1. Project introduction:
1. What is dYdX
dYdX is the world's first decentralized digital currency derivatives trading platform, which aims to build more open, transparent and secure financial products through decentralized technology.
In the dYdX platform, it mainly supports margin (leverage) trading and derivatives (perpetual contract) trading, and can support up to 20 times leverage.
2. Product architecture
1) Main trading modes
As we all know, AMM (Automated market maker) is one of the cornerstone protocols of DeFi. In the AMM model, the counterparty is a capital pool, and the capital pool completes the quotation in real time, which is equivalent to human-computer trading. There is no need to wait for the platform's transaction matching, so it can Complete transactions quickly, which is also the advantage of the AMM model.
Classic DeFi projects Uniswap (DEX), Pancakeswap and GMX (derivatives) all adopt the AMM model.
However, dYdX went in the opposite direction. Instead of following the trend and adopting the AMM model, dYdX adopted the order book model that has been used by centralized exchanges (CEX) to this day.
Users can not only place market orders and limit orders on the dYdX platform, but also include 5 stop-loss modes. In addition, they can also set the effective deadline of the order.
In dYdX’s view, the order book model is more in line with the needs of professional traders and also caters to the needs of more cryptocurrency traders. After all, in the current cryptocurrency trading, the market share of centralized exchanges (CEX) accounts for 10% of the market share. above 95.
Compared with DeFi platforms that adopt the AMM model (passive trading), it is obvious that traders have more autonomy on the dYdX platform. Users can create more complex trading strategies based on their own needs (customized combinations of leverage multiples, order types, stop loss types, order validity periods, etc.) to meet their own trading needs.
2) Underlying technical architecture
dYdX (currently in V3 version) is a DeFi derivatives trading platform built on the Starkware network, one of the four kings of the Ethereum L2 track.
With the help of Starkware's high scalability and low transaction fees, as well as dYdX's smooth off-chain order book and on-chain settlement model, users' trading experience on the dYdX platform is almost comparable to that of centralized exchanges (CEX).
The dYdX V4 version will be migrated to the Cosmos network. dYdX will create its own independent L1 blockchain dYdX Chain based on the Cosmos SDK and CometBFT PoS consensus protocol, with a fully decentralized off-chain order book and matching engine.
dYdX Chain As a customized L1 blockchain on Cosmos, dYdX will have more autonomy, such as being able to run nodes, adjust the platform's charging structure, etc., thus providing users with a better trading experience.
3. Development process
dYdX was founded in July 2017. Founder Antonio Juliano worked as an engineer at Coinbase from 2015 to 2016. At that time, the first generation of decentralized exchanges (0x, Kyber) had appeared, but dYdX was mainly positioned in margin trading and derivatives. trade.
To dYdX founder Antonio Juliano, this seems logical. Because margin trading (led by Bitfinex) had begun to take off in the crypto space at that time, in his view, the financial market would experience the evolution of "spot-margin-derivatives" over time.
Cryptocurrency seems to be no different, and will also undergo the evolution process from spot, margin (leverage) to derivatives (contracts, etc.).
dYdX’s first product, Expo, is built on the V1 Margin Protocol, a simple trading application that can be used to purchase leveraged tokens. At its peak, Expo traded about $50 a day.
Then, in 2019, a second version of the dYdX margin trading protocol was launched, codenamed “Solo.” This version was more powerful and solved some of the problems with the original protocol. It soon grew the platform’s trading volume to approximately $1 million per day.
Then dYdX began to build its own order book system.
dYdX was originally built on Ethereum L1, but the explosion of DeFi increased gas costs by 100–1000 times, and the congestion of the Ethereum network also seriously affected the user's transaction experience.
Then, in April 2021, dYdX moved to the more scalable Ethereum L2 Starkware platform. Whether it is scalability (TPS) or gas fees, Starkware’s advantages are very obvious. Shortly after the launch of L2, transactions on the dYdX platform Volume surged about five times to about $30 million per day.
dYdX Foundation issues DYDX tokens
In the summer of 2021, the Swiss independent foundation dYdX Foundation was established. The foundation released DYDX, the Token of the dYdX protocol, in August 2021. After the launch of Token, the trading volume of the dYdX platform soared.
In June 2022, dYdX announced that its v4 version would be launched as an independent blockchain based on the Cosmos SDK and Tendermint consensus.
