🤔 What is dYdX ?
dYdX is a decentralized crypto exchange(DEX). It is similar to well-known exchanges like Binance and Coinbase, but is decentralized and runs on Etherium.
It allows users to lend, borrow and trade in cryptocurrencies.
💡 What role does DYDX token play ?
DYDX is an ERC-20 token. It has following utility:
- Discounted trading fee: DYDX token holders receive trading fee discounts based on the number of tokens they hold in their wallet. For example, a user holding > 10,000 tokens, will receive 15% discount on trading fees.
- Staking: DYDX token holders can stake their tokens in dYdX staking pool to earn additional DYDX tokens as staking rewards.
- Governance: DYDX token holders can create and vote on proposals.
📝 Origin of dYdX
- dYdX was founded by Antonio Juliano in 2017.
- The team launched dYdX on Kovan testnet(Etherium testnet) in June 2018.
- dYdX was launched on Etherium mainnet in October 2018.
- Option to trade perpetual was added to the platform in April 2020.
- dYdX migrated on Starkware, layer 2 solution for Etherium in April 2021.
👴🏻 Antonio Juliano - Founder of dYdX
- He studied Computer Science at Princeton University.
- He has worked as a software engineer at MongoDB, Coinbase and Uber.
- He founded Weipoint(a search engine for decentralized web) in 2017. Weipoint was a good idea but the timing was off. There were hardly any apps on the decentralized web and no one knew about them in 2017.
- Antonio founded dYdX in August 2017.
😌 What problems does dYdX solve ?
- Take out loan:
- None of the traditional banks issue loans against crypto.
- dYdX allows users to take out loan against their crypto holdings.
- Users do not have to sell their crypto holdings and incur capital gain tax. Instead, they can use it as collateral to borrow.
- Flexible payment solutions:
- No fixed payment schedules
- No min payments
- No credit history
- Users pay at their own pace.
- Most banks in the world offer no interest on savings. People can choose to store their savings on dYdX and earn a much higher interest.
- dYdX does not require users to submit KYC to trade, unlike other centralized exchanges such as Binance.
- Users are always in control of their funds. The platform cannot stop them from withdrawing their funds and trading, unlike other centralized exchanges.
🤖How does it work ?
Features offered by dYdX:
1. Spot trading
dYdX allows users to go long and short a cryptocurrency. dYdX uses order book model to match users on both sides of the trade. Traditional exchanges also work on order book model.
2. Margin trading
Leverage magnifies gains as well losses. Users can borrow funds from dYdX pool of capital at market rates to increase their exposure. dYdX offers max leverage of 5 times.
- Isolated margin: Gives the user choice to isolate a particular part of fund for a particular trade. The losses will be capped to the part of fund used for isolated margin, but the position will be liquidated quicker if trade goes in loss.
- Cross margin: User can utilize all the assets in the account as margin. The position will not be liquidated easily, but the complete capital is at risk.
Perpetual contracts are derivative contracts similar to futures but have no expiration date or settlement, allowing them to be held or traded for an indefinite amount of time.
Perpetual contracts allow users to buy or sell an asset at a predetermined price at a later date.
Users can use perpetual to get exposure of up to 25X leverage to a crypto asset.
Users can also lend their crypto to the platform to earn interest. This pooled capital is used by borrowers and other traders for leverage. The interest amount is added continuously to the user’s wallet.
Borrowers can borrow from the pooled crypto assets by providing collateral. They also have to pay interest on the capital borrowed.
Borrowers have to maintain minimum collateral of 125%. Borrower’s collateral is liquidated if the value of collateral falls down to 115%.
dYdX also liquidates the positions of traders using leverage in case their position goes in loss and they do not have sufficient margin to maintain the position.
2. Staking pool
DYDX token holders can decide to stake their tokens in the staking pool. Staking pool acts as insurance in case of market crash(when collaterals are not sufficient to cover debt obligation).
DYDX in the staking pool is sold to re collateralize the protocol, in case of a market crash. DYDX token holders who deposit their tokens in the staking pool receive additional tokens as reward for providing insurance to the protocol.
⚙️ Working Demo
🏛️ Governance model
The team launched the dYdX as a “governance token”. However, it is not!.
