DEVELOPMENT
Let’s cover the dYdX blockchain: what kind of network it is, what are the results for 2022, and development plans for 2023.
About dYdX
What is dYdX
dYdX is a decentralized exchange (DEX) currently running on L2 Ethereum (on StarkWare technologies). The platform uses StarkWare Zero-Disclosure Evidence (ZK) to create a secure, decentralized and privacy-focused platform.
In June 2022, dYdX announced plans to leave Ethereum, replacing its StarkWare-based platform with its own Cosmos-based blockchain.
The dYdX blockchain will have a decentralized off-network order book capable of scaling with the growth of the platform.
Although dYdX offers DEX similar to Uniswap or SushiSwap, dYdX was designed to trade a specific type of asset: perpetual contracts.
Perpetual contracts are essentially a derivative or financial instrument whose value is determined by the underlying asset.
Like futures or options, perpetual contracts allow traders to speculate on the future value of an asset. Unlike futures or options, perpetual contracts have no expiration date, hence the “perpetual” nature of the contracts.
Who is the founder of dYdX?
Antonio Giuliano is an experienced programmer with experience in blockchain technology, the founder and CEO of dYdX. He first entered the crypto space in 2015, taking a job as a software engineer at Coinbase, a cryptocurrency exchange platform. A Princeton University graduate with a degree in computer science, Antonio Giuliano began his entrepreneurial journey and founded dYdX in early 2017.
Zhuoxun Yin is the chief operating officer of dYdX. Previously, he worked at Nimble, a CRM social sales and marketing system, and Bain & Company, a consulting service. Zhuoxun Yin studied at the University of Queensland and has a bachelor’s degree in commerce.
Overall performance for 2022
Ecosystem
The dYdX ecosystem looks like this:
TVL
The current TVL of dYdX is $392 million.
Peak TVL was $1.12 billion in
October 2021. From the peak TVL has fallen by 65%.
Ranked 2nd among DeFi projects in the Derivatives category.
Ranked 18th among all Ethereum-based DeFi projects.
And ranks 26th (out of 75) among all DeFi projects with TVL >$100 million.
Number of users and trading volumes
As of the end of 2022, more than 33K unique addresses hold the dYdX token, and the dYdX token has been distributed to more than 61.5K unique addresses through a combination of retroactivity, trading, staking and liquid rewards.
In 2022, there was an overall monthly decline in cryptocurrency trading and use of DeFi in general.
However, in 2022, there were 33,900 active traders on dYdX , and the number of active traders on dYdX increased by an average of 4.2% each epoch.
Separately, dYdX’s aggregate volume and total fees were $466.3 billion and $137.8 million, respectively.
Changing Tokenomics
In 2022, circulating volume (including Treasury) reached 194M dYdX tokens (19.4% of total issuance), and the accrued balance of Treasury was 39M dYdX tokens.
The three management offerings also led to a 225% increase in the number of dYdX tokens available to the community each epoch.
Overall, the community voted to reduce the issue and collectively increased the five-year Treasury distribution by 11.2%.
Within 5 years, 16.2% of the token supply will go to the Treasury, which is managed by dYdX token holders.
The new allocation of allocations is as follows:
International outreach and community
In 2022, the dYdX Foundation’s international team was busy building the dYdX brand and supporting and educating the dYdX community.
Social presence and community engagement
In 2022, the dYdX team made significant strides in terms of social media presence, resulting in a 62.5% increase in Twitter followers, a 30% increase in page views in major markets, and a 390% increase in Discord members.
Conducted more than 200 in-person and virtual events within the dYdX ecosystem during the year, with more than 8,000 participants.
dYdX launched dYdX Quests, a rewards program for contributions to the dYdX ecosystem. So far, 4,111 quests have been submitted, and 689 participants are tracking their progress.
The dYdX Academy.
Lack of knowledge is often cited as a major barrier to entering DeFi, trading and trading perpetual assets on a decentralized exchange. The dYdX Academy was created in May 2022 by members of the dYdX community to fill that gap.
To date, the dYdX Academy website has had over 27,950 page views and over 750 hours of content. The dYdX Grants Program (“DGP”) recently commissioned the creation of a revamped dYdX Academy, scheduled to launch in February 2023.
