In this edition, we’re providing you with some background on dYdX, the leading derivatives DEX, favored by many institutions in the crypto space.
Despite their lead in the DeFi derivatives space, the team has their sights set on developing dYdX Chain. Dive deep into dYdX, their reasons for choosing Cosmos over Starknet, and more.
Stay alert in the markets ⬇
dYdX Background & Transition to Cosmos
dYdX is a leading decentralized exchange that currently supports perpetual trading.
The platform operates on the Starknet L2. In June 2022, the team announced dYdX Chain; plan to transition the exchange to be built on it’s own Cosmos appchain with a scalable and decentralized off-chain orderbook.
It is the goal of dYdX is to become one of the largest exchanges in the crypto space, either centralized or decentralized, within the next five to 10 years.
While dYdX has had significant success with over a trillion dollars in trading volume and about a billion dollars traded daily, they still have only about 1% of the entire crypto derivatives market.
This contrasts with their more than 50% market share in DeFi derivatives.
There is a clear discrepancy between DEX derivatives trading volume vs CEX volume, with CEXs facilitating the majority of trades.
Why is dYdX Moving to Cosmos?
The decision to move dYdX to its own native Cosmos base chain is aligned with their larger ambitions to capture a bigger share of the entire crypto derivatives market.
dYdX Founder Antonio Juliano believes that taking big risks and making key product and technical decisions are essential for achieving their long-term goals.
While it may be fundamentally impossible for decentralized exchanges to match the performance of centralized ones due to inherent constraints, efforts are being made to close the gap.
dYdX chain's innovative off-chain order book aims to allow for an almost instantaneous trading experiences.
Although enhancing user experience to resemble centralized exchanges has been a primary focus, it may not be enough for the long-term success of DeFi platforms. There is a need to develop features that are fundamentally new and enabled by DeFi technology itself.
Antonio has shared that for 2024, the team is planning to explore potentially groundbreaking ideas that are still uncertain but have the potential to be significant.
The team’s current focus has been on porting existing technologies to a fully decentralized platform and improving user interfaces. These are crucial steps but truly disruptive ideas are necessary for the future.
dYdX achieves high performance and a high-quality UX by being vertically integrated, controlling both software and front-end elements. This approach allows them to implement features like off-chain order books that would be impossible on layer-2 solutions.
The team will intentionally limit developer customizability on the dYdX chain, as they focus on excelling in decentralized derivatives. They will not support a general-purpose smart contracting language initially, keeping the focus on the core product, which is derivatives trading.
There are also plans to push the boundaries in allowing permissionless market listings, enabling users to list their own markets similar to Uniswap. Antonio believes in the concept of user-generated value and sees this as the next step for dYdX, planning to test other hypotheses as well.
dYdX's User-Centric Strategy and Future
dYdX aims to develop open-source software, sometimes incorporating community feedback and sometimes not.
Antonio says he doesn't always align with community opinion but believes that dYdX's track record shows they're ahead in technological decisions. He says they're willing to risk their current billion-dollar trading volume for a fundamentally better product experience.
Some other ideas the team has considered are copy trading features and portfolio margining.
Antonio once believed in the horizontal integration approach, as seen with centralized exchanges like Binance and Coinbase. He now sees more value in focusing on one major vertical like perpetuals, which dominates the crypto trading volume.
dYdX's Shift to AppChains & Decentralized Scaling
dYdX was among the first in DeFi to adopt layer-2 solutions.
As of now, they have the highest trading volume on any layer-2 platform worldwide, but their focus has shifted to AppChains.
dYdX 24H Trading Volume
The current platform, dYdX v3, can handle about 1,000 orders per second. They aim to scale further to match platforms like Binance or Coinbase.
Other technologies the team considered for scaling, include various Layer 2 solutions, StarkNet, optimistic rollups, other Layer 1s like Solana, and even building their own chain using Cosmos or Polkadot technology. None could meet their specific requirements for throughput and low gas fees.
The new dYdX structure only requires consensus for orders that actually match and result in a trade. This led them to build on top of the Cosmos SDK, where the order book is off-chain but still decentralized.
Fees on the platform will be paid in USDC, aligning incentives for validators and stakers.
Important Links
Become a Premium member to unlock all our research & reports including access to our members-only discord server
Join thousands of sharp crypto investors & traders by becoming a Premium Member & gain an edge in the markets. For just $33.25/month you’ll get:
Access to Members Only Discord server
Premium access to the entire Revelo Intel platform
Analyst Insights reports - actionable trade ideas
Project Snapshots - Monthly protocol-specific performance reports
Project Breakdowns & Timelines - Deep dive 50+ page protocol-specific reports
Notes - Summaries of your favorite podcasts & AMA’s
*NEW* Launch Alpha - Weekly report highlighting new projects
*NEW* Trace Alpha - Real-time onchain alerts for smart money movements
*NEW* Airdrop Alpha - Reports on airdrop opportunities
*NEW* Strategy Guides - Demonstration of profitable strategies