DYdX is a leading decentralized exchange (DEX) platform created by developers on a mission to build open, secure and powerful financial products. It is similar to other popular cryptocurrency exchanges like Bybit, Binance, Kraken, Coinbase etc. It offers margin trading options for assets like BTC, ETH, SOL, DOT and others.
DYdX runs on a smart contract on Ethereum which eliminates the need to trust a central exchange for trading. Founded in 2017 by the ex-Coinbase & Uber engineer, Antonio Juliano, dYdX is a decentralized exchange that offers a perpetual, margin and spot trading as well as a borrow and lead pool on ethereum.
DYdX supports more than 30 assets including Ethereum, Bitcoin, Solana, Chain link etc. Existing as an intensely executed decentralized crypto advanced derivative exchange that resides on top of the ethereum blockchain, dYdX is a non-custodial and permission-less decentralized platform that runs on ethereum and is powered by smart contracts. Unlike other platforms, you can lend, borrow, trade margin, and every user is in control of their private keys. It aims to bring traditional trading tools from the financial world to the blockchain, dYdX was designed to trade a specific type of asset and that is ‘perpetuals’.
DYdX does not rely on a programmed market marker to enable trading but rather uses a traditional order book plus a matching model to meet the requirements and prospects of institutional traders while settling trades and liquidations in a trust less manner. As of the time this article was written, it had a market capital of $311.70M with a current price of 1 DYDX as $2.05. Up until August 2020, dYdX was hosted on ethereum but due to how problematic ethereum’s volatile gas fees that increase with traffic are, they sought for a better option. To significantly increase the transaction size, dYdX and StarkWare established a layer 2 protocol based on StarkWare’s StarkEX scalability engine and dYdX’s perpetual smart contract.
With this, traders are able to look forward to a substantial reduction in the cost of gas resulting in significantly lower transaction fees and minimum trade sizes. DYDX’s margin protocol uses the main ethereum smart contracts to enable decentralized financing transactions for ERC20 tokens. It can be used for short selling and leveraged long trading by basically converting borrowed tokens (also known as owed tokens) to Held tokens. Providing a low risk complete collateral loan from margin trades and can deliver interest fees on long positions.
Crypto derivative exchanges, have traditionally relied on centralization to organize lending & borrowing for trading, margin and perpetual contracts. However, smart contracts have enabled decentralization, liquidity pools, collaterizations and lending across popular protocols like sushiSwap, uniSwap etc. It has ultimately branched out to offer spots and margin trading on the ethereum layer-1 blockchain and layer-2 cross-margin. DYdX combines the best decentralized financial technology for a first of its kind in crypto derivative exchange using only crowd source liquidity.
In practice, this means that when the you deposit collateral to open a leverage trading position, you are borrowing from a decentralized liquidity pool funded entirely by traders. The basic flow for trading crypto perpetual contracts on dYdX exchange is straight to the point and it follows these simple steps:
- Load up the dYdX trading App.
- Connect your wallet (it could be Meta Mask, Coinbase)
- Deposit funds then select trade.
- Open a position with selected leverage if any and limits.
- Track P&L, and fund your positions as needed.
- It is important to remember that there are two versions of DYDX. The user should know the version he’s on, either ETH version (layer 1) or STARKWARE version (layer 2) in order to keep track of your mileage as they both differ.
The goal of the founder, is to create an open source, community governed derivative exchange, although this was in a surging ICO bubble period, he decided to raise funds through token sales. Instead of this, dYdX received 2-million-dollar investment from some well-known VC funds which includes; Andreesen Horowitz, Bain capital and polychain capital. In August 2021, the exchange launched its native governance token, ‘dYdX’ and air dropped it to loyal users. The team also set up a foundation that connects the users and the developers. The dYdX token is accountable for paying trading fees and staking earners yield. This serves as a liquidity redundancy layer for extreme market conditions. The token holders gain voting rights proportional to their holding. It does all these by partnering with Starkware.
This blockchain uses zero-knowledge (ZK) rollup proofs to make transactions fast, privacy-focused, free and secured. DYdX also offers extra stablilty by staking USDC (stable coins) in either of the platforms safety or liquidity pools. Currently, dYdX supports five order types and they include the: Market, limit, stop limit, trailing stop and take profit limit. It is widely regarded as the largest decentralized exchange platform and this comes down only to its functionality but simplicity as well.
Perpetual Trading/Contracts Vs. Traditional Contracts Vs. Spot Trading
In order to fully understand how dYdX works, a potential user needs to understand the several trading options available and the major distinguishing factor between them. A perpetual contract is simply an agreement between two parties to either buy or sell an asset at a predetermined price without an expiration date. Perpetual contract market exists in dYdX perpetual contract protocol and they are synthetic trading markets on ethereum that allows the exposure of any liquid asset using ERC20 tokens as collateral. Spot trading on the other hand depends on the instability of the crypto market. It is a simple and straightforward process that has to do with traders buying assets on the spot with the expectation of selling them at a higher rate in the future. It is referred to as ‘spot trading’ because the transactions are handled instantly or on the spot. Meanwhile traditional future contracts deal with a binding arrangement to buy or sell a standardized asset on a particular date or within a precise month which breakdowns once the time runs out. As a decentralized exchange, dYdX is mainly home to perpetual markets that ultimately branched out to offer spot and margin trading on the Ethereum layer-1 blockchain and layer-2 cross-margined perpetuals.
Trading Options On The dYdX Exchange.
As the leading and largest decentralized exchange dYdX proposes a layer 2 perpetual trading options, NFT collections for community building and a Ropsten ethereum testnet for projects that are after risk-free testing environment. Going further, the V3 of dYdX exchange has four essential key products and they are: Perpetual trading, governance, staking and NFTs. We will go ahead to briefly discuss these products.
