Dydx, the Steadfast Giant, Strategically Advancing

LBank Labs
10 min readNov 14, 2023

The Saga of Dydx:

In the realm of perpetual contracts, DyDx emerges like a seasoned warrior, traversing six winters and summers since its first scroll of wisdom in 2017. Behold the current incarnation, Dydx v3, an alchemy of contract combat, lending scrolls, and the elusive flash loan arts. Commanding a mere treasury of $344 million, this giant conjures daily battles worth over $800 million, reigning supreme in the on-chain perpetual arena. Its prowess surpasses all other on-chain combatants combined, a testament to its early rise under the auspices of the Coinbase clan and the versatility of its order book strategy, offering an arsenal of diverse trading instruments.

Gryphsis Academy

Known to the wise, Dydx’s reliance on the ancient order book tactic means much of its battle strategy cannot fully transcend to the ethereal on-chain realm. Initially etched on the 0x canvas, it maneuvers most of its tactics in the shadows, save for the rites of settlement, lending, and governance (such as the shadow dance of order matching and the calculations of Profit and Loss). Thus, many sages argue Dydx is not a true spirit of the on-chain perpetual world. Around the epoch of 2021, seeking the path of decentralization and to ease the burden of the high gas scrolls unleashed during the DeFi summer, Dydx sought refuge in StarkWare’s StarkEx fortress, crafting its own Layer 2 domain for the art of cross-margin contract warfare. (In the cross-margin strategy, interconnected fates of different instruments in a portfolio can neutralize risks, allowing a reduction in the collective war chest required). Thus, aside from its order book and shadow matchmaking, Dydx has now shifted most of its tactics to the on-chain realm, harnessing the power of zero-knowledge spells for security while hastening battles and lessening costs in the Ethereum lands. This strategic move catapulted its battle prowess, vaulting over obstacles, with its war chest briefly swelling to $1 billion — a feat, though still in the shadow of DefiKingdoms’ legendary $1.7 billion hoard.

defillama

As Dydx stands a titan in the annals of perpetual lore, there is abundant discourse on its saga, hence we shall not dwell on its mystical mechanisms. However, amidst its chronicles, two intriguing tales are woven:

  • In a move unspoken, Dydx harbored the secret art of meta-transactions. With a singular incantation, one can engage with Dydx’s contracts (depositing, waging, withdrawing) in a seamless flow. Dydx, with its all-seeing eye, only scrutinizes one’s balance after all maneuvers are complete. This covert method, when combined with the ‘call’ technique to summon other contract powers, enables a flash loan sorcery without any tribute, a craft far surpassing the ancient AAVE methods.
  • The decree DIP-14 witnessed the demise of the fleeting USDC staking rewards haven, a realm promising 2.5% of the total tokens, only to be dissolved before its glory was fully realized. This sanctuary sought to alleviate the order book’s limitation in channeling liquidity like the simpler AMM pools, offering interest-free loans as a boon to professional market sages for fortifying the platform’s liquidity. However, the sanctuary’s low utilization of resources (barely reaching 30%) and the lavish distribution of rewards led to a council decree abolishing this sanctuary, with the remaining treasures redirected to the communal treasury. Post this edict, Dydx enacted several reductions in rewards across the board, impacting market maker blessings, trading boons, and fee discount graces.

Such are the chronicles of Dydx’s current form. Yet, as the last year’s leaves fell, Dydx unveiled its intent to embark on the v4 odyssey, not merely an evolution like its predecessors but a bold leap into the cosmos, aspiring to forge its own Dydx app chain — a move that sparked spirited debates across the land.

Before venturing into this new chapter, let us gaze upon the essence of this venerable token, transcending mere tales of battle and valor.

Fundamentals

The Steadfast Pillar of the Crypto Realm

The tale of Dydx’s genesis speaks of a golden lineage. Its founder, Antonio, hails from the hallowed halls of Coinbase, imparting an aura of preeminence. Coinbase not only joined the Dydx odyssey during its seed round but also bestowed liquidity upon its lending ventures. The current helmsman, Charles, a veteran of ConsenSys and former fintech overseer at InvestHK, adds to the saga’s grandeur. Verily, Dydx was born with a golden spoon, destined for greatness.

In the realm of financing, Dydx’s journey has been one of ease and prosperity.

