Here at blocmates, we’ve covered a lot of DEX platforms as of late. HXRO, GMX, and PERP to name a few. However, none of these combined come close to doing the daily volume of the current king of DEX platforms dYdX. Year to date, dYdX has done $330 billion in trading volume. Currently, $DYDX averages around 500 million in daily trading volume on the platform. So what is dYdX and how did we get here?
dYdX was founded in 2017 by Antonio Juliano who first launched Solo on Ethereum’s layer 1 which supported margin trading, lending, and borrowing. Fast forward to today dYdX has gone through many upgrades and changes. Currently, dYdX is a decentralized exchange built on the Ethereum network leveraging Starkware’s StarEx Layer 2 Rollup Engine. dYdX offers perpetuals and margin. All trading on dYdX is non-custodial because of dYdX’s innovation in off-chain order books and on-chain settlement with Starkware. In short, dYdX offers a combination of the best of both worlds offering a decentralized and secure exchange with the speed and functionality of a centralized one. Recently, dYdX announced an ambitious plan to transition from Starkware to its own native blockchain built on the Cosmos SDK stack, dubbed the dYdX Chain. This is a step towards dYdX’s goal to be completely decentralized and continually push the boundaries of what is possible for a decentralized exchange.
This announcement will be the primary focus of this piece and it should be given that the dYdX Chain if successful will evolve the dYdX chain into something very different from what it is today. If you're looking for an article on how to use dYdX and an in-depth guide on dYdX in its current state this isn’t it. Although, I will discuss dYdX and its current functionality it will only be for comparison’s sake. In addition, a brief context will be included to better understand how everything has led up to this announcement. Nonetheless, there are many articles covering dYdX in its current state, however; I’ve yet to see one tackle the dYdX Chain. Thus, many do not understand the implications and the sheer magnitude and promise of the project. In addition, to address the elephant in the room, the dYdX Chain could redesign the $DYDX token bringing back investor interest. My hope is by the end of this article you will understand that what dYdX is trying to do is something truly revolutionary and like nothing we’ve ever seen before.
With that said, here are a few reasons to be bullish on the dYdX Chain…
What we’re aiming to do is build the best possible product. - Antonio Juliano (Founder of dYdX)
Before we get into the dYdX Chain, it's important to understand how we got here. How does a protocol become the defacto leading DEX? It's not by luck I'll tell you that. You become the de facto leading DEX by blowing every competitor out of the water. And time and time again, dYdX has done just that. It is undeniable that the dYdX product and user experience is one of the smoothest in the industry. If you don't believe me, go try it for yourself (dYdX). dYdX functions much like a centralized exchange offering 38 perpetual pairs, all while remaining decentralized. Many like to criticize dYdX for its poor token performance, however; when it comes down to a product standpoint there just isn’t another one like it. dYdX has always strived to give users the best possible experience and compete with centralized exchanges. They were early adopters of layer 2 tech and have since established themselves as the biggest protocol on layer 2.
So if the experience is so good, why change it? Well, that's who dYdX is and always has been, innovative. Currently, dYdX (V3) on Starkware processes around 1k transactions per second. There are two components to dYdX’s functionality: a centralized component and a decentralized one. The centralized piece is the order book and the order matching engine that runs on AWS servers. Of course, these orders remain non-custodial but nonetheless, this centralized piece does much of the heavy lifting when it comes to throughput. The decentralized piece runs on Starkware effectively running the smart contracts for the system. Although, Starkware isn’t truly that decentralized in itself. Starkware rollups like most rollups are bottle-necked through a single centralized sequencer. While Starkware does plan to decentralize these in the future, the expected ETA on decentralization of sequencing is not yet known. So in summation, V3 has one of the best UI/UX experiences, fast throughput, and great security, but is relatively weak on the decentralization and censorship-resistant front. This is where the move to V4 or dYdX Chain comes into play.
I would quickly like to run through the dYdX Foundation and spotlight the many advancements only made possible by the contribution of the dYdX Foundation.