The dYdX V4 test network was officially launched in the early morning of July 6th.
4. Financing situation
According to public information, dYdX has completed at least 4 rounds of financing so far:
(1) In December 2017, it received US$2 million in seed round financing, with participation from Andreessen Horowitz (a16z), Polychain Capital, 1confirmation, Kindred Ventures, Caffeinated Capital, Abstract Ventures and many other investment institutions.
(2) In October 2018, received $10 million in Series A financing from Andreessen Horowitz (a16z), Bain Capital Ventures, Abstract Ventures, Craft Ventures, Polychain Capital, Fred Ehrsam (former partner of Coinbase) and Brian Armstrong (Coinbase CEO) ) and other investment institutions and individual investors participated in the investment.
(3) In January 2021, it received US$10 million in Series B financing, led by Three Arrows Capital and deFiance Capital, with new investors Wintermute, Hashed, GSR, SCP, Scalar Capital, Spartan Group, RockTree Capital and Existing investors a16z, Polychain Capital, Kindred Ventures, 1confirmation, Elad Gil, Fred Ehrsam and other institutions followed the investment.
(4) In June 2021, it received US$65 million in Series C financing, led by Paradigm, with liquidity providers QCP Capital, CMS Holdings, CMT digital, Finlink Capital, Sixtant, Menai Financial Group, MGNR, Kronos Research and venture capital Companies HashKey, Electric Capital, delphi digital and StarkWare also participated in the investment.
Four rounds of financing raised a total of US$87 million, and the investment list includes Paradigm, Polychain Capital, Andreessen Horowitz (A16Z), Three Arrows Capital and other well-known institutions in the industry, as well as Wintermute, one of the largest liquidity providers on dydx, etc. The lineup is strong and the project development funds are sufficient.
According to its token distribution plan, 27.73% of the tokens, or 277 million tokens, are owned by investors, and the average cost of DYDX for investors is US$0.31.
Taking into account the difference in valuation between previous and later rounds, the cost of the final round of investment of $65 million may be higher than $0.31. Part of the market attention dydx has received comes from its strong capital background. At the same time, this is also part of its current leading position on the track.
5. Fundamental influence
dYdX is the world's first decentralized digital currency derivatives trading platform.
According to statistics from the defillama platform, in the DeFi derivatives track, dYdX’s TVL has reached US$350 million, second only to GMX.
According to statistics from the CoinMarketCap platform, in the DEX track, dYdX ranked first in trading volume in the last 24 hours, with a market share of 23.3%, surpassing Uniswap V3.
Moreover, the dYdX platform currently supports only 37 trading pairs, which is far lower than the trading pairs on other DEX trading platforms.
2. DYDX Token
1. Token distribution
The total number of DYDX tokens is 1 billion, which will be distributed over five years starting on August 3, 2021.
1) 50.00% of the supply will be used in the community, of which:
25.00% as trading bonus;
7.50% is used for retroactive mining rewards;
7.50% allocated to liquidity provider rewards;
5.00% will go into the community treasury;
2.50% will be dedicated to users staking USDC to liquidity staking pools;
2.50% will be used exclusively for users staking DYDX to a secure staking pool.
The remaining 50%:
2) 27.73% will be retained by past investors.
3) 15.27% will be allocated to founders, employees, consultants and advisors.
4) 7.00% will be reserved for future employees and advisors of dYdX.
After 5 years, the maximum annual inflation rate is 2.00% to support the development of the platform.
2. Token usage
The main uses of DYDX coins are as follows:
1. Participate in governance and voting
As a governance token, DYDX coins have the functions of voting and participating in governance.
2. Handling fee discount
As a trading platform token, DYDX, like Binance Coin (BNB), allows holders to receive discounts on trading fees based on the size of their current holdings.
3. Make a pledge
Stakers will receive DYDX in a continuous distribution based on each staker's share of the total USDC in the pool. If you want to withdraw USDC in the next period, the staker must request to unpledge USDC at least 14 days before the end of the current period. If stakers do not request withdrawal, their staked USDC will be transferred to the next period.
3. Latest progress and future imagination space
1、dYdX Chain
In the dYdX community, dYdX V4 is currently receiving the most attention.
In the current version of dYdX, most components have been decentralized, but the order book and matching engine are still centralized components.