How much has been invested
According to known information, about $87 million has been invested in dYdX. See table for details.
Current capitalization is $0.4 billion.
Total capitalization is $2.6 billion.
There are 15% of tokens in circulation.
The current price of dYdX is $2.63. The price has fallen 90% from the highs.
Development activity of dYdX
Among similar DeFi projects (GMX, Liquity), dYdX on Ethereum is in last place.
And it is clear why this is so – developers are creating a new blockchain on Cosmos. Development on Ethereum is minimal.
Development activity – shows the project’s development activity over time based on a number of purely development-related “events” in the project’s publicly accessible Github repository. (does not take into account: release comments, forks, stars, etc.).
dYdX token
The dYdX protocol token is controlled by its holders. The dYdX does not control how they are used. This protocol token is used for validator stacking as well as for ongoing blockchain management.
Holders of dYdX tokens can participate in the governance process and propose changes to the protocol. Here are some of the voting rights of dYdX holders:
- Set the risk parameters of the protocol
- Determine the payment of the betting insurance pool in the event of a loss
- Vote to add a new list of tokens to the protocol
- Manage contracts
- Vote for market makers to add them to the liquidity pool
How dYdX works
dYdX V4 – L1 blockchain on Cosmos
In June 2022, dYdX announced plans to leave Ethereum, replacing its StarkWare-based platform (version V3) with its own Cosmos-based blockchain (version V4).
All dYdX V4 code will be open source and dYdX will not manage any services.
Key elements of dYdX:
Main Node
The main node is the core software that validators and node providers will run. It is built on Cosmos SDK, the standard framework for building Tendermint blockchains. The core node will run: consensus, offline order book and matching, all types of transactions (deposit, transfer, withdrawal, etc.), price oracles and other core systems.
Indexer
Indexer is an open source software which supports APIs and web sockets that will serve web, mobile and software traders. Indexer will take the data that exists in the underlying blockchain and store it in a much more efficient format, allowing dYdX V4 to serve high-performance REST and WebSocket APIs. The indexer software will also run on a distributed network, ensuring that data is always available to traders.
Clients
TypeScript and potentially other language clients to simplify interaction with the network. The clients connect to both indexers and the underlying nodes and will be used by software traders as well as the website.
Web application
A fully functional, open source version of the dYdX web interface.
Mobile applications
iOS and Android mobile apps for dYdX V4. The project team is still exploring the best way to develop them so that they are available in a decentralized open source form.
Frequently Asked Questions
Is connecting assets between blockchains not an issue? Will it limit the number of markets available for trading on dYdX?
Yes, bridging assets between blockchains has proven to be a challenge. Most existing bridges have user interface and/or security issues. One of the advantages of dYdX focused on synthetic trading is that only one pledged asset (e.g., Stablecoin) needs to exist to enable synthetic trading of any asset.
The top priorities (in order) are to support the best experience:
- Transfers from/to CEX
- Transfers from/to Ethereum
- Transfers from/to other networks/rollups
Cosmos supports IBC, a protocol for decentralized and securely connecting assets between two blockchains. This means that dYdX requires only one stablecoin to exist in any secure Cosmos blockchain, which can then be easily connected to the dYdX blockchain using IBC.
We are in talks with several bridges and stablecoins to create a better provisioning and I/O experience for the dYdX blockchain.
I thought Ethereum-based L2s were more decentralized than Cosmos. Don’t you care about decentralization?
We care about decentralization! That’s the whole purpose of dYdX V4. We believe that the dYdX blockchain is the best and most decentralized option for the dYdX protocol.
The goal of V4 is to make the entire product as decentralized and productive as possible. The decentralization of the system is determined by its least decentralized component.
Ethereum L1 is probably more decentralized than Cosmos (at least for now), but not even close to as efficient as dYdX.
Ethereum-based L2 has two problems: insufficient performance to run dYdX, and Ethereum currently runs through central sequencers that have the ability to censor transactions*.
* Censorship can usually be avoided by bypassing the sequencer and going directly to L1, but this does not satisfy the whole decentralized product because L1 is too expensive/slow to make the core product work.