The dYdX Foundation is an independent not-for-profit foundation headquartered in Zug, Switzerland. The dYdX Foundation’s purpose is to support and grow every aspect, technical or otherwise, of the current implementation and all future implementations of the dYdX Layer 2 Protocol, including but not limited to the ecosystem related to the dYdX Layer 2 Protocol, and to foster participation from others who seek to support and grow any aspect, technical or otherwise, of the ecosystem or the current implementation and all future implementations of the dYdX Layer 2 Protocol.
One of the many great programs funded by the dYdX Foundation is their newly founded ambassador program. This program consists of 6 burrows or groups that focus on improving the dYdX platform and providing free resources for the public. This is a fully community-led program onboarding some of the brightest minds in the space. Each burrow is tasked with researching and providing things like marketing, analytics, risk analysis, onboarding, and more. The program just finished its first season and you can check out the recap right here.
Link to Burrow Description: dYdX Ambassador Program
Link to Ambassador Program Forum: Ambassador Program Forum
Tokenomics & Vesting Schedule
Before we go over the dYdX Chain, let's quickly run through the current tokenomics
dYdX currently sits at FDV of $1.59 billion with a circulating supply of 125 million tokens (dYdX token price $1.59) and a $199 million market cap. dYdX has a max supply of 1 billion dYdX tokens
Here is a great graphic by Token Unlocks breaking down the allocations and vesting schedules:
To summarize the graphic (Over the course of 5 years):
- The dYdX community will receive 50% of the total $DXDY supply in liquidity provider rewards, trading rewards, staking pools, and more.
- Investors will receive 27.72% of $DYDX tokens.
- 15.27% of tokens are given to employees and consultants.
- The final 7% of the $DYDX tokens put aside for future hires.
Retroactive Mining Rewards
7.50% of the initial token supply (75,000,000 $DYDX) will be distributed to past users of any dYdX protocol who complete certain trading milestones on the Protocol, except for users located in a jurisdiction where $DYDX is not permitted, including the United States. To claim earned tokens, users will need to trade on dYdX’s Layer 2 Protocol and achieve their respective claim milestones.
More Info: Retroactive Mining Rewards
25.00% of the initial token supply (250,000,000 $DYDX) will be distributed to users who trade on the dYdX Layer 2 Protocol based on fees paid. Things like volume, user activity, and more are all taken into account.
More Info: Trading Rewards
Liquidity Provider Rewards
7.5% of the initial token supply (75,000,000 $DYDX) will be distributed to liquidity providers based on a formula rewarding a combination of uptime, two-sided depth, bid-ask spreads, and the number of markets supported.
More Info: Liquidity Provider Rewards
Safety Pool Staking
dYdX has set aside 2.50% of the initial token supply (25,000,000 $DYDX) to be distributed to users staking $DYDX to a Safety pool for backstopping the system.
- Bootstrap a decentralized fund to be used in the case of insolvency or other issues with the protocol.
- Incentivize $DYDX holders to govern correctly: $DYDX holders risk dilutive events as the ultimate backstop and act as the governors of risk in the system.
More Info: dYdX Safety Module
Fee Discounts & Free Trading
dYdX offers free trading for everyone, up to $100,000 every month.
$DYDX token holders receive trading fee discounts based on their current $DYDX token holdings. Here is a breakdown:
The $DYDX token holders can participate in the governance process through the community, and propose changes to the Layer 2 protocol.
Some voting rights held by token holders:
- Risk parameters
- Governance of contracts.
- Whitelist market makers to the liquidity staking pool
- Define the safety staking pool payout in case of a loss.
- Safety Pool Staking parameters
- Vote on adding a new token listing in the Layer 2 protocol.
One of the biggest issues that have continually plagued the $DYDX token is its large FDV and its opening price of around $14-15. Subsequently, thanks to this opening price and the large FDV it has left many holding the bag with $DYX currently trading at $1.59. The bigger problem lies in the fact that there is still a major portion of $DYDX to be unlocked over the next 5 years. 83% of $DYDX’s token supply is still locked and remains to be unlocked. The cliff unlock begins on February 8 2023 with a massive unlock of 150 million $DYDX tokens. Based on the vesting schedule, there would be 200 million unlocked before the start of the cliff. This 150 million unlock would account for 75% (200 million) of the total unlocked supply at the time of the unlock. Thus, this really hurts the investability of the $DYDX token. You just can't bet on a token with such a high inflation rate and constant sell pressure. The product is great but the token isn’t. The annual inflation rate for the $DYDX from September 2022 - 2023 would be around 380% (Sept 2022: 125 Mil | Sept 2023: 600 Mil). Under normal circumstances, I wouldn’t want anything to do with the $DYDX token, however; after the announcement of the dYdX Chain, there's promise in the redesign of the $DYDX token.