Perpetual Trading On The dYdX Exchange
Since its launch in 2018, dYdX has risen as the largest perpetual trading platform for crypto assets. As stated on Crypto Briefing, ‘perpetuals, otherwise known as “perps” were introduced by the centralized exchange BitMex and they are a kind of derivative that allow traders to gin long or short exposure to a certain crypto asset”. As they are considered similar to future contracts, they part ways given perpetual’s trading feature of ‘never expiring’. Due to this feature, stakeholders can maintain their buy or sell positions indeterminately up until the prearranged trade requirements are met. Stakeholders or investors may decide to dismiss the contract by pre-closing the perpetual trading order. Unlike BTC futures, there is no fixed date or time for the exchange in perpetual trading. This simply means that you can hold a perpetual contract indefinitely. One of its biggest advantages is that a user is not stuck on a loss if the trade goes against him rather he can keep riding the position by funding it which makes way for a possible reversal of fortunes subsequently. It is like margin trading but instead of borrowing funds, traders use perpetual contracts with leverage to trade assets. Because perpetual contracts are built on top of an essential asset, which in the case of dYdX, are Ethereum-based ERC-20 tokens, the creation of entirely new classes, which derive their value from underlying blockchain-based assets is made possible. Perpetual trading as stated on Coin telegraph is dYdX’s flagship offering, as it allows users to trade open markets with contracts that don’t expire. Investors can decide to dismiss the contract by pre-closing the buy or sell order.
Governance And Staking In dYdX
One of the trading options dYdX offers, is governance and staking protocol which allows users to contribute in the decision making process of the platform and earn rewards for staking their tokens. DYDX was launched a year after the launch of the dYdX platform as the governance token. The governance mechanism on dYdX is referred to as “dYdX DAO”, which is a decentralized autonomous organization that lets token holders to vote on proposals connected to the development and operations of the platform. Following this, the community arm of the exchange platform allows token holders to submit, vote on proposals and earn rewards for partaking in the governance procedure or to earn a share of the trading fees generated on the platform. The exchange proposes two pools where users can stake USDC and earn rewards. This two pools are the liquidity and the safety pool.
Based on the amount of dYdX tokens staked by each user, the staking rewards are distributed equivalently. Staking on dYdX involves a smart contract on the Ethereum blockchain, it runs on a feature which permits users to stake and unstake their tokens at any time, hence it’s flexibility. Ultimately, the governance and staking protocol on dYdX are intended to incentive participation and reward to users for contributing to the platforms growth and advancement.
Non Fungible Tokens(NFTs) on dYdX
NFTs are unique assets that represent ownership of a particular item or artwork. Typically created on the Ethereum blockchain, it can be bought, sold and traded on several marketplaces and platforms including some decentralized exchange. As of September 2021, dYdX did not support the trading of NFTs on their decentralized exchange platform but all that changed on the 1st of February 2022 when they launched 4,200 unique characters represented as NFTs on the Ethereum blockchain. Created by two independent digital artists, Anna and Arek Kajda’s animated hedge dogs popularly known as ‘Hedgies’ stand as dYdX’s latest and newest product offering with a total of 2,443 Hedgies minted during the free mint and the remaining reported to be distributed to voters, traders, and the crypto community at large.
A user holding a Hedgie will automatically receive a one tier increase in $DYDX fee tier discount on the protocol. Minting Hedgies only costs gas fees and was created as a means of reward to users on several instances.
Spot And Margin Trading On dYdX (Legacy)
Before pulling out to its layer-1 offering on November 1, 2021, dYdX offered spot and margin trading services over the Ethereum layer-1 protocol. It is recorded to have also moved over to offering layer-2 perpetual products in its aim to become a truly decentralized exchange. Generally, dYdX offers a use-friendly exchange platform for spot and margin trading, with a range of features and tools to assist users in managing their trades and mitigating risk. The platform uses Ethereum smart contracts to leverage spot, margin and also includes trading features like stop-loss and limit orders.
The Future Of dYdX Decentralized Exchange
dYdX is on the path to proffer progressively advanced trading options and features that people look out for in the traditional world of finance. It is presently one of the most liquid DEXs with high trading volumes comparative to other platforms in DeFi space. The decentralized exchange is currently in its third version and with the next version, the platform is focused on operating fully as decentralized with no centralized factor. Although most mechanisms of current dYdX version are decentralized, the platform still relies on centralized systems for the orderbook and matching engine. With its future plans of being fully decentralized given the fourth version, the orderbook and matching engine will also be decentralized. They have announced their intention of developing the V4 as a stand-alone blockchain on the cosmos SDK. The developers intend to migrate from the current proof-of-work consensus on Starkware to the Tendermint-based protocol which supplies users with a fully decentralized protocol.
As stated on Coin telegraph, the fourth version of the dYdX protocol will be rolled out as an open-source, decentralized and community-controlled trading platform. There will be a re-establishment of trading features like spot, margin and more synthetic products. DYdX could also potentially integrate with other DeFi protocols like lending and borrowing platforms to create a smoother user experience and expanding the potential use cases for the platform. Traders will not have to pay gas fees for trading, instead they will pay fees based on trades executed (taker and maker fees). The version-4, promises to take control away from the company and hand it over to the community of investors making it more transparent and decentralized. Summarily, the future of dYdX appears to be promising coupled with its exponential growth. As the DeFi space continues to evolve, dYdX has high potentials of becoming a leading decentralized trading platform for cryptocurrency derivatives.