Development Stages
In 2022, dYdX announced dYdX V4, which will be developed as an autonomous blockchain based on the Cosmos SDK and the Tendermint Proof-of-stake consensus protocol.
It will be fully decentralized, autonomous, have an order book and a matching mechanism capable of providing several orders of magnitude more bandwidth than Ethereum currently has.
Planned milestones
M1 – Test network for developers – complete!
M1 provided basic trading on the blockchain so that testing could begin as early as possible. The main features of M1 were:
- Order book and matching mechanism
- Margin system.
- JavaScript client
- Telemetry and monitoring.
This phase created an automated way to run a test network for developers consisting of multiple verification nodes on multiple continents, enabling stress testing of the system in a higher latency environment.
Achieved 50 transactions per second and 500 orders/cancellations placed per second. The existing dYdX product on L2 Ethereum (Starkware technologies) handles about 10 transactions per second and 1,000 orders/cancels per second, with 100 times the bandwidth needed to scale dYdX.
M2 – Internal test network – completed!
M2 consists of completing all of the basic features needed to run the exchange. The main features of M2 were:
- Trading fees.
- Liquidations
- Oracle price updates
- Static funding rates
- Token transfers
- Indexing service and APIs
Also created more robust developer tools for network maintenance and testing, including:
- A tool to quickly reset all validators from genesis
- A crane for registering new accounts
- Simulation trading bots that add liquidity and do load testing of nodes
M2 has turned the developer test network into a more stable test network with more validation nodes. This test network will still remain internal to dYdX, but will allow developers to perform more robust testing, including those who create products for end users.
M3 – private test network – completion in March 2023
M3 is designed to complete more advanced features. The main features of M3 are:
- Validator Stacking.
- Dynamic funding rates
- Advanced order types
- Documentation for validators
- Indexing service
- Advanced order types (e.g. Post-Only,
- Stop-Limit and Reduce-Only)
- Use of the latest Cosmos-SDK features for block bidding and validation
- Web trading interface
This phase will create a private test network external to dYdX. A limited number of partners will work with it so that documentation and setup for the validator and full nodes will be as simple and full-featured as possible.
M4 – public test network – completion in July 2023
M4 is designed to create the rest of the features that can be added to the non-production blockchain and for testing on the public network. The main features of M4 are:
- Blockchain governance.
- Token issuance and rewards
- Wallet compatibility and connectivity
At the end of M4, the private test network will become the public test network, which will allow anyone to trade test network tokens and become validators and full nodes.
M5 – the core network – completion in September 2023
M5 is designed to polish, optimize and build any other features needed to launch the core network. The main features of M5 are:
- Connections via IBC to other blockchains
- Integration with Stablecoin
M5 will create the dYdX core network, which will allow trading in perpetual futures.
Total, dYdX plans to launch the core network in the second half of 2023, and here’s what the future phases of work look like briefly:
- M3 (private test network) – end of March 2023
- M4 (public test network) – end of July 2023
- M5 (core network) – end of September 2023
More specific details will be provided when M3 is completed.
Right now, the project is at the end of the M3 phase. Completion of M4 will include the launch of the public test network, and M5 will include the launch of the main network blockchain.
Benefits of dYdX
Decentralization
The main requirement for the V4 protocol is full decentralization. Decentralization of the system equals decentralization of its least decentralized component. This means that every part of V4 must be decentralized but still remain productive.
Decentralized autonomous network to run the order book
The fundamental problem with every L1 or L2 that dYdX ran on is that none of them can handle even close to the bandwidth needed to run a first-class order book and matching mechanism.
For reference, the existing dYdX product on L2 Ethereum (Starkware technology) handles about 10 transactions per second and 1,000 orders/cancels per second, with dYdX, needing 100 times the bandwidth to scale.
dYdX considered developing another trading model, such as the AMM or RFQ* system, but ultimately decided that an order book-based protocol was critical to the trading experience that professional traders and institutions demand.
* AMM (Automated Market Maker). A form of exchange in which a DEX smart contract calculates prices using a predetermined formula referencing a list of contract assets (liquidity pools). Liquidity pools can be filled by any market participant, i.e. anyone can be a market maker. Example, Uniswap.