What is dYdX Chain?
(All this is very new information and may change over time. So take everything with a grain of salt.)
dYdX will be moving to its own chain on the Cosmos SDK Tendermint Blockchain. They plan to launch and build out their own standalone blockchain within a year. The reason for this ambitious move comes primarily from Juliano’s (dYdX founder) pursuit of true decentralization. As mentioned before, dYdX V3 currently does poorly in terms of decentralization and censorship resistance given that they rely heavily on AWS and centralized sequencers with Starkware. dYdX has gained a lot of its volume because of the institutional adoption of the platform. It is for this reason that dYdX must continue to have high throughput, otherwise, it doesn’t make sense to move. However, Starkware currently processes 1k transactions per second which are already miles ahead of what other layer 1 blockchains (Cosmos included) can do. Although, Cosmos is a tech that enables you to build your own blockchain. You can build your own nodes and customize them to your liking. Therefore, although the scalability may not be as apparent as Starkware, the customization to fit the specific needs of a decentralized exchange is what has drawn them to Cosmos. The goal is to build an off-chain order book but decentralize the order book into the validators that power the network. Thus, the previously centralized order book and matching engine run by AWS will now be run through a decentralized network. Latency may be slightly higher. But still well within the bounds from what you would experience on the centralized exchange. Going back to the issue of scalability, given that validators will be set for transactional validation it may be the case that the network doesn't have to come to a consensus at all. The proposed workaround is to have each validator run its own version of the order book. If the system is built this way then scalability and latency may be able to be on par with Starkware. The key is the customization of a blockchain-specific validator set. Thus, we could allow the scalability of the order book to be orders of magnitude higher because the fundamental bottleneck of blockchain is coming to consensus. So if you don't need to come to consensus it's more scalable because there are fewer things you need to validate which means less work is required.
Everything, Everywhere, All At Once…
So that is the plan to decentralize the dYdX platform. However, with building your own chain comes a lot of questions like:
- What will be the gas token?
- What utility will the $DYDX token have?
- How many validators will you start with?
- What will be the collateral token on the network?
- Will you have to bridge?
- What happens in the case that dYdX validators halt the chain?
- How will dYdX combat MEV? Can it combat MEV?
My point is there are so many questions as to how the infrastructure and tokenomics for the dYdX blockchain will turn out. In addition, to the many things that dYdX must build. The truth is that this is a highly risky move. As Juliano said he’s not even sure that it can be built or that it will actually be better. dYdX is going to have to build everything from scratch including wallet plugins, bridges, collateral pairs for perp pairs, etc… The list goes on and on. Nonetheless, the hope is that the dYdX Chain repurposes the $DYDX token. I believe there is discussion now on the token dynamics on the dYdX Forum. Therefore, given that the governance of the $DYDX token belongs to the community there aren't any concrete details for the changes that will be implemented or really for anything at all at the moment. That said, what I would like to see on the dYdX Chain is for the $DYDX token to be used as gas, for it to be the staking token, and for emissions to go to validators. I think dYdX could work out a way to funnel emissions to validators and make it so there are 0 trading fees or no transaction fees. No transaction fees make more sense if you just take a bigger cut out of the trading fees. Anyways, I believe there are many ways that the talented dYdX team could take it and I have confidence that they will continue to push the boundaries of what is possible. In addition, I am confident that they are in tune with the issue of their tokenomics and as such will resolve them given the opportunity.
You can learn more about the dYdX Chain and stay up to date with the links down below.
V4 Milestones/Roadmap: dYdX V4 Milestones
dYdX Exchange: dYdX Exchange
Twitter: dYdX Twitter
Discord: dYdX Discord
Youtube: dYdX Youtube
Reddit: dYdX Reddit
dYdX Chain Announcement: dYdX Chain
dYdX Forum: dYdX Forum