Author: Wu Shuo Blockchain
Recently, dYdX Chain publicly displayed that its total on-chain trading volume has reached 120 billion US dollars, with 20 million USDC allocated to staking users, showing good data indicators. As a well-established decentralized derivative trading platform with 7 years of development, dYdX first migrated from the Ethereum mainnet to Layer 2, and eventually built its own chain, dYdX Chain, with an interesting and unique development path that is worth analyzing. This article will start from the development history of dYdX and explore its impact on users, developers, and the decentralized finance industry.
1. Interesting and Unique Development Path of dYdX
1.1 From Layer 1 to Layer 2 and Back to Layer 1
dYdX is now known as a decentralized exchange that supports perpetual contract trading, but in fact, the original dYdX was quite different from what it is now. Initially, it was deployed on the Ethereum mainnet, used third-party DEX, and did not even support perpetual contract trading.
dYdX can be traced back to 2017 when the founder, Antonio Juliano, saw huge opportunities in cryptocurrency trading and derivatives and realized that centralized exchanges and hedge funds in the traditional financial market 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 widespread attention from users and the community. At that time, dYdX was once one of the largest DEX in terms of trading volume, accounting for about half of all DEX trading volume, which was quite remarkable.
However, with the arrival of the DeFi Summer in 2020, dYdX faced a dual crisis of market share and financial situation due to losing to Uniswap in competition and soaring 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 based on Starkware's scalable engine StarkEx, a Layer 2 decentralized derivative trading platform on Ethereum. With the help of cross-margining and significantly improved scalability, dYdX successfully attracted more traders, and the trading volume increased fivefold, once again becoming one of the most eye-catching projects in the market.
However, behind the project's revival, some issues gradually emerged, especially becoming "not decentralized enough" (the order book and matching engine of dYdX on Layer 2 are operated in a centralized manner). The founder of dYdX, Antonio Juliano, has been thinking about how to differentiate dYdX from other centralized exchanges (CEX). Can dYdX consider its pursuit of complete decentralization as a unique selling point? Among the many reasons for independently launching its own chain, one core goal repeatedly emphasized by dYdX is "achieving comprehensive decentralization." Therefore, in addition to the need to further improve data trading capabilities and expand the development environment, dYdX turned away from the Rollup trend in 2023 and shifted to the construction of its own independent Layer 1 chain. In the dYdX v4 version released in October 2023, dYdX Chain was officially launched.
1.2 dYdX Chain —— A Completely Decentralized Blockchain
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 previously managed by dYdX Trading is now managed by 60 active validators distributed around the world on the chain.
Supporters of Ethereum may question how it can be more decentralized to depart from the most decentralized Layer 1 network, Ethereum, and launch a dedicated chain. However, given that dYdX does not handle all of its product business on-chain, Ethereum's decentralized advantage does not seem so crucial here. Perhaps Ethereum supporters and dYdX have different definitions of decentralization.
What dYdX truly seeks is not to partially utilize a decentralized network but to handle every aspect of its product in a completely decentralized manner, which inevitably requires launching their own blockchain. This means that simply running on the most decentralized network does not automatically guarantee the complete decentralization of its products.
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 of the dYdX blockchain.
1.3 What Advantages Has the Independent Blockchain Brought to dYdX?
The advantages of dYdX Chain mainly lie in three aspects: high throughput, bridging, and customizability, including:
1. High Throughput
Each dYdX Chain validator will run an in-memory order book that will never reach 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 will eventually be consistent with each other. Orders will be matched in real-time by the network and the resulting transactions will be submitted to the chain for each block. This allows dYdX Chain to have extremely high order throughput while maintaining decentralization.
2. Bridging
dYdX Chain will be governed by DYDX token holders and share on-chain trading revenue, marking a significant shift towards decentralized governance. An on-chain bridge interface has been deployed, allowing anyone to bridge their DYDX tokens from Ethereum to dYdX Chain. By providing a simplified token exchange process, dYdX Chain incentivizes more eth DYDX holders to exchange their tokens for 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 functionality 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 completely permissionless markets, allowing the addition and removal of trading pairs through on-chain governance, with the goal of adding 500 markets by the end of 2024. Other goals include core trading and user experience upgrades.
