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.

The dYdX platform mainly supports margin (leverage) trading and derivatives (perpetual contracts) trading, with a maximum leverage of 20 times.

2. Product Architecture

1) Main transaction mode

As we all know, AMM (Automated market maker) is one of the cornerstone protocols of DeFi. In the AMM model, the counterparty is the capital pool, and the capital pool completes the quotation in real time, which is equivalent to human-machine transaction. There is no need to wait for the platform's transaction matching, so the transaction can be completed quickly. This is also the advantage of the AMM model.

Classic DeFi projects such as Uniswap (DEX), Pancakeswap and GMX (derivatives) all adopt the AMM model.

However, dYdX went the other way. Instead of following the trend and adopting the AMM model, it adopted the order book model that centralized exchanges (CEX) have been using to this day.

Users on the dYdX platform can not only place market orders and limit orders, but also include 5 stop-loss modes. In addition, they can also set the effective deadline for 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 transactions, centralized exchanges (CEX) account for more than 95% of the market share.

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 combine more complex trading strategies according to their own needs (customize the leverage ratio, order type, stop loss type, order validity period, etc.) to meet their own trading needs.

2) Underlying technical architecture

dYdX (currently version V 3) 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 V 4 version will be migrated to the Cosmos network. dYdX will create its own independent L 1 blockchain dYdX Chain based on the Cosmos SDK and CometBFT PoS consensus protocol, with a fully decentralized off-chain order book and matching engine.

As a customized L1 blockchain on Cosmos, dYdX Chain will have more autonomy, such as the ability to run nodes, adjust the platform's fee structure, etc., thereby providing users with a better trading experience.

3. Development History

dYdX was founded in July 2017. Its 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 already appeared, but dYdX was mainly positioned in margin trading and derivatives trading.

This seemed logical to Antonio Juliano, founder of dYdX, as margin trading (led by Bitfinex) was beginning to take off in the crypto space at the time, and in his opinion, financial markets would evolve from “spot — margin — derivatives” over time.

Cryptocurrency seems to be no different, and will also go through the evolution process from spot, margin (leverage) to derivatives (contracts, etc.).

dYdX’s first product, Expo, was built on top of the V1 Margin Protocol, a simple trading application that could be used to buy leveraged tokens. At its peak, Expo was trading around $50 per day.

Then, in 2019, a second, more powerful version of the dYdX margin trading protocol, codenamed “Solo,” was launched, which fixed some of the issues with the original protocol. It soon increased the platform’s trading volume to around $1 million per day.

Then dYdX started building its own order book system.

dYdX was initially 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 users’ trading experience.

Then, in April 2021, dYdX moved to the more scalable Ethereum L 2 Starkware platform. Whether it is scalability (TPS) or gas fees, Starkware's advantages are very obvious. Shortly after the launch of L 2, the transaction volume of the dYdX platform soared by about 5 times to about US$30 million per day.

dYdX Foundation issues DYDX tokens

In the summer of 2021, the Swiss independent foundation dYdX Foundation was established. In August 2021, the foundation released DYDX, the token of the dYdX protocol. After the launch of the token, the trading volume of the dYdX platform soared.

In June 2022, dYdX announced that its v 4 version will be launched as an independent blockchain based on Cosmos SDK and Tendermint consensus.

The dYdX V 4 testnet was officially launched in the early morning of July 6.

4. Financing

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 many investment institutions including Andreessen Horowitz (a16z), Polychain Capital, 1confirmation, Kindred Ventures, Caffeinated Capital, and Abstract Ventures.

(2) In October 2018, it received US$10 million in Series A financing, with participation from investment institutions and individual investors such as Andreessen Horowitz (a 16 z), Bain Capital Ventures, Abstract Ventures, Craft Ventures, Polychain Capital, Fred Ehrsam (former partner of Coinbase) and Brian Armstrong (Coinbase CEO).

(3) In January 2021, it received US$10 million in Series B financing, led by Three Arrows Capital and deFiance Capital, and followed by 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.

(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 firms HashKey, Electric Capital, delphi digital and StarkWare following suit.

A total of US$87 million was raised in four rounds of financing, and the investment list includes well-known industry institutions such as Paradigm, Polychain Capital, Andreessen Horowitz (A 16 Z), Three Arrows Capital, as well as Wintermute, one of the largest liquidity providers on dydx, etc. The investment 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, belong to investors, and the average cost of DYDX for investors is US$0.31.