The goal of dYdX is to achieve complete decentralization. In dYdX’s view, the decentralization of the system is equal to the decentralization of its least decentralized components, which means that every assembly of v4 needs to be decentralized. And maintain high performance.
The V4 version is to achieve the decentralization of the order book and matching engine. The platform will no longer run centralized components, thus achieving the complete decentralization of the dYdX platform.
In order to achieve the goal of decentralization, dYdX created its own L1 blockchain on Cosmos, the dYdX Chain.
Compared with previous versions, V4 is an independent L1 blockchain. It is its own L1 blockchain customized on Cosmos according to its required functions, whether it is scalability or gas transaction fees. All are better than dYdX V3 on L2 Starkware, and will receive more technical support from Cosmos.
In fact, the main reason why dYdX migrated from Ethereum to Cosmos is to improve users’ trading experience.
dYdX founder Antonio once said on Twitter:
“If there is a better technology to build (dYdX), we will use it”, “I 100% don’t care what chain dYdX is built on, I only care about giving users the best product experience.”
The implication is that he believes that currently dYdX building a Cosmos application chain is the best solution to improve user experience.
StarkNet co-founder @TobbyKitty also bluntly stated that the biggest reason for migrating to Cosmos is to allow dYdX Token to run verification nodes on the new chain and lock the protocol value, but this cannot be done on L2.
In the future on the dYdX chain, users will use DYDX tokens instead of ETH to pay transaction fees.
Currently, DYDX is equivalent to a mining coin. Although the dYdX protocol is developing quite well, it runs on the Ethereum ecosystem, and the gas fees consumed by transactions are paid in ETH.
Moreover, the transaction income generated on the dYdX platform will ultimately belong to the project party.
The token DYDX lacks rich application scenarios. Therefore, the rapid development of the dYdX platform has not promoted the price increase of the DYDX token to a great extent.
In fact, DYDX and UNI encountered the same problem. Although the platform developed quite well, the performance of the platform tokens was relatively average.
However, after dYdX migrates to Cosmos as an L1 blockchain with greater autonomy, the token DYDX will become the underlying basic token for the ecological development of the entire dYdX Chain, and the value of the token is deeply bound to the development of the platform.
The token that needs to be pledged to build a node is DYDX, and the gas consumed in transactions also uses DYDX tokens. The better the dYdX Chain develops, the more DYDX tokens it consumes.
Moreover, after the V4 version is fully decentralized, the community will take away control from dYdX Trading Inc. Therefore, the community can pass proposals to make more of the platform's income flow into the hands of DYDX token holders, and Unlike the V4 version, all revenue flows into the platform.
This way, the DYDX token can capture more value from the development of the dYdX protocol.
If V3 is just an application chain on Ethereum L2, then V4 (dYdX Chain) is an independent L1 blockchain, which of course has more room for operation.
2. Derivatives trading volume
In traditional financial markets, the trading volume of derivatives is much higher than the trading volume of spot products.
In the cryptocurrency market, the current derivatives trading volume is not much higher than the spot trading volume, so the derivatives trading volume in the crypto market still has a lot of room for development.
And compared with Binance’s derivatives trading volume, dYdX’s derivatives trading volume is only 2% of Binance’s derivatives trading volume. As the leading decentralized derivatives trading platform, dYdX’s overall trading volume is Lots of room for growth.
3. PoS pledge locked tokens
After dYdX switches to PoS consensus, it will run its own nodes, and running a PoS node requires a certain amount of DYDX tokens to be pledged. The higher the DYDX pledge rate, the safer the dYdX Chain network will be.
Even the pledge rate of some PoS blockchains is as high as more than 50%. As we all know, the current circulation of DYDX tokens is only 15.63%, and the subsequent unlocking and release volume is still somewhat large.
The PoS node staking will dilute the impact of the unlocking selling pressure of the DYDX token to a certain extent, coupled with the consumption of DYDX tokens in the dYdX Chain and the linear unlocking of DYDX in batches, so overall, the DYDX token The currency unlocking selling pressure will not have a great impact on the DYDX token.
4. Number of coins listed on dYdX
Currently, only 37 tokens are available for trading on the dYdX platform. Compared with other DEX platforms, the dYdX platform has very few trading pairs.
Although the number of currencies listed on the dYdX platform is much lower than that of other DEX platforms, the trading volume of the platform is higher than other platforms.