2. How Is dYdX Chain Performing in the Market Currently?
2.1 Excellent Development Data
dYdX Chain's trading volume surpassed that of dYdX v3 (5-10 billion US dollars per day) within just 2 months of its launch, and no major issues have occurred. dYdX's publicly available data also continues to accelerate, for example:
The total trading volume of dYdX Chain has exceeded 120 billion US dollars.
14.9% of DYDX tokens (150 million) are staked.
75% of eth DYDX has been bridged to DYDX.
Over 20 million US dollars' worth of USDC has been allocated to 18,991 stakers.
Community members have initiated 55 governance proposals to date.
These data can be said to represent surprisingly excellent performance. From a data perspective, dYdX's independent application chain is gradually realizing its original vision of becoming a super decentralized perpetual trading platform. At least, dYdX has established its ultimate form as an application chain and no longer needs to tell stories about technical aspects such as chain expansion and performance. It only needs to continue to focus on user and trading volume growth in the future.
2.2 How Does dYdX Chain Incentivize Users to Provide Liquidity and Participate in Governance?
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 enable the protocol to be community-driven and autonomously operated, while encouraging protocol users to participate more actively in trading. Although there was significant growth after the transition to Layer 2, the introduction of the token was an important step towards "consolidating" development.
The distribution model of the DYDX token differs from other tokens, especially in terms of retroactive mining, trading incentives, and liquidity incentives. For example, to maintain fairness for long-term users, dYdX introduced the so-called "retroactive mining" system, which aims to reward users who have previously traded on the platform with tokens. As long as a user has made a deposit and completed at least one trade in the past, they are eligible to receive tokens through retroactive mining. Measures like this have made users more confident in and supportive of dYdX, contrasting sharply with some projects that have caused dissatisfaction among users.
As mentioned earlier, the primary goal of the dYdX blockchain is "complete decentralization." Previously, dYdX had limited governance, but on the dYdX Chain, every aspect of the product will be determined by DYDX token holders. Another significant change is that in the past, all revenue generated by dYdX went to dYdX Trading, but on the dYdX Chain, this revenue will be distributed to DYDX token holders. This is expected to increase the demand for DYDX tokens—the protocol's development will bring more revenue, leading to higher expected returns, increasing the attractiveness of the assets themselves, and ultimately increasing market demand and asset value.
Recently, dYdX has also introduced various incentives to encourage users to provide liquidity and participate in governance. The following are some of the user incentive methods currently provided by dYdX:
1. Staking Incentives
This involves staking DYDX and earning USDC. DYDX token holders can stake DYDX with any active validator (currently 60) through Keplr. All fees on dYdX Chain (recipient/maker fees) go to validators and stakers, primarily in USDC. The specific incentive amount varies based on the day's trading activity. Since dYdX trading fees are the source of staking rewards, stakers do not need to worry about the inflation of DYDX tokens.
2. Trading Incentives
Chaols Labs' $20 million trading incentive program. This is a 6-month plan with a total reward value of $20 million, targeting early adopters of dYdX Chain. In the first season, $5 million worth of DYDX tokens were proposed to be distributed to 2,006 accounts. In the second season, Trade League (performance-based rewards) was introduced as a new initiative. Performance is measured by percentage return, and the top performers of each season will receive a portion of this reward pool. Traders will receive rewards in DYDX for each successful trade on the protocol, automatically allocated to eligible dYdX Chain addresses by block, without the need to wait or manually claim.
3. Stride Liquidity Staking
DYDX token holders can use Stride to stake their DYDX as liquidity. Holders will receive stDYDX, allowing them to continue earning staking rewards while maintaining the liquidity of the tokens. This will allow users to flexibly earn staking rewards and use these tokens in decentralized finance protocols, or exit their positions immediately without waiting for the 30-day unstaking period of dYdX.
It is evident 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 dYdX's weekly updated public data, these incentive policies have further increased user activity and participation, helping it to continue to grow steadily in a turbulent market environment and consolidate its position in the race.
3. The Significance of dYdX Chain for the Decentralized Derivatives Trading Market
Since 2023, the industry has been swept by the trend of Layer 2 Rollup, with Rollup, Rollup as a Service (RaaS), and Rollup Software Development Kits (SDK) being seen everywhere, and industry experts often recommending the use of Rollup to build products. However, as mentioned in the