Considering the difference in valuations between the previous and subsequent rounds, the cost of the last round of $65 million investment may be higher than $0.31. Part of the market attention that dydx has received comes from its strong investor background, which is also part of its current leading position in 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 reached US$350 million, second only to GMX.

According to data 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 V 3.

Moreover, the dYdX platform currently supports only 37 trading pairs, which is far lower than the trading pairs launched on other DEX trading platforms.

2. DYDX Token

1. Token Allocation

The total supply of DYDX tokens is 1 billion, which will be distributed over five years starting from August 3, 2021.

1) 50.00% of the supply will be used for social qu, of which:

25.00% as trading bonus;

7.50% for retroactive mining rewards;

7.50% is allocated to liquidity provider rewards;

5.00% will go into the community treasury;

2.50% will be reserved for users who stake USDC into the liquidity staking pool;

2.50% will be reserved exclusively for users who stake DYDX into the secure staking pool.

The remaining 50% :

2) 27.73% will be reserved for past investors.

3) 15.27% will be allocated to founders, employees, advisors, and consultants.

4) 7.00% will be reserved for future employees and advisors of dYdX.

After 5 years, the maximum annual inflation rate will be 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 vote

As a governance token, DYDX coin has the functions of voting and participating in governance.

2. Handling fee discount

As a token of the trading platform, DYDX, like Binance Coin (BNB), allows holders to receive trading fee discounts based on the size of their current holdings.

3. Make a pledge

Stakers will receive DYDX based on a continuous distribution based on their share of the total USDC in the pool. To withdraw USDC to the next period, the staker must request to unstake USDC at least 14 days before the end of the current period. If the staker does not request a withdrawal, their staked USDC will be rolled over to the next period.

3. Latest progress and future prospects

1、dYdX Chain

In the dYdX community, the most popular one at the moment is dYdX V 4.

In the current version of dYdX, most components have been decentralized, but the order book and matching engine are still centralized components.

dYdX’s goal is to achieve full decentralization. In dYdX’s view, the decentralization of a system is equal to the decentralization of its least decentralized component, which means that every component of v 4 needs to be decentralized while maintaining high performance.

The V 4 version aims to achieve the decentralization of the order book and matching engine. The platform will no longer run centralized components, thus achieving complete decentralization of the dYdX platform.

In order to achieve the goal of decentralization, dYdX created its own L1 blockchain on Cosmos, namely dYdX Chain.

Compared with previous versions, V 4 is an independent L 1 blockchain. It is a customized L 1 blockchain on Cosmos according to its required functions. Whether in terms of scalability or gas transaction fees, it is better than dYdX V 3 on L 2 Starkware, and will receive more technical support from Cosmos.

In fact, the reason why dYdX migrated from Ethereum to Cosmos is mainly to improve the user's trading experience.

Antonio, founder of dYdX, once tweeted:

"If there is 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."

What this means is that he believes that 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 in the value of the protocol, but this is not possible on L2.

On the future dYdX chain, users will pay transaction fees with DYDX tokens instead of ETH.

Currently, DYDX is equivalent to a mining coin. Although the dYdX protocol has developed quite well, it runs on the Ethereum ecosystem, and the gas fees consumed by transactions are paid in ETH.

Moreover, all transaction revenue generated on the dYdX platform will ultimately belong to the project owner.

The DYDX token lacks rich application scenarios. Therefore, the rapid development of the dYdX platform has not driven the price of the DYDX token to a great extent.

In fact, DYDX and UNI face the same problem. Although the platform has developed quite well, the performance of the platform token is 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 development of the entire dYdX Chain ecosystem, and the token value will be deeply bound to the development of the platform.

The token that needs to be staked 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 will be consumed.

Moreover, after the V 4 version is fully decentralized, the community will take control away from dYdX Trading Inc. Therefore, the community can pass proposals to make more of the platform's revenue flow into the hands of DYDX token holders, rather than all the revenue flowing into the platform as in the V 4 version.

This way, the DYDX token will be able to capture more value from the growth of the dYdX protocol.

If V 3 is just an application chain on Ethereum L 2, then V 4 (dYdX Chain) is an independent L 1 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 that of spot products.

