Decentralized exchanges (DEXs) play an important role in financial innovation, reshaping how we perceive and engage with traditional finance. Imagine a world where intermediaries and centralized authorities take a back seat, allowing financial transactions to happen seamlessly, governed by code and community consensus. In contrast to traditional centralized exchanges, DEXs enable users to trade directly from their crypto wallets.
Established in 2017, dYdX has positioned itself as a decentralized perpetual exchange, integrating lending, leverage trading, and perpetual contracts. Distinguishing itself from popular DEXs like Uniswap and SushiSwap, dYdX focuses on perpetuals, a form of derivatives trading. Perpetual trading — a form of derivatives trading akin to options or futures contracts — enables traders to speculate on the future value of digital assets. Yet uniquely, perpetuals don’t include expiration dates.
Meanwhile, compared to other DEXs that commonly employ automated market maker (AMM) models, dYdX takes a different approach. The dYdX platform opts for a traditional order book and matching system, providing a familiar trading environment for individuals and institutions accustomed to conventional financial markets.
What is a decentralized exchange (DEX) and how does it differ from centralized exchanges (CEX)?
Before we dive into the functionalities of dYdX, it’s important to understand the fundamental concepts and differences between DEXs and CEXs.
A DEX reflects the essence of blockchain's decentralized ethos. Unlike CEXs, DEXs operate without a central authority, cutting out intermediaries from the trading process. In a DEX, transactions occur directly between users with the help of smart contracts and blockchain technology. This approach allows users to maintain control of their private keys and funds, creating a trustless and transparent trading environment.
Conversely, CEXs represent the traditional model of exchanges wherein a central entity controls cryptocurrency trading. Users create accounts on the trading platform, deposit funds into crypto exchange-controlled wallets, and execute trades within the exchange's ecosystem. While centralized cryptocurrency exchanges offer user-friendly interfaces, liquidity, and compliance with local regulations, they also introduce elements of trust as users relinquish control of their private keys to the exchange.
Ultimately, DEXs embody the principles of decentralization, emphasizing autonomy and privacy, while CEXs offer convenience, liquidity, and adherence to local regulations, albeit with a centralized structure.
What is dYdX and how does it work?
dYdX functions as a DEX, enabling users to engage in perpetual swaps while maintaining control over their crypto assets. The platform supports a variety of well-known USD-paired cryptocurrencies, including Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Polygon (MATIC), and Dogecoin (DOGE).
Traders on the dYdX platform can employ leverage of up to 25x on the available assets, using the stablecoin USD Coin (USDC) as both collateral and the quoting currency. If a user's account value decreases due to margin trading activities or market volatility, and falls below the specified margin requirement, the platform automatically triggers the liquidation of their positions. This liquidation process acts as a protective measure, preventing users from experiencing catastrophic losses while upholding the platform's integrity.
What is leverage trading?
Leverage essentially allows users to control a larger position size with a smaller amount of capital. While leverage has the potential to amplify gains, it comes with inherent risks. Traders should exercise caution and employ leverage carefully. Higher leverage not only magnifies gains but also intensifies losses, possibly exceeding one’s initial capital. Therefore, understanding the risks and formulating a sound risk management strategy is crucial for those intending to trade with leverage.
Origins of dYdX: understanding the mechanisms of dYdX v3
Before the latest v4 upgrade in 2023, dYdX's v3 transactions were settled on StarkEx, an Ethereum layer-2 solution developed by StarkWare. Publicly launched in 2021, StarkEx used zk-STARKs (zero-knowledge scalable transparent argument of knowledge) to increase throughput and reduce gas fees, resulting in lower trading fees and minimum trading sizes.
A type of zk-rollup, zk-STARKs batches multiple transactions off-chain and proves their validity on-chain with a zero-knowledge proof. This approach not only enhances scalability and reduces on-chain load but also protects the security and integrity of transactions.
dYdX protocol’s latest upgrade: v4 dYdX Chain
While dYdX v3 functioned as a non-custodial layer-2 scaling solution, its order book and matching engine were still centrally managed. Committed to decentralization, the platform transitioned to its own open-source blockchain with its v4 update in 2023, aiming for complete decentralization. This means that no central entity, including dYdX Trading Inc., can collect trading fees on dYdX v4.
V4 signifies a departure from the Ethereum blockchain as dYdX forges its own path and introduces the v4 dYdX Chain. Leveraging the Cosmos SDK, including components like Tendermint, CometBFT, and the Inter-Blockchain Communication Protocol (IBC), dYdX sets its sights on achieving even higher throughput, customizability, and interoperability. With the new chain, dYdX claims transaction speeds of up to 2,000 transactions per second (TPS).
It's important to note that perpetuals will remain the focus for dYdX in v4. While the trading platform continues to support spot trading and margin trading, these trading instruments might be phased out in the future.
The dYdX team and foundation
Antonio Juliano founded dYdX in 2017, applying his experience as a software engineer from roles at Coinbase and Uber. Before entering the decentralized finance (DeFi) space, he founded a search engine named Weipont.
dYdX Foundation operates as an independent not-for-profit organization based in Zug, Switzerland. It supports dYdX protocol’s current and future implementations while nurturing community growth. The entity also finances research and development initiatives, educates the public about the dYdX ecosystem, and manages the deployment of governance smart contracts and governance tokens. The foundation’s council members include Arthur Cheong, Rebecca Rettig, and Markus Spillman.
DYDX token: expanded utility on the v4 dYdX chain
DYDX, the native token of the dYdX Chain, functions as a layer-1 protocol token. Before dYdX transitioned to its v4 chain, DYDX tokens were exclusively used for governance. However, with the migration, DYDX now serves a broader range of functions, including staking and contributing to the security and governance of the network.
Staking DYDX tokens
dYdX offers users the opportunity to participate in staking — a process where users lock up a certain amount of DYDX tokens to earn rewards and participate in governance. Users who stake DYDX tokens contribute to the network's proof-of-stake (PoS) consensus mechanism when they delegate their stake to validators who secure the network. In return for their participation, stakers earn token rewards, typically in the form of USDC and DYDX, with all fees generated on the dYdX Chain directed towards them.
Governance
Staking on dYdX not only provides users with an avenue to earn passive returns but also grants them a say in the platform's governance. Token holders can participate in key decisions such as protocol upgrades, fee structures, and other proposals through a democratic process.
The final word
The release of the v4 dYdX Chain represents a milestone in the platform's development and the fulfillment of dYdX's journey towards achieving complete decentralization. This accomplishment reflects another step in dYdX’s mission to democratize access to financial opportunities, reinforcing the platform’s efforts in establishing an inclusive and decentralized financial landscape.
As of late 2023, dYdX features more than 100 trading pairs, showcasing its commitment to supporting a diverse range of crypto assets. Additionally, the dYdX Chain has reached a cumulative trading volume of more than $8 billion. DYDX token stakers and traders have reaped substantial rewards, receiving a distribution of 1.4 million USDC and earning $700,000 in trading rewards, respectively. This positive user engagement not only marks dYdX’s position within the DeFi space but also spotlights the growing crypto landscape.