RFQ (Request for Quotes) is on-demand pricing: a user initiates a transaction by querying, using a smart contract, a known set of market makers with a specific requirement (e.g., “buy 10 ETH”). Example, Hashflow.
dYdX was also unhappy with existing offline order book systems, which either did not include matching (huge problems with advance and trade collisions) or were based on centralized matching (no centralized systems can be in dYdX V4). This led to the realization that we needed to build a decentralized autonomous network to run the order book.
And this is where Cosmos comes to the rescue. A huge advantage of developing a blockchain designed for dYdX V4 is that it offers full customizability of the operation of the blockchain itself, as well as the work that the validators do.
Order Book + Matching
In dYdX V4, each validator will run an order book on its own, which will never be tied to the consensus (i.e. off the network). Placed orders/cancellations will propagate through the network similar to normal blockchain transactions, ensuring that placed orders/cancellations will always go through the network.
The order book that each validator keeps is eventually matched against each other. In real time, orders will be matched by the network. The resulting transactions are then recorded on the blockchain for each block.
This allows dYdX V4 to have extremely high throughput for the order book (which, requires 100 times the transaction throughput!) while remaining decentralized.
No commissions for gas trading
A major advantage of Cosmos is that the network can be tailored to the specific needs of the dYdX network. One application of this is that traders will not pay a commission for gas (for trading), but rather will pay a commission based on trades executed similarly to dYdX V3 and centralized exchanges. These fees would accrue to validators and their stackers.
The ideal platform for building
dYdX V4 is a fully autonomous blockchain, meaning the blockchain does not depend on any external blockchain or systems. The platform, allows for further vertically integrated building, where the token holders of the protocol are in full control of the system.
Whether creating additional features such as spot trading, options or multi-securities, or improving the core underlying technology, the dYdX community will now control every aspect of the stack and can create the best possible product features.
The 2022 Bottom Line
M1 and M2 milestones completed
The goal of M1 and M2 was to complete all the basic functions needed to launch the main exchange product on Cosmos.
As a result of the M2 phase, a more stable internal test network with more test nodes was created. This test network remains internal to dYdX, but allows developers to test reliably.
New functionality in the IOS app
Introduced a new way to trade with dYdX: Swap Mode
Swap Mode allows you to trade perpetual leveraged contracts through the familiar swap-style user interface.
You can swap any supported asset for U.S. dollars or any other supported asset using leverage with open-ended contracts.
Plans for 2023
M3-M5 phases of work
Phase M3 will create a private test network external to dYdX. It will be handled by a limited number of partners so that documentation and customization for validator and full node operations will be as simple and full-featured as possible.
At the end of M4, the private test network will evolve into a public test network that will allow anyone to trade test network tokens and become validator and full nodes.
M5 will create the main dYdX network, which will allow trading in perpetual futures.
Future phases of the work, briefly:
M3 (private test network) – end of March 2023
M4 (public test network) – end of July 2023
M5 (main network) – end of September 2023
Split DAO to subDAO
Most likely, in the near future, the dYdX DAO will consist of several autonomous subDAOs, each working on core functional areas of the dYdX protocol and ultimately reporting to the dYdX community.
For now, the only subDAO is the dYdX Grants Program (“DGP“).
The future subDAOs currently being discussed in dYdX are “Operations subDAOs. Future subDAOs they want to create are financial and treasury management, growth, risk management, community, and others.
Conclusion
dYdX is the L1 on Comsos (soon to be), a DeFi project implementing the concept of high-intensity derivatives trading on blockchain, with top top investors on board.
In 2022, dYdX decided to switch from Ethereum blockchain to Cosmos. The reasons for the switch are varied and are described above.
The main reason: the L2 solution (based on Starkware) is not suitable for high-intensity derivatives trading. The required network bandwidth should be hundreds times higher than it is on L2.
L1 on Cosmos is suitable for this task. The project is now actively working on developing a blockchain on Cosmos, with plans to launch the main network in September 2023.
We can also say that dYdX token shows excellent dynamics on the trading chart and the work of the market maker is well visible.
I recommend looking at buying around $1.