In the cryptocurrency market, the current derivatives trading volume is not much higher than the spot trading volume, so there is still a lot of room for development in the derivatives trading volume of the cryptocurrency market.

Moreover, compared with the derivatives trading volume of AoAn, the derivatives trading volume of dYdX is only 2% of that of AoAn. As a leading decentralized derivatives trading platform, dYdX's overall trading volume still has a lot of room for improvement.

3. PoS staking and locking tokens

After dYdX switches to PoS consensus, it will run its own nodes. Running PoS nodes requires staking a certain amount of DYDX tokens. The higher the DYDX staking rate, the more secure the dYdX Chain network will be.

There are even some PoS blockchains with a pledge rate of over 50%. As we all know, the current circulation of DYDX tokens is only 15.63%, and the subsequent unlocking and release volume is still quite large.

The PoS node staking will dilute the impact of the unlocking pressure of DYDX tokens to a certain extent. In addition, the consumption of DYDX tokens in dYdX Chain and the linear unlocking of DYDX in batches will not have a significant impact on DYDX tokens in general.

4. Number of dYdX listed coins

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 far less than that of other DEX platforms, the platform's trading volume is higher than other platforms.

Therefore, as dYdX continues to develop and after the V4 version is launched, the community can vote to list more tokens, and there is still a lot of room for imagination in the platform's trading volume.

5. Anti-regulation

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.

This is because the dYdX platform has a certain degree of anti-regulatory properties. In the future V 4 version, dYdX will be completely decentralized. dYdX Trading Inc (the platform) will no longer run any centralized components. dYdX will be managed and controlled by the community. Which tokens will be launched on the platform, how the protocol income will be distributed, and the future development direction of the platform will all be decided through community voting.

dYdX Chain's 100% decentralized operation 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. dYdX's goal is to eventually become one of the largest exchanges in the cryptocurrency field.

4. Comparison of Competitive Products

In the decentralized derivatives sector, the most noteworthy ones are GMX and dYdX. Let’s compare these two projects.

First of all, the two adopt different models.

dYdX adopts an order book model, where users and users (or market makers) are counterparties to each other, and the platform operates orders for buyers and sellers.

GMX adopts the AMM (automatic market maker) model, in which users and asset pools are counterparties to each other.

Now let’s analyze from three aspects: liquidity, price discovery mechanism and funding rate.

1. Liquidity

The liquidity of a cryptocurrency exchange refers to the amount of cryptocurrencies that can be bought and sold on that exchange and the degree of price stability of those cryptocurrencies.

dYdX introduces market makers to provide liquidity and pursue matching efficiency, but slippage cannot be avoided and transactions will not be completed at stable prices. When the transaction amount is huge, the slippage is higher.

The GMX platform adopts a zero slippage mechanism. The counterparty is the capital pool, and the quote is provided by the oracle, so the transaction can be completed quickly. Due to zero slippage, traders can buy and sell at a relatively stable price. Even when the transaction volume is huge, its oracle zero slippage mechanism still ensures price stability.

For example, when 1,000 ETH is traded on the dYdX platform, the price will definitely increase (such as 10%), and the trader will have to bear a higher slippage. However, when 1,000 ETH is traded on the GMX platform, the price remains stable because the quote of the funding pool is provided by the oracle and there is zero slippage.

In this sense, GMX has better liquidity.

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, the liquidity ceiling of dYdX will be higher than that of GMX.

Because dYdX adopts an order book model, there is no need to consider how to maximize the profitability of LPs, thereby incentivizing more LPs to provide liquidity for the platform. As long as there are buyers and sellers matching in the market, there is liquidity.

However, GMX adopts the AMM model, in which users and asset pools bet against each other. There is no matching of buy and sell orders between users. The liquidity of the platform depends on the LP providers. The platform needs to consider the profitability of LPs so as to incentivize more LPs to provide liquidity for 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 prices. Relatively speaking, there will not be a large deviation in OI, because the order book is between users who are counterparties to each other, so the long and short positions need to be matched 1:1. Most positions can be offset, and the part that is not offset and causes position deviation will be reflected in price increases or decreases, which is the same as the mechanism of centralized exchanges.

The oracle does not have 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 oracle attack problems. For example, GMX was attacked in September 2022 due to zero slippage.

