What is DYDX? Tokenomics, Fees & More

What is dYdX?

dYdX is a decentralized finance (DeFi) platform that offers advanced trading tools, including crypto futures, margin trading, and spot trading, all on a blockchain-based exchange. It operates without traditional financial intermediaries, providing a trading experience that is transparent, secure, and efficient. Launched in 2017, dYdX was the first protocol to bring decentralized margin trading and derivatives leverage into crypto (which took a good 3 years of work).

With the launch of dYdX V4, the platform has made a leap toward full decentralization by introducing its own Layer 1 blockchain, known as the "dYdX Chain," built on Cosmos SDK and Tendermint. This advancement aims to enhance scalability, speed, and interoperability. Among the most recent updates on the platform is the release of the V4 5.0 software and the upcoming dYdX Unlimited upgrade that will introduce permissionless listing of any market on dYdX Chain.

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How Does dYdX Work?

dYdX operates using a decentralized, off-chain order book and matching engine, particularly in its V4 version, to facilitate trading on its platform. This architecture allows for improved, scaled efficiency, surpassing the typical limitations of onchain competitors.

Here's how the order book architecture works in dYdX V4:

• Order Placement: Users submit buy or sell orders, which are processed off-chain rather than being directly recorded on the blockchain.
• Order Book Maintenance: Validators on the dYdX Chain maintain an in-memory order book, ensuring rapid updates and matches without the burden of blockchain data storage.
• Order Matching: A decentralized network of validators matches orders in real-time, with trades executed instantly.
• Trade Settlement: Once orders are matched, the resulting trades are securely recorded on the dYdX blockchain, combining the flexibility of off-chain processes with the transparency of on-chain settlement.
• Mobile App: The mobile dYdX Chain app is available for both iOS and Android users, giving them full access to market, limit, stop-limit, and leverage orders.

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What Assets Does dYdX Support?

dYdX supports over 129 cryptocurrency assets, including Bitcoin (BTC-USD), Ethereum (ETH-USD), Solana (SOL-USD), and newer assets like Dogwifhat (WIF-USD) and Celestia (TIA-USD).

dYdX's competitive edge over other decentralized perpetual exchanges comes from its deep liquidity (great for traders to execute large orders with minimal slippage) and 20x leverage, which is just moderate to avoid instant liquidations. Users remain in full control over their assets as they are stored in self-custodial wallets.

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dYdX Trading Fees

dYdX uses a maker-taker fee model, with Maker fees ranging from 0% to 0.02% and Taker fees ranging from 0.02% to 0.05%, depending on the 30-day trading volume. Fees decrease as trading volume increases, and Hedgie holders receive a 3% fee discount. No gas fees are required for trades since transactions are executed on Layer 2.

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dYdX V3 vs dYdX V4

The transformation from dYdX V3 to V4 brings several changes to the platform’s infrastructure and capabilities, with key enhancements in decentralization, scalability, and governance. Here’s a comparative look:

• Blockchain Foundation: V3 was an Ethereum Layer 2, while V4 operates on its blockchain within the Cosmos ecosystem.
• Consensus Mechanism: V3 depended on Ethereum’s security, but V4 employs the CometBFT PoS mechanism through Cosmos.
• Node Structure: V4 introduces Validators and Full Nodes for processing and block generation, a structure absent in V3, which relied on Ethereum and StarkWare’s infrastructure.
• Order Book Mechanism: Both versions use an off-chain order book, but V4 eliminates trading gas fees by having Validators manage real-time matching.
• Governance: V3 had centralized control aspects, while V4 fully transitioned governance to the dYdX DAO, enabling community-driven decision-making.
• Regulatory Strategy: V4’s move to full decentralization is designed to reduce regulatory risks, unlike V3’s more centralized model.
• Cross-chain Functionality: V4 benefits from Cosmos’ IBC for smoother cross-chain transactions, a significant improvement over V3’s Ethereum-limited ecosystem.
• Scalability & Composability: V4’s shift to an application chain offers unmatched scalability and customization, a considerable advancement from the shared rollup environment in V3.

As of August 2024, dYdX V4 has surpassed V3 by daily volume at around a 7-to-1 ratio according to data from DefiLlama.

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dYdX Tokenomics

The platform released the DYDX token in 2021 under an independent Swiss organization called the dYdX Foundation.

The tokenomics utility included retroactive mining, trade liquidity mining, safety staking pool, and liquidity staking pool among other important components like:

• Total Supply: 1 billion $DYDX tokens, with distribution planned over five years from August 2021 to August 2026.
• Community Allocation: 50% (500 million $DYDX) is allocated to the community, including 14.5% for trading rewards, 5% for past users as retroactive mining rewards, 5.2% for liquidity providers, 24.2% for the Community and Rewards Treasuries, 0.6% for $USDC liquidity staking, and 0.5% for safety staking.
• Investor and Employee Allocation: The remaining 50% is designated for investors and employees to support the platform’s development.
• Inflation Policy: Starting five years after launch, the protocol may introduce an inflation rate of up to 2% per year for ongoing development, pending governance approval.
• Governance: $DYDX holders have full control over the protocol, including the ability to define token functions, add or remove markets, and adjust parameters.
• Validator Staking: Introduced in V4, this new utility allows $DYDX holders to participate in network security and consensus.
• Fee Discounts and Staking: While maintaining its utility for fee discounts, V4 expands staking to include validator staking, enhancing the platform’s decentralization.

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dYdX Unlimited

dYdX's autumn 2024 update, "Unlimited" will introduce permissionless market listings, allowing users to launch markets instantly without governance approval, with automatic liquidity provided by the new MegaVault, a master liquidity pool. MegaVault will offer passive earning opportunities for users by enabling them to deposit USDC and share in the pool's profits.

Additionally, dYdX will introduce an affiliate program with potential earnings of up to $1,500 per referral and a new security feature, Permissioned Keys, which will enhance self-custodial wallet control for institutional and high-value traders. The update also promises a refreshed UI, easier onboarding, and more integrations.

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Who Founded dYdX?

dYdX was founded in 2017 by Antonio Juliano, a software engineer with a computer science background from Princeton University. Before creating dYdX, Juliano worked at Coinbase and Uber. The platform has attracted support from prominent investors, including Brian Armstrong, the inventor of Coinbase.

In an emotional memo on May 2024, Juliano announced that he is stepping down from his role as CEO after building dYdX for 7 years. Under his guidance, the exchange reached $1 trillion in trading volume and has rebounded from its lowest points every time, including when their market share dropped from 50% to 1% with the explosion of Uniswap in 2018.

Going forward, he will continue to serve as the founder of dYdX, a title that will always be associated with his name. By entrusting business administration to other capable leaders, he will be able to dedicate his full attention to making strategic, high-impact decisions for the company.

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Bottom Line

dYdX is a crypto company with deep roots in decentralized finance. Having survived through the DeFi summer where competition was fiercely eating up market share and the great Terra Luna crash that erased billions of total value locked from decentralized protocols, dYdX has adapted each and every time to keep its status as one of the top 5 perpetual DEX.

The company has evolved throughout the years; from offering simpler leveraged tokens as a protocol on Ethereum to building its Layer 2 with Starkware to mitigate the high Ethereum fees, to eventually launching its own appchain, the dYdX L1 Chain on Cosmos and the supporting DYDX token. Looking into the future, the project will look for ways to conquer its goal by vertically integrating teams designed to make more rapid product progress.