The name dYdX comes from the mathematics concept of derivatives. In calculus, derivatives—stylized “dy/dx”—describe of the rate of change of a variable using certain inputs. In traditional finance, derivatives is used to describe contracts between traders to bet on future prices of underlying assets. Many times, leverage is used to do so. These contracts, such as futures and options, derive their value from other securities like stocks, and they can be bought and sold on the market.
Some centralized exchanges have historically offered crypto traders the opportunity to use leverage through margin trading of perpetual futures contracts. Also called perpetual swaps, these allow traders to use borrowed assets to make bets on the future prices of BTC, ETH, and other cryptocurrencies.
dYdX also enables the use of leverage through margin trading of perpetual futures contracts. Although the platform previously used the Ethereum mainnet to process platform transactions, in 2021 it began using a form of zk-rollup called StarkEx to reduce gas fees for its users. StarkEx’s zk-rollup technology is a scaling solution that creates a second layer (or “layer 2”) to the blockchain. It efficiently processes transactions while still using Ethereum’s security.
By July 2022, dYdX could accommodate over 60,000 unique depositors on its platform, primarily driven by activity over the prior year. Some of those depositors were airdropped its DYDX token upon launch, providing them the opportunity for participation in community governance, staking, and trading fee reductions.
How was dYdX developed?
dYdX was founded by Antonio Juliano in 2017. Juliano previously worked as a software engineer for both Coinbase and Uber, and he founded a now-defunct search engine called Weipont before jumping into DeFi.
In its early years, the dYdX development team launched products called Expo and Solo, introducing margin trading of cryptocurrencies. dYdX formally went live in 2019 and progressed through three versions, the last of which—released in 2021—was built on the StarkWare-based layer 2 solution to reduce Ethereum gas fees for its traders. In late June 2022, the development team announced that the platform would be moving to its own dedicated chain in the Cosmos ecosystem.
The popularity of dYdX was perhaps best highlighted in late September 2021, when it outpaced both centralized exchange Coinbase and fellow DEX Uniswap in trading volume for the first time, in back-to-back days.
The project has gone through multiple funding rounds, including a $65 million series C round that included Israeli developer StarkWare Industries and well-known venture capital firms Polychain and Paradigm. Andreesen Horowitz is also an early investor in dYdX.
How does dYdX work?
Perpetual futures contracts
The primary way that dYdX allows traders to use leverage is through perpetual futures contracts. Put simply, perpetual swaps are agreements between traders to buy or sell an asset in the future. Unlike traditional futures contracts, however, no date is set on the actual trade, which makes them perpetual.
Traders can specify up to 20x leverage on the assets offered by dYdX’s trading platform, which includes ETH, BTC, SOL, and AVAX. Collateral is denominated in USDC, as are the quotes for the assets. Should a user’s account lose enough value—whether it is due to trading on margin or fluctuations in the crypto market—and falls below the margin requirement, their positions are liquidated.
Assets on dYdX are held in a non-custodial fashion, meaning that all user funds can be managed by only two parties: the user her-/himself and dYdX’s smart contracts, as instructed by the user. Although this is trustless, the Perpetual protocol’s order book is centralized in order to remove barriers to both average users and market makers.
StarkEx layer 2
Transactions on dYdX’s platform are settled on an Ethereum layer 2 (L2) solution called StarkEx. The layer 1 Perpetuals protocol wound down in April 2021, paving the way to increased capacity (and subsequently, usership) through developer StarkWare’s zk-rollup.
StarkEx is a scalability solution that takes multiple transactions from applications like dYdX and batches them together. The batch of transactions is then sent to an off-chain service that attests the validity of the batch and sends it to be verified by an on-chain component through the StarkEx smart contract on the Ethereum blockchain.
zk-STARKs (zero-knowledge scalable transparent arguments of knowledge) are the basis of this technology. These use zero-knowledge proofs, which allows for complex computation of shared data without the need to make the data public or trust a third party with it.
Batching transactions using StarkEx’s zk-rollup significantly improves throughput and cost effectiveness compared with the Ethereum layer 1 chain, while also protecting user privacy off-chain.
How is the DYDX token used?
DYDX is the governance token of the ecosystem, allowing holders to manage the platform. Alongside the launch of the token, two staking pools were announced: one to promote platform liquidity and one to protect against any shortfall events (as defined by community governance) that the system may experience, such as insolvency. Rewards for staking are paid out in the form of DYDX.
DYDX tokens are also awarded to traders based on their participation on the platform. Further, holding DYDX benefits platform users by granting trading fee discounts correlated with the balance of DYDX in their wallets. In short, the more someone uses the system and holds DYDX, the more benefits they gain on the platform.
Token distribution
DYDX was released on August 3rd, 2021, and 7.5% of all tokens were airdropped to traders who used the protocol in the past, stratified by how much they transacted. In total, 1 billion DYDX were minted, unlocking over the course of 5 years. This initial supply saw 27.7% of tokens go investors, 25% go to trading rewards, 22.3% allocated to current and future employees and consultants, 7.5% dedicated to liquidity provider rewards, 5% to the community treasury, and 2.5% each to the safety staking and liquidity staking pools.
dYdX essentials
- dYdX is a decentralized exchange that allows crypto users to trade on margin through perpetual futures contracts.
- After being hosted directly on Ethereum’s layer 1 blockchain, dYdX transitioned to a scalable, zk-rollup based layer 2 solution to improve network speeds and significantly lower fees.
- The DYDX token is the governance token of the platform, and holders can benefit from staking rewards as well as reductions in trading fees proportional to their DYDX holdings.