYdX?
dYdX doesn't directly provide yield for users and liquidity providers, but it offers token incentives. Market makers, who balance the order book algorithmically, are compensated in DYDX tokens and earn funding fees based on open interest on specific asset pairs. The platform also offers trading rewards for retail users, distributing DYDX tokens based on trading volume and open interest, effectively incentivising participation on the platform.
The DYDX token itself grants holders the right to propose and vote on changes to the protocol, where staking and delegating your tokens has an impact on your proposing and voting power. A total of 1,000,000,000 DYDX were minted for the following allocations:
- 50% Community
- 18.5% Trading Rewards (partially redirected to Rewards Treasury)
- 7.5% Retroactive Mining Rewards
- 7.5% LP Rewards
- 5% Community Treasury
- 11.5 % Rewards Treasury (absorbed 25% of Trading Rewards & 100% of DYDX/USDC Staking Rewards)
- 28% Investors
- 15% Founders, Employees, etc.
- 7% Future Employees, etc.
DYDX Token Unlocks
According to the DYDX vesting schedule, tokens not distributed to the community (50%) are locked up for the following periods:
- 30% will unlock after 18 months post-launch (cliff)
- 40% will unlock equally from month 19 through month 24 (vest)
- 20% will unlock equally from month 25 through month 36 (vest)
- 10% will unlock equally from month 37 through month 48 (vest)
These unlocks along with the general emissions schedule can be visualised below. From this, we can see 15% of the entire supply is due to be released at once in Q1 2023 before aggressive vesting begins for 6 months. Based on the FDV trend shown above, it may get even more ugly for DYDX as the circulating supply is due to almost triple by the end of Q2 2023.
Is dYdX Safe?
dYdX in its current form has been audited by Peckshield, one of the leading auditors in the space. Additionally, dYdX run a ‘Vulnerability Disclosure Policy’ (bug bounty) to rewards those who find exploitable faults in the system.
During periods of high volatility, its possible that the value of some accounts may fall below zero before the exchange has liquidated them. In these cases, an insurance fund is the initial backstop to ensure the exchange remains solvent. However, if the insurance fund is drained, positions with the highest leverage and profit may be used to offset the shortfall.
Finally, it should always be consider that L2 rollups currently require a large amount of trust in the centralised party behind the chain, in this case, dYdX themselves along with Starkware.
What’s Next for dYdX on Cosmos?
dYdX have embarked on their V4 product offering, which will take the form on an entirely new chain, dYdX Chain, based on the Cosmos SDK and Tendermint Proof of Stake (PoS) consensus protocol. This decision is based on their strive for full decentralisation but also on the customisablilty of this new blockchain. The key highlights to this new venture are the likely use of DYDX as a gas token, and the design of an off-chain order book and matching engine capable of scaling to orders of magnitude of the current architecture.
In conclusion, dYdX stands out in the decentralized finance sector with its high-throughput perpetual exchange platform, unique L2 rollup, and up to 20x leverage on a variety of assets. Despite challenges, it shows promise with its planned V4 product launch, introducing the dYdX Chain based on the Cosmos SDK and Tendermint PoS consensus protocol. With a focus on further decentralization and scalability, dYdX is poised for continued evolution in the crypto trading landscape.