dYdX Review

What is dYdX?

dYdX is a decentralized trading platform supporting multiple financial products including margin trading, leveraged trading, spot trading, and perpetual. The project enables bidirectional trading by combining off-chain order books with an on-chain settlement layer. The company has a portfolio management tool allowing traders to monitor their trades, claim trading rewards, and get discounted fees based on their trading volume.

How does dYdX work?

The platform employs a number of protocols specifying the operation and execution of different types of financial products. The plans for future development are focused on prioritizing whichever of the protocols are the most used ones and creating additional types of financial products.

The first protocol in use is the Margin Trading Protocol. It consists of one main Ethereum smart contract to facilitate decentralized margin trading of ERC20 tokens and allows lenders to offer loans for margin trades by signing a message containing information about the loan. Loan offers can be transmitted and listed on off-blockchain platforms. The protocol can be used both for short selling and leveraged long trading.

There are three contracts used for margin trading - The margin contract, which contains all the business logic and public functions, the Proxy contract – used to transfer user funds, and the Vault contract where all assets are locked up in positions.

Options Protocol uses one Ethereum smart contract per type of option. Type refers to input parameters such as base token – the asset the option is for, quote token - the token in which the premium and strike price are denominated, strike price, and expiration date.

To allow for the issuance and functionality of options there are three types of smart contracts at play: The Creator – responsible for creating all CoveredOption contracts, The Proxy – once again used for transferring user tokens between accounts, and The CoveredOption – this contract represents a specific type of covered option, allowing each option to be publicly traded on an exchange as any other ERC20 token.

How to use dYdX?

To trade on the platform, users need to deposit funds into their account first. The dYdX app interface has a sidebar for perpetual markets allowing users to choose markets. leverage type, trade direction, and order types. There are also price and depth charts, as well as an order book and positions/balances panel. 

Currently, the supported by dYdX wallet apps include popular browser extension wallet - MetaMask, and hardware wallets Ledger and Trezor, as well as Coinbase Wallet and all wallets supporting the WalletConnect protocol. 

Borrowing fees dYdX charges float depending on supply and demand and can be found on the Markets page in the dYdX app. There are no fees for deposits nor for withdrawals, however, users still need to pay for the gas costs. Fast withdrawals on Layer 2 perpetual products have a 0.1% fee dYdX charges to cover the cost of the liquidity needed to perform it. Liquidation carries a 1% fee, and for perpetual trading, the platform maintains an up-to-date list on their webpage.

The DYDX token

The native dYdX token – DYDX has a main function of governance and can be used to gain rewards for mining and participating in staking pools. The token also offers trading discounts on its exchange to its holders.

Users of the platform can stake it in two pools as offered by the dYdX team. One of them is the Safety Pool – aiming to create a “safety net” for all users staking their DYDX tokens, by making sure that the DYDX users with staked funds continue to receive a portion of rewards in proportion to their staked tokens in the pool. Clients must wait for two weeks before they are able to unstake their tokens and must also submit a request before the end of the current epoch. 

The other is the Liquidity Pool – targeted towards major goals such as providing liquidity network effects and encouraging investments in the platform from professional market makers. Stakers receive DYDX in proportion to their staked tokens in the liquidity pool only after a two-week period and during the ongoing epoch period.

Holders of the token can claim rewards based on three different incentives - Retroactive Mining Rewards – distributed among dYdX users trading on the platform’s Layer 2 protocol, and those who have been using the platform for a long time. The amount of the rewards depend on the overall activity and the tier to which a user belongs. Trading Rewards – is to encourage crypto traders in using the Layer-2 Protocol. Another aim is to speed up the market liquidity process. Anyone trading on the aforementioned protocol is eligible to earn rewards, with the amount depending on factors such as trading activity and volume. Liquidity Provider Rewards – by maintaining a minimum maker volume of 5% in the previous epoch, any user with an active Ethereum address can gain this type of reward after 28 days during the five-year period in which this process will run. Trading Fee Discounts – will be provided to users based on the number of tokens being held in their wallets.

The total supply of 1,000,000,000 DYDX tokens is planned to be distributed over a period of five years in the following manner: 50% allocated to the community, comprising liquidity providers, traders, stakeholders, and users who complete trading milestones. A portion of this fund will go to the community treasury. 27.73% are to be given to previously active investors. 15.27% will be given to the official team members, including founders, advisors, employees, and others. 7% of the tokens are reserved for consultants and employees who join the platform in the future.

Is dYdX safe?

The company was established in 2017 by Antonio Juliano, who is also known for being the founder of Weipoint and has experience as a software engineer for Coinbase and Uber.

Other members of the dYdX team include the software engineers- Brendan Chou, Bryce Neal, Phillip Goldberg, Zhouxun Yin – Head of Operations, and the advisors – Reuben Bramanathan, and Steve Jang.

In November 2021, the exchange was notified of a vulnerability prevented with an implementation. The funds that were at risk were recovered thanks to the help of white hat hacker Sam Sun, also known as Samczsun. It was discovered that around 700 accounts were at risk and the platform transferred their funds to an escrow smart contract during the recovery process.

dYdX audits can be found in the protocol dashboard on this webpage.

Partners 

In June 2021, the platform raised $65 million in a funding round led by Paradigm attracting other big market makers such as Andreessen Horowitz, Three Arrows Capital, and others.

The dYdX platform implements StarkEx, for cross-margin perpetuals on Layer 2, powered by StarkWare.

In Q2 2021, Sixtant – a company focused on providing market making and liquidity services for exchanges and crypto companies published a market report regarding dYdX, after becoming one of the largest market makers on the platform. Other big market makers working with the project are Kronos Research, Bitlink, and Wintermute.

The DYDX token is tradeable on Uniswap (v2) and Hotbit.

What's next?

The dYdX platform is currently developing a mobile trading app that will be available both for IoS and Android users and is planned to go live in Q2 2022. The other big priority for the team is bringing full decentralization to their project by building a fully decentralized version of the protocol, as well as having no central components such as no off-chain order book or matching engine being part of the product. 

The rapid addition of new assets and features to the perpetual contracts, partnering with infrastructure players to bridge the gap between centralized and decentralized finance, and strategically investing in international growth markets such as Asia, have been stated as the company’s long-term development goals.

Links

https://docs.dydx.exchange/ 

Author:

Frank Stewskid

Last updated: Aug 14, 2023