dYdX Chain, as a special case of transformation, announced to the public that Layer 2 and Rollup are not the only solutions to the problem.
Table of Contents
1. The Interesting and Unique Development Path of dYdX
1.1 From Layer 1 to Layer 2 and Back to Layer 1
1.2 dYdX Chain – A Completely Decentralized Blockchain
1.3 What Advantages Does an Independent Blockchain Bring to dYdX?
2. How is dYdX Chain Performing in the Market?
2.1 Impressive Development Data
2.2 How Does dYdX Chain Incentivize Users to Provide Liquidity and Participate in Governance?
3. The Significance of dYdX Chain for the Decentralized Derivatives Trading Market
Recently, dYdX Chain publicly disclosed data showing a total on-chain trading volume of $120 billion, with 20 million USDC allocated to staking users, demonstrating positive data indicators.
dYdX, as a well-established decentralized derivatives trading platform that has been in development for 7 years, initially migrated from the Ethereum mainnet to Layer 2, and ultimately built its own chain, dYdX Chain, which has an interesting and unique development path that is worthy of analysis. This article will explore its impact on users, developers, and the decentralized finance industry, starting from dYdX’s development history.
dYdX is now known as a decentralized exchange that supports perpetual contract trading. However, in reality, the original dYdX was quite different from what it is now. Initially, it was deployed on the Ethereum mainnet and used third-party DEX, and it did not even support perpetual contract trading.
The earliest origins of dYdX can be traced back to 2017 when its founder, Antonio Juliano, saw great opportunities in the cryptocurrency trading and derivatives field and realized that centralized exchanges and hedge funds in traditional financial markets were not suitable for the cryptocurrency world. Therefore, he decided to create a decentralized trading platform and lending protocol to provide users with a more open, transparent, and secure trading environment.
After continuous research and development, dYdX was officially launched in 2019 and quickly attracted a wide range of users and community attention. At that time, dYdX was once one of the largest DEXes in terms of trading volume, accounting for about half of all DEX trading volume, which was quite impressive.
However, with the arrival of DeFi Summer in 2020, dYdX faced a dual crisis of market share and financial situation due to losing out to Uniswap in competition and skyrocketing gas costs (dYdX has always borne the gas fees for users). As a result, dYdX decided to leave the Ethereum mainnet and built the familiar dYdX, a decentralized derivatives trading platform based on Ethereum Layer 2, using StarkEx, a scalable engine powered by STARK, a subsidiary of Starkware.
With the help of cross-margin functionality and significantly improved scalability, dYdX successfully attracted more traders, and its trading volume increased fivefold, once again becoming one of the most notable projects in the market.
However, behind the project’s revival, some issues gradually emerged, particularly the concern that it was becoming “less decentralized” (the order book and matching engine of dYdX on Layer 2 operated in a centralized manner). Antonio Juliano, the founder of dYdX, had been thinking about how to differentiate dYdX from other centralized exchanges (CEXs).
Can dYdX consider its pursuit of complete decentralization as a unique selling point? Among the many reasons for launching its own chain, one core goal repeatedly emphasized by dYdX is to achieve “comprehensive decentralization”. In addition to the need to further improve transaction capabilities and expand development environments, dYdX deviated from the trend of Rollup in 2023 and turned to building its own independent Layer 1 chain. With the release of dYdX v4 in October 2023, dYdX Chain was officially launched.
Simply put, dYdX Chain is an independent public chain built on Cosmos, and its main selling point is that every part of the protocol is “completely decentralized”, including its consensus mechanism, order book, matching engine, and front-end. For example, the order book, which was previously managed by dYdX Trading, is now managed by 60 active validators spread across the world.
Supporters of Ethereum may question how it can be considered decentralized when it departs from the most decentralized Layer 1 network, Ethereum, to launch a dedicated chain. However, considering that dYdX does not handle all of its product business on-chain, Ethereum’s decentralization advantage is not critical here. Perhaps Ethereum supporters and dYdX have different definitions of decentralization.