Therefore, with the continuous development of dYdX, after the V4 version is launched, the community can vote to list more tokens, and the platform’s transaction volume still has a lot of room for imagination.
5. Resist supervision
After the FTX platform crash, the trading volume of the DEX platform increased significantly. For dYdX, both the platform trading volume and the DYDX token price performed well.
The reason for this is that the dYdX platform has certain regulatory resistance, and in the future V4 version, dYdX will be completely decentralized. dYdX Trading Inc (the platform side) will no longer run any centralized components, and dYdX will transfer Managed and controlled by the community, which tokens will be listed on the platform, how the protocol revenue will be distributed, and the future development direction of the platform will all be decided through community voting.
The 100% decentralized operation of dYdX Chain will avoid some unnecessary regulatory issues.
The dYdX team is an ambitious team. The team mentioned in the blog: One of the core values of dYdX is to think ten times bigger. dYdX should focus on what it can achieve rather than protecting what has been built so far. The goal of dYdX is for dYdX to eventually become one of the largest exchanges in the cryptocurrency space.
4. Comparison of competing products
In the decentralized derivatives track, the most noteworthy ones are GMX and dYdX. Let’s compare these two projects below.
First of all, the models adopted by the two are different.
dYdX adopts an order book model, where users and users (or market makers) are counterparties to each other, and the platform operates the orders of buyers and sellers.
GMX adopts the AMM (automatic market maker) model, where users and the asset pool are counterparties to each other.
Now we analyze from three aspects: liquidity, price discovery mechanism and funding rate.
1. Liquidity
Liquidity on a cryptocurrency exchange refers to the amount of cryptocurrencies that can be bought and sold on the exchange and how stable the prices of these cryptocurrencies are.
dYdX has introduced market makers to provide liquidity and pursue matching efficiency. However, slippage cannot be avoided and transactions will not be completed at a stable price. When the transaction amount is huge, the slippage will be higher.
The GMX platform adopts a zero-slippage mechanism. The counterparty is a capital pool, and the quotation is provided by an oracle, which can quickly complete the transaction. Since it has zero slippage, traders can buy and sell at a more stable price, even when the transaction is completed. Even when the amount is huge, its oracle's zero-slippage mechanism still ensures price stability.
For example, if 1,000 ETH is traded on the dYdX platform, the price will definitely increase (for example, by 10%), and traders will have to bear higher slippage. However, if 1,000 ETH is traded on the GMX platform, the price will remain stable, because the quotation of the fund pool is determined by the oracle. provided with zero slippage.
In this sense, GMX is more liquid.
However, when more CEX derivatives users move to the chain in the future, the users and trading volume of DEX derivatives will increase significantly. In theory, dYdX has a higher liquidity limit than GMX.
Because dYdX adopts an order book model, there is no need to consider how to maximize the profitability of LPs, thereby motivating more LPs to provide liquidity to the platform. As long as there is a match between buyers and sellers in the market, there will be liquidity.
However, GMX adopts the AMM model, which is a bet between users and an asset pool. There is no matching of buy and sell orders between users. The liquidity of the platform depends on the LP provider. The platform needs to consider the profitability of LP, so as to encourage more Multiple LPs provide liquidity to the platform.
2. Price discovery mechanism
The price discovery mechanism determines whether the exchange has pricing power.
The order book has pricing power and can determine the price. Relatively speaking, there will be no large deviations in OI, because the order book is a competition between users, so the long and short positions need to be matched 1:1, and most positions are It can be offset, and the part that is not offset and causes the position to shift is expressed as an increase or decrease in price, which is the same as the mechanism of a centralized exchange.
The oracle machine has no pricing power and does not affect the price. It can only passively receive the price feed from the oracle, so the party receiving the price can only digest the price changes by itself. This may lead to problems with oracle attacks. For example, GMX was attacked in September 2022 for having zero slippage.
Because GMX adopts a zero slippage mechanism, zero slippage actually means that attackers always have unlimited liquidity and low attack costs.
If a user is long $1 billion in AVAX on the GMX platform, according to common sense, such a high transaction volume will definitely drive up the price of AVAX. However, GMX uses 0 slippage, and it still opens a position based on the quotation given by the oracle. .
However, a transaction of this size will definitely drive up the price of AVAX tokens on other trading platforms. Assuming it has increased by 20%, then the oracle will feed back the latest AVAX price (which has increased by 20%) to the GMX platform. This will At that time, the position can be closed according to the latest price that has increased by 20%.
