Simply Explained: dYdX (DYDX)

The DeFi sector is one of the most bullish in crypto. One of the projects we’ve kept a close eye on for a long time and covered in great detail is dYdX.

What is dYdX?

dYdX is a decentralised exchange with a focus on perpetual futures (perps) trading. Currently built on Ethereum Layer 2 Starkware, users pay zero network fees. 

As of the time of writing, the platform offers perps on 37 different markets with up to 20X leverage. dYdX is one of the biggest exchanges in the world, with volumes exceeding the likes of Coinbase. It also offers one of the most advanced DeFi derivatives exchanges and competes directly with the likes of Binance.

A few things to quickly address before moving on; what are ‘perps’? And, what is meant by ’20X leverage’? Okay, so:

Perps: (also known as perpetual futures) are instruments that base their price on an underlying asset and offer leverage. If you long, and it goes up, you earn and vice versa. They are ‘perpetual’ because the contract doesn’t have a deadline, so they roll on until you close the position. 

Leverage: leveraging is when you take out a notional position with a smaller amount of money. Leveraging can be done on both ‘longing’ and ‘shorting’. The multiplier used will have a % change that would cause a liquidation (that liquidation is the loss of the original investment).

Now that you understand what perps are and how leveraging works, you can understand why it’s such a popular market. It’s high risk, high reward, and a lot of people make a lot of money in the space. So, if dYdX becomes the leading exchange offering that service, there’s no limit to its potential success.

How does dYdX work?

Instead of the traditional automatic market maker (AMM) model that most decentralised exchanges use, dYdX uses an order book model. This was a big contributing factor to its success as operations became quicker and more affordable (both of which are very important aspects of trading).

dYdX is currently built on StarkEx, an Ethereum Layer 2 scaling solution designed to optimise the Ethereum blockchain. On StarkEx, the platform runs on a hybrid model where the majority of operations are decentralised, but some remain centralised. However, this is set to change as dYdX is planning to achieve full decentralisation and community governance by the end of 2022 as part of its V4. 

dYdX is building its own blockchain, the dYdX chain on Cosmos SDK. (Starkware involves centralised block production, which would mean if dYdX launched V4 on StarkEx, it wouldn’t be fully decentralised.) dYdx’s V4 milestones can be viewed here. 

What does the DYDX token do?

dYdX, like many exchanges, leveraged its native token, DYDX, to drive the platform forward. The platform offers a very robust rewards programme for traders. 

DYDX is a governance token that facilitates the operation and allows traders, liquidity providers, and partners to contribute to the future of dYdX as a community. Holders can vote on proposals presented by the team, earn a profit by staking their tokens, and receive discounts on trading fees.

With dYdX V4, where it goes fully decentralised and moves onto its own blockchain, it’s expected that the token will be used for gas fees on the network, and fees generated will be shared with stakers of the DYDX token.

Conclusion

dYdX has certainly taken the DeFi perpetual futures market by storm. We produced a deep dive on the project, make sure to check it out!

Curious about how Cryptonary rates dYdX? Browse our Rating Guide to see how it fares against its peers in terms of team, tokenomics, fundamentals and more.

Thanks for reading.

Disclaimer: Not financial or investment advice. You are responsible for any capital-related decisions you make, and only you are accountable for the results.