All the websites consider it as “governance token”. However, it is not.
The team has also launched a voting platform. But still, DYDX is not a governance token.
Why DYDX is not governance token ?
DYDX holders can create and vote on proposals but that does not update the smart contracts.
dYdX holds the admin keys for updating the smart contracts. They are free to implement/ not implement the proposals.
In case you do not agree. Try making these two proposals:
- Allowing US residents to trade in perpetuals. (US residents are banned from using perpetuals on dYdX !)
- All the revenue generated(millions of dollars) via trading fees goes to dYdX team. Try making a proposal to distribute a part of revenue to DYDX token holders.
You can try asking the team in discord or Twitter if dYdX holders can get a share of the revenue.
🤑 How much money does the project have for future development ?
- The project has raised $ 87 million from venture capital funds.
- The project and founders hold approx 27% of all DYDX tokens.
- The team is making millions of dollars as revenue in trading fees. Which will keep growing as more users join and trade on the platform.
- Capital: The project has large amount of funds. They can use the funds to hire the best talent and improve their platform.
- Network effects: As more traders use the platform:
- The liquidity will increase and the platform will be able to add new trading pairs.
- The team can reduce the transaction fee and still make up the revenue because of increased volume.
This will make the platform better, attracting even more users. This positive feedback loop can result in exponential growth in a short period of time.
😨 Risks and challenges
- Market crash: Crypto markets are volatile. It can happen that the protocol is not able to liquidate the collateral in case of a sudden market crash. dYdX has much lower collateral and liquidation requirement than other projects like Aave, Compound finance and Maker DAO.
This possibility cannot be ruled out even though dYdX operates on layer 2, which makes it much faster and cheaper to liquidate collateral.
- dYdX protocol depends on external price feeds to maintain collateral ratio and liquidate collaterals. It is possible that a hacker manipulates the price feed and benefits from an arbitrage opportunity.
The possibility of this happening is also rare because the project uses multiple Chainlink oracles to fetch prices.
- Banking and trading sector is heavily regulated by their respective governments, central banks and securities & exchange commission. Many governments will try to ban/regulate dYdX for operating without a banking license and threatening their financial sector.
It is a centralized project which makes the project vulnerable to such governments crackdowns.
- There are many lending and borrowing crypto platforms like Aave, Compound Finance, Maker DAO etc.
DYDX token had initial supply of 1 billion tokens. They have been distributed as follows:
- Community: 50% – 500,000,000 DYDX:
- User Trading Rewards: 25% – 250,000,000 DYDX.
- Retroactive Rewards: 7.5% – 75,000,000 DYDX.
- Liquidity Provider Rewards: 7.5% – 75,000,000 DYDX.
- Community Treasury: 5% – 50,000,000 DYDX.
- Liquidity Staking Pool: 2.5% – 25,000,000 DYDX.
- Liquidity Provider Rewards: 2.5% – 25,000,000 DYDX.
- Investors: 27.73% – 277,295,070 DYDX.
- Employees & Consultants of dYdX Trading or Foundation: 15.27% – 152,704,930 DYDX.
- Futures Employees & Consultants of dYdX Trading or Foundation: 7% – 70,000,000 DYDX.
DYDX tokens will have 2% yearly inflation rate to fund community treasury, after 2025.
🧐 Indicators to watch out for
- Their Twitter following is growing:
- Value locked in dYdX is growing:
- Revenue is growing:
- Trading volume is growing:
- Users are growing:
DYDX token cannot be considered a governance token if token holders do not have the power to change smart contract parameters like how revenue is shared etc.
dYdX is a great project and the team/investors deserve to get rich. However dYdX token holders should not expect a part of revenue.
A much better model to earn revenue would have been:
- Revenue generated is distributed among the DYDX token holders.
- The team could hold a majority of tokens and receive revenue because they are DYDX token holders and not because they have access to admin keys of smart contracts.
dYdX code is open source. I would love if someone takes their code and launches a new platform with fair governance.
I expect the price of dYdX to crash, once DYDX holders realize that DYDX is not a true governance token.
dYdX is a wonderful platform and much more decentralized than Binance and Coinbase. Do use it if you are a trader. But I would not recommend buying dYdX in hope of future price appreciation.
😊 Do further research
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