On the GMX platform, because it uses oracle quotations, it has a zero-slippage mechanism. If the trading volume of the platform is huge in the future, but the way to obtain the price is still from the outside, it will be easy for the price to be attacked.
Because no matter how big or small the transaction volume is, there will be no slippage on the GMX platform. When a large transaction occurs, there will be a difference and delay between the price of the external platform and the quotation of the GMX platform, and this price delay will be used by attackers. use.
But for the dYdX platform, it does not use the oracle quotation mechanism, and the price can reflect the fair market price. This model of dYdX has an advantage when competing with CEX.
3. Funding rate
dYdX’s fee charging mechanism is consistent with that of centralized exchanges (CEX).
But in the GMX platform, whether you are long or short, you can understand it as lending risk assets or stablecoins in the GLP pool to establish a position. Both long and short sides of GMX have always paid funding fees without charging funding fees.
That is to say, long and short cannot be balanced on the GMX platform. Once a strong unilateral market occurs, causing a large deviation in OI, the GLP pool may bear huge profits or losses.
For example, in the bull market, most people choose to go long. If they go short on the GMX platform, not only will they not receive funding fees, but they will also have to pay a certain amount of borrowing fees. Therefore, traders will not choose to go short on GMX, which will lead to GMX The long and short positions on the platform are in an unbalanced state.
But in the dYdX platform, it adopts the consistent strategy of centralized exchanges, which can well balance the long and short sides.
4. Value capture ability
Obviously, GMX has a stronger value capture capability. 30% of the platform fee is given to GMX pledgers, and the remaining 70% is given to GLP pledgers. GMX gives 100% of platform fees to token pledgers. The better the development of the platform, the higher the income of token holders. That is, the value of GMX tokens is deeply bound to the development of the platform. This is also The main reason for the increase in GMX price.
However, the value of the DYDX token is not deeply bound to the development of the dYdX platform. The platform token has not captured much value from the development of dYdX. Although dYdX has developed quite well, the price performance of the DYDX token is very average. .
From the above comparison between dYdX and GMX, we can find that both sides have their own merits.
GMX’s value capture capabilities and degree of decentralization surpass those of the dYdX platform.
But it remains to be seen whether GMX’s “cash burning” approach of returning 100% of platform fees to token holders is truly sustainable.
The degree of decentralization of dYdX and the value capture capabilities of platform tokens will be addressed in the future dYdX V4 version.
dYdX V4 claims to achieve complete decentralization, which is mainly reflected in the order book and matching engine. The platform no longer operates any centralized components of the protocol, which means that the community has more control over the development of dYdX, such as being able to vote. Increasing the distribution of protocol revenue toward platform currency holders and giving DYDX more application scenarios will improve DYDX's value capture capabilities.
So, although the GMX token currently has better price performance, in the long run, it is clear that DYDX has greater room for imagination in the future.
5. Market value forecast
The current price of GMX is around US$2, and its market value is only over US$200 million. It ranks around 100th, while GMX’s market value ranks at 80th.
Observing the historical K-line chart of the DYDX token, we can find that the highest increase in DYDY occurred after the token was issued and mining started, with the price rising to more than $27. Later, because the platform did not give DYDX more application scenarios, DYDX has been lacking sufficient application scenarios. Although dYdX has developed quite well, the price of DYDX has been sluggish for a long time.
The current price of DYDX is far from the highest price, with a decline of more than 93%. It has basically been at a low level for a long time, and can even be said to be in an oversold state.
But after the V4 version goes online, these problems will be solved, and the community will allocate more platform income to DYDX holders through voting.
Of course, a problem faced by DYDX tokens that cannot be ignored is that the unlocking selling pressure is relatively large, but after the V4 version is launched, token staking is likely to absorb the unlocking selling pressure.
In addition, the current trading volume of decentralized derivatives is still very low. With the advent of global regulatory policies, more transactions will be transferred to decentralized trading platforms, and decentralized derivatives have relatively large room for future development.
Based on the above predictions, in the future bull market, the market value of DYDX will most likely enter the TOP30-50. It is not ruled out that the market value will enter the TOP30. The price of the token DYDX is conservatively estimated to increase by 5-10 times, or even higher.
Hot Air Balloon will continue to pay attention to the subsequent development of dYdX.