Centralized exchanges (CEXs) like Binance and Coinbase initially dominated perpetual futures contracts or ‘perps’ trading in crypto. However, despite getting access to deep liquidity and a fast, seamless trading experience, users had to give up control of their assets while using CEXs.
Thus in August 2017, ex-Coinbase engineer, Antonio Juliano, launched an on-chain and non-custodial solution for perps trading in crypto. From there, dYdX has grown into a leading Decentralized Exchange (DEX) by trading volumedYdX Overview article, bigger than Uniswap at one point.
It’s also a go-to platform for professional perps and margin trading. Plus dYdX further expanded its scope by integrating prediction markets, while Instant Deposits offer a UX boost for end-users.
This article provides a complete overview of dYdx, covering what it is, how it evolved, how it works, why it’s different (and better), what’s in store for the future, and more. Let’s dive in.
What is dYdX?
The dYdX Exchange is the project’s core offering. It’s a DEX where you can trade perpetual futures contracts for 143+ cryptocurrencies, including BTC, ETH, SOL, APT, and SUI. Top memecoins like DOGE, FOXY, etc., also feature on dYdX’s expanding list of available markets.
dYdX particularly appeals to margin traders by providing up to 50x leverage on perps trade, increasing their scope for profit. Plus features like cross-margin accounts and isolated margin sub-accounts give traders the flexibility they need to efficiently navigate volatile markets.
Although dYdX offers a fast and seamless ‘CEX-like’ experience, it puts traders in control with self-custody. Moreover, the open source code and API structure fosters innovation.
Later this month, dYdX will be launching Unlimited, allowing users to list any token on dYdx by providing initial liquidity therefore making it instantly tradable.
The dYdX Chain
dYdX Chain is a Layer-1 blockchain optimized for high-frequency spot and derivatives trading. It offers sub-one percent or even zero percent trading fees, providing a respite for traders facing congestion and prohibitive fees on Ethereum.
The dYdX Exchange was initially deployed on Ethereum which soon became unsustainable as the project gained traction. Especially because dYdX subsidized users’ gas fees. Thus in 2021, dYdX deployed its v3 iteration on the Ethereum Layer-2 (L2), Starkware.
For v4, however, the project built its independent L1, i.e. dYdX Chain, leveraging the Cosmos SDK. It marked a key milestone in the project’s journey towards full decentralization. Unlike previous iterations, every component of the dYdX v4 protocol is deployed on-chain.
Currently, the dYdX Chain powers the entire dYdX ecosystem, including the DEX, core validator nodes, indexer, and clients. It’s a fully open-source and permissionless environment where anyone can build or verify.
How Does dYdX Work?
The off-chain yet decentralized orderbook and matching process was a key innovation included in v4. Thus, when a user initiates an order, it triggers validator activity under the hood.
Each dYdX validator runs an ‘in-memory orderbook’ that is not committed to the chain’s Tenderment Proof-of-Stake (PoS) consensus mechanism.
However, though the orderbook remains off-chain in this sense, the users’ orders/cancellations propagate through the network as ordinary blockchain transactions. This ensures validator nodes are ultimately in sync, eliminating manipulation or foul play.
This process helps dYdX achieve very high throughput—100x the number of traders per second—while remaining decentralized.
Besides decentralized order processing, community governance is another key aspect of dYdX’s functioning. Since dYdX is a PoS blockchain, $DYDX holders can earn voting rights and rewards by staking their coins to secure the network.
Simply put, the governance process begins with community members submitting a dYdX Request for Comments (DRC). Once submitted, DRCs are subject to active discussion, followed by multiple voting stages until approval.
dYdX community members can vote on most crucial aspects of the protocol’s future, including platform upgrades, market expansions, fee adjustments, etc. This ensures that the platform’s and the community’s interests are closely aligned, both short-term and long-term.
Staking & Validator Rewards
dYdX incentivizes community participation through staking utility and rewards. You can thus earn 15-30% APR by staking native $DYDX on the dYdX chain.
Staking rewards on dYdX has two main components:
- Trading Fees — Traders pay taker and maker fees in USDC, based on their DEX activity.
- Gas Fees — dYdX derives a gas fee on every transaction, payable in $DYDX or USDC.
The fees collected in each block is sent to a distribution module in the next one. Governance-defined portions of this pool are earmarked for the community tax and validator commissions. The rest goes to validators and stakers in proportion to their staked $DYDX.
Notably, since both trading and gas fees vary based on activity in the DEX, higher participation ensures bigger rewards for the dYdX community as a whole.
Conclusion & The Road Ahead
Overall, dYdX represents a critical wheel in the entire DeFi machinery since it combines a high-fidelity and scalable experience with optimal decentralization.
Practically solving the Blockchain Trilemma in this manner, dYdX sets the standard for DEX innovations. While perps traders enjoy full asset control and decentralized security, developers can leverage dYdX’s open-source landscape to build cutting-edge solutions on top.
Marching ahead, dYdX is preparing to release its biggest update since launch, a.k.a. Unlimited. It’ll introduce novel features that aren’t currently available on any crypto DEX or CEX. There will be:
- Permissionless market listing to enable near-instant market entry for new users.
- MegaVault or master liquidity pool to ensure deep liquidity for all dYdX markets, big and small, established and new.
- Affiliate program to incentivize dYdX ambassadors worldwide.
- Permissioned keys for enhanced security on user wallets.
Besides the Unlimited update, dYdX will receive multiple UI enhancements, integrations, and governance proposals in the coming months.
Finally, emerging coins and narratives will find a place in dYdX, opening new avenues for the community while boosting adoption and innovation across crypto as a whole.