What dYdX truly seeks is not to leverage a decentralized network to some extent, but to handle every aspect of its product in a completely decentralized manner, which inevitably requires launching its own blockchain. This means that achieving execution solely on the most decentralized network does not automatically guarantee complete decentralization of their product.
By launching its own blockchain, dYdX has successfully managed all aspects of its business, including the order book, in a decentralized manner. The operational entity of dYdX, dYdX Trading, is no longer involved in any business processes on the dYdX Chain.
The advantages of dYdX Chain mainly lie in three aspects: high throughput, bridging, and customizability, including:
1. High Throughput
Each dYdX Chain validator runs an in-memory order book that never achieves consensus (i.e., off-chain). Placing and canceling orders will be propagated through the network, similar to normal blockchain transactions, and the order books stored by each validator eventually reach consensus with each other. Orders will be matched together in real-time by the network and the resulting trades will be submitted to each block. This allows dYdX Chain to have extremely high order throughput while maintaining decentralization.
2. Bridging
dYdX Chain will be governed and share on-chain trading revenue by DYDX token holders, marking a significant shift towards decentralized governance. A bridge user interface has been deployed on-chain, allowing anyone to bridge their DYDX tokens from Ethereum to dYdX Chain. By providing a simplified token exchange process, dYdX Chain encourages more eth DYDX holders to bridge their tokens to DYDX, enabling them to better participate in the dYdX ecosystem.
3. Customizability
Built on Cosmos, dYdX Chain benefits from complete customizability in terms of blockchain functionalities and validator tasks. It is an independent blockchain that can be fine-tuned for specific purposes. This allows builders to freely customize various aspects, from the underlying protocol to the user interface.
Recently, dYdX also announced its 2024 roadmap, starting with fully permissionless markets, where users can add and remove trading pairs through on-chain governance, with a target of adding 500 markets by the end of 2024. Other goals include core trading and user experience upgrades.
dYdX Chain has surpassed the trading volume of dYdX v3 (daily $500-1 billion) within just 2 months of its launch and has not encountered any major issues. The publicly available data from dYdX continues to accelerate rapidly, as evidenced by the growing trading volume and staking users.1. The total trading volume of dYdX Chain has exceeded $120 billion.
2. 14.9% of the DYDX tokens (150 million tokens) are staked.
3. 75% of ETH is bridged to DYDX.
4. Over $20 million worth of USDC has been allocated to 18,991 stakers.
5. The community has initiated 55 governance proposals to date.
These data can be said to be impressive performance. From the data, it can be seen that the dYdX independent application chain is gradually realizing its original vision of becoming a super decentralized sustainable exchange. At least, dYdX has identified its ultimate form as an application chain and no longer needs to tell stories about chain scalability and performance. It only needs to continue to operate the growth of users and trading volume.
As early as the summer of 2021, the dYdX Foundation, in collaboration with StarkEx, launched the DYDX token to establish its market position. As the governance token of dYdX, DYDX aims to allow the protocol to be community-driven and autonomously operated, while encouraging active participation in trading by protocol users. Although there has been significant growth after transitioning to Layer 2, the launch of the token was an important step towards “consolidation”.
The distribution model of the DYDX token is different from other tokens, especially in terms of retroactive mining, trading incentives, and liquidity incentives. For example, to maintain fairness to long-term users, dYdX introduced the so-called “retroactive mining” system, which rewards users with tokens who have conducted transactions on the platform in the past. Users who have made deposits and at least one transaction in the past are eligible to receive tokens from retroactive mining. Similar initiatives make users trust and support dYdX more firmly, which is in stark contrast to some projects that have caused dissatisfaction among users.