Because GMX uses a 0 slippage mechanism, zero slippage actually means that the attacker always has unlimited liquidity and the cost of attack is low.

If a user goes long on $1 billion of AVAX on the GMX platform, common sense would indicate that such a high transaction volume will definitely push up the price of AVAX. However, GMX uses 0 slippage, and it still opens positions based on the quotes given by the oracle.

However, transactions of this volume will definitely push up the price of AVAX tokens on other trading platforms. Suppose it rises by 20%. Only then will the oracle feed back the latest AVAX price (which has risen by 20%) to the GMX platform. At this time, the position can be closed according to the latest price which has risen by 20%.

On the GMX platform, since oracle quotes are used and there is a zero slippage mechanism, if the platform has a huge trading volume in the future, but the way to obtain prices is still from the outside, it is easy for prices to be attacked.

Because there will be no slippage on the GMX platform regardless of the transaction volume, 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 exploited by attackers.

However, for the dYdX platform, it does not use the oracle quotation mechanism, and the price can reflect the fair market price. When competing with CEX, the dYdX model has more advantages.

3. Funding Rate

dYdX’s fee collection mechanism is consistent with that of centralized exchanges (CEX).

But in the GMX platform, whether long or short can be understood as lending risky assets or stablecoins in the GLP pool to establish a position. The long and short parties of GMX have been paying funding fees without charging any funding fees.

That is, the long and short positions cannot be balanced on the GMX platform. Once a strong one-sided market emerges, resulting in a large deviation in OI, the GLP pool may incur huge profits or losses.

For example, in a bull market, most people choose to go long. If you go short on the GMX platform, not only will you not receive any funding fees, but you will also have to pay certain borrowing fees. Therefore, traders will not choose to go short on GMX, which will cause the long and short positions on the GMX platform to be in an unbalanced state.

However, in the dYdX platform, it adopts a strategy consistent with centralized exchanges, which can balance the long and short sides well.

4. Value capture capability

Obviously, GMX has a stronger ability to capture value. 30% of the platform fees go to GMX stakers, and the remaining 70% go to GLP stakers. GMX gives 100% of the platform fees to token stakers. The better the platform develops, the higher the returns of token holders. That is, the value of GMX tokens is deeply bound to the development of the platform, which is also the main reason for the increase in GMX prices.

However, the value of the DYDX token is not deeply tied to the development of the dYdX platform, and 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 has been very average.

From the above comparison between dYdX and GMX, we can find that both have their own advantages.

GMX's value capture capabilities and degree of decentralization surpass the dYdX platform.

However, it remains to be seen whether GMX’s “burning money” approach of returning 100% of platform fees to token holders is truly sustainable.

The degree of decentralization of dYdX and the value capture ability of the platform token will be addressed in the future dYdX V 4 version.

dYdX V 4 claims to achieve complete decentralization, which is mainly reflected in the order book and matching engine. The platform will no longer operate any centralized components of the protocol, which means that the community has more control over the development of dYdX. For example, it can vote to tilt the distribution of protocol revenue toward the holders of platform coins and give DYDX more application scenarios, which will improve DYDX's value capture ability.

Therefore, although the GMX token has a better price performance at present, in the long run, it is clear that DYDX has greater room for imagination in the future.

5. Market value forecast

Currently, the price of GMX is around 2 US dollars, and the market value is only more than 200 million US dollars, ranking around 100, while GMX's market value ranks 80th.

Observing the historical candlestick chart of DYDX tokens, we can find that the highest increase in DYDY was 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 always lacked 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 has fallen by more than 93% from its highest price. It has basically been at a low level for a long time, and it can even be said to be in an oversold state.

However, after the launch of version V 4, these problems will be solved, and the community will vote to distribute more platform revenue to DYDX holders.

Of course, an issue that cannot be ignored for DYDX tokens is the high selling pressure from unlocking. However, after the launch of version V 4, token staking is likely to absorb the selling pressure from unlocking.

In addition, the current trading volume of decentralized derivatives is still very low. With the arrival of global regulatory policies, more transactions will be transferred to decentralized trading platforms, and decentralized derivatives will have greater room for future development.

Based on the above predictions, in the future bull market, the market value of DYDX will most likely enter the TOP 30-50. It is not ruled out that the market value will enter the TOP 30. The price of the token DYDX is conservatively estimated to increase by 5-10 times, or even higher.