The Scroll of Dydx Tokens

First, we must peer into the tapestry of DYDX’s tokenomics: The most daunting shadow lies in the 27.7% tokens allocated to investors, set to begin their linear release this December. Other scrolls reveal:

  • A total of 1 billion DYDX tokens, unfurling over 5 years
  • Potential annual inflation of 2%, subject to the will of the community, capped at a 2% rate
  • Throughout the five-year dispersal, 25% of tokens are allotted for trading rewards, releasing 3.835 million tokens every 28 days; 7.5% air-dropped to past Dydx users, distributed in tiers based on past trading volumes; 10% reserved for liquidity provision and staking rewards (2.5% for staking, 7.5% for liquidity provision); 5% for the community treasury; 2.5% for the insurance pool; the remaining 50% granted to early investors, the founding team, and future employees. This 50% is subject to a four-phase lock-up period: 30% locked for 18 months; 40% linearly released between the 19th to 24th months; 20% between the 25th to 36th months; and the final 10% between the 37th to 48th months.
dYdX doc

In our prior analysis of which metrics truly influence token price, we observed:

  • Generally, MACP/TVL shows a positive correlation with token price. But the most strongly correlated metrics are TVL and trading volume.
  • Lower MACP/volume and TVL/volume ratios often coincide with peak token prices.
  • For newer projects like GMX, the correlation between MACP/TVL and price is exceptionally strong.

Hence, we selected these metrics to compare some of the current popular perpetual tokens:

*D-Volume : derivative trading volume, T-volume: token trading volume

Without considering turnover, DYDX’s performance stands commendable. Yet, we have yet to speak of V4.

Dydx V4: A Strategic Launch at an Opportune Moment

As the saga of Dydx unfolds, its token release looms, particularly the 27.7% earmarked for early investors. Announcing V4 at this juncture is akin to spinning a new chapter in its tale, enticing traders to invest, thereby aiding the dignitaries in offloading their holdings. However, every tale must have a beginning and an end. Let us delve into why Dydx is forging its own chain, and more crucially, why it chooses the Cosmos ecosystem over an L2 route like Base.

To unravel this mystery, we must first discern Dydx’s edge over other perpetuals, beyond its prestigious lineage and diverse currency support.

  • Its order book offers a seamless experience akin to centralized exchanges (CEX perps), coupled with remarkably low gas fees.
  • Extremely competitive transaction fees. Here, we refer not to gas fees, but to maker and taker fees. As per the scrolls of Dydx forums, their fees rank among the lowest compared to centralized exchanges:
https://forums.dydx.community/discussion/9916-v4-vanguard

These strengths, combined with its esteemed backing (ensuring ample liquidity), have conquered the on-chain perps domain. So, why venture into creating its own chain? The answer lies in its current limitations:

  • Speed and Limited Capacity: Presently, Dydx can process only 10 transactions per second. Even including off-chain order book logic (placing/cancelling orders), the TPS is merely 1000. This could be why Dydx’s volume lags behind Uniswap, where derivatives reign supreme in CEX.
  • Token Utility Issues: Despite being tolerable in trading, Dydx struggles with token utility. Its use is limited to governance and fee discounts. The previously planned safety staking module (akin to AAVE’s safety module for black swan events) was scrapped due to doubts. Hence, Dydx tokens, akin to UNI, have plummeted in value by 90%.
  • Lack of Native USDC, USDT: Due to its reliance on StarkEX, its ecosystem is sparse. Native stablecoins are out of reach, necessitating collateralization of these coins for use.
  • Regulatory Challenges: In September, CFTC rulings in the U.S. implicated Opyn, Inc., ZeroEx, Inc., and Deridex, Inc. in unlawful digital asset derivative trading, facing hefty fines. CFTC’s stance on cryptocurrency is stricter than SEC’s, and it’s only a matter of time before they target decentralized perpetual contract platforms for KYC implementation. Notably, these charged entities are registered in California, similar to Dydx Trading, Inc., which, due to its centralized control in V3, is highly susceptible to regulatory scrutiny.
  • Composability Issues: The lack of native stablecoins and the inability to utilize those from other chains highlight a broader issue in the Stark ecosystem.
  • Centralization Concerns: While not a critical issue, any blockchain discussion is incomplete without addressing centralization. Currently, Dydx’s setup on StarkEx relies on a centralized sequencer.

For Dydx to ascend further and enrich its narrative, it eyes the Cosmos ecosystem, which “coincidentally” addresses these issues.

  • Cosmos allows for fully customized chains using only its consensus engine and IBC. This means even a non-traditional blockchain can be realized.
  • PoS: The underutilized tokens? They can be staked, especially as the Dydx community hints at future transaction fees being entirely distributed to token stakers, along with MEV profits.
  • Native USDC: Conveniently, Cosmos has its own, officially backed by USDC for enhanced security. Could there be a more reliable cross-chain bridge?
  • Composability is not an issue with IBC, especially with many chains now implementing CosmWasm for EVM compatibility.
  • “I am now a public chain, decentralized, understand?”
  • Decentralization: In Dydx V4, each validator will run an in-memory order book that never commits to a consensus (i.e., off-chain). Similar to regular blockchain transactions, orders and cancellations are propagated through the network, ensuring consistent dissemination. The order books maintained by each validator will ultimately be consistent with each other. In real-time, orders will be matched across the network, and the resultant trades submitted to each block on-chain. This allows Dydx V4 to achieve a high order book throughput (requiring 100 times the transaction throughput) while maintaining decentralization.

Thus, Dydx’s choice to not follow the rollup stack path like Base or Grvt is because no existing L1 or L2 meets its performance needs, and crucially, to weave a compelling story for its token and platform, enriching its potential.

Now, let us explore what Dydx V4 has specifically set out to achieve.

DyDx V4: Plz call me dYdXChain

The Great Transformation

In the cosmic realm of Cosmos, the Dydx sage has orchestrated three grand shifts in its essence:

  • The Token Mechanism Transmuted: Embracing the PoS path and its accompanying LSDs (Liquid Staking Derivatives) has unleashed a new horizon for the token’s mystique.
  • With the last year’s treasure of $76 million in protocol fees, the stakers might ride the dragon of prosperity, soaring above 20% returns, especially if the legendary Bitcoin halving heralds a bullish era.
Token terminal
  • The DYDX Tokens, Now Masters of 100% Protocol Revenue.
https://dydx.exchange/blog/v4-rewards-and-parameters
  • Gas-free Limit Orders: Within the realms of Dydx V4, each validator wields an ethereal order book. Here, warriors can place and retract their trading commands without expending any gas — a tactic of the shadows. Only when the order battles are etched in the annals of the chain do the protocol levies emerge.
  • Post-confirmation, these orders traverse the paths of PoS consensus.
  • The Path to True Decentralization (Governance): The DIP18 prophecy speaks of the rise of subDAOs, relinquishing the grasp of Dydx Trading Inc. over the protocol. Thus, Dydx Trading Inc. retreats from the centralization battlefield, entrusting the Dydx realm to the collective wisdom of the community. With this, even the keen eyes of the regulatory sentinels can no longer brand Dydx as a “centralized trading fortress.”

A promising vista indeed, but is the path free of shadows and pitfalls?

Dydx V4: The Price of Carving One’s Destiny

In the world of new chains, the specter of security looms large.

  • Consider the fortress of L2 Rollups, standing tall with the unparalleled defense of Ethereum. Without bearing the burden of safeguarding their own walls, they offer a sanctuary for those who trust in Ethereum’s might. In V4, however, the fate lies in the hands of new guardians on the Dydx Chain. And with the guardians pledging their loyalty with DYDX tokens, the consensus on their value is a tale yet to be fully written.
  • The other edge of the sword of interoperability is its propensity to ripple through the cosmos. The IBC, a powerful tool, can turn disastrous if calamity strikes. Envision Dydx forging an alliance with a lesser-known app chain, like a lending protocol, only to find the ally’s stronghold compromised. The reverberations could send shockwaves through the Dydx Chain. No ill omens have yet appeared, but with a titan like Dydx entering the arena, will dormant hunters begin their hunt?

The “Grand” Summation

In the annals of crypto chronicles, the launch of Dydx V4 is akin to a masterful stroke by a seasoned warrior, most likely having honed its strategy long before the decisive moment. For its token, as long as the saga continues to unfold, there will always be tales worthy of attention and whispers of potential.

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Disclaimer: This article is provided for informational purposes only and should not be considered as financial advice. The cryptocurrency market is highly volatile and unpredictable. Always conduct thorough your own research and consult with a qualified financial professional before making any investment decisions.

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