As mentioned earlier, the primary goal of the dYdX blockchain is “complete decentralization”. Previously, the governance scope of dYdX was limited, but on the dYdX chain, all aspects of the product will be determined by DYDX token holders. Another important change is that in the past, all the revenue generated by dYdX belonged to dYdX Trading, but on the dYdX chain, these revenues will be distributed to DYDX token holders. This is expected to increase the demand for DYDX tokens—protocol development will bring more revenue, thereby bringing higher expected returns, increasing the attractiveness of the assets themselves, and ultimately increasing market demand and asset value.
Recently, dYdX will also encourage users to provide liquidity and participate in governance through various incentive methods. The following are several user incentive methods currently provided by dYdX:
1. Staking incentives: Users can stake DYDX and earn USDC. DYDX token holders can stake their tokens with any active validator (currently 60) through Keplr, and all fees on the dYdX chain (recipient/maker fees) belong to the validators and stakers, mainly in USDC. The specific incentive amount varies based on the daily trading situation. Since dYdX transaction fees are the source of staking rewards, stakers do not need to worry about inflation of DYDX tokens.
2. Trading incentives: The $20 million trading incentives program by Chaols Labs. This is a 6-month program with a total reward value of $20 million, targeting early adopters of the dYdX chain. In the first quarter, $5 million worth of DYDX tokens were proposed to be distributed to 2,006 accounts. In the second quarter, Trade League (performance-based rewards) was introduced as a new initiative. Performance is measured by percentage returns, and the best performers of each season will receive a portion of the reward pool. Traders will receive rewards after each successful trade on the protocol. The rewards are denominated in DYDX and automatically allocated to eligible dYdX chain addresses according to blocks, without waiting or manual claiming.
3. Stride liquidity staking: DYDX token holders can use Stride to stake their DYDX as collateral and receive stDYDX, which allows them to continue earning staking rewards while maintaining the liquidity of the tokens. This allows users to flexibly earn staking rewards and use these tokens in decentralized financial protocols or immediately exit their positions without waiting for the 30-day unstaking period of dYdX.
It can be seen that staking incentives are currently the main incentive policy. As mentioned earlier, dYdX has already distributed over $20 million worth of USDC to stakers. According to weekly updated public data from dYdX, these incentive policies have further increased user activity and participation, helping it to continue stable growth in a volatile market environment and consolidate its position in the race.
Since 2023, the Layer 2 Rollup trend has swept the industry, and Rollup, “Rollup as a Service” (RaaS), and Rollup software development kits (SDKs) can be seen everywhere. Industry experts also often recommend using Rollup to build products.
However, the article has already introduced several stages of dYdX’s product development: from launching on the Ethereum mainnet, transitioning to Layer 2, and ultimately launching its own independent blockchain. For dYdX, the project achieved true decentralization only after launching its own blockchain, which reflects that Layer 2 Rollup is not the only solution.
Some have criticized dYdX’s decision to launch its own chain as the “worst decision”. Although it is still too early to judge its success, we can see that dYdX has maintained its excellent reputation developed over many years, gained the trust of a large number of traders on the chain, and continues to optimize its product, with impressive data performance.
In the current context where Rollup is the only topic, dYdX Chain, as a special transformation case, has declared to other projects that Layer 2 and Rollup are not the only solutions. In fact, many researchers have been attracted by the powerful narrative of Rollup but overlooked the fact that their products may be more suitable for execution on an independent Layer 1. Therefore, if dYdX Chain ultimately becomes an outstanding “success case”, it will demonstrate the bright prospects of this path to many other projects.
However, such a case is difficult to replicate. As can be seen from the introduction of dYdX’s development process, each transformation of dYdX has faced significant external pressures. Achieving progress through transformation also means giving up some advantageous conditions and making necessary compromises after weighing the pros and cons. Therefore, if another project that is closely dependent on the Ethereum ecosystem tries to build its own independent chain, its departure from the Ethereum ecosystem would result in a loss of a large amount of composability liquidity, which is tantamount to a dead end for certain projects.
The prudent solution is still to continuously optimize through stacking in Layer 1, Layer 2, Layer 3, and other layers. Just don’t forget that there is indeed another option here, and there are excellent cases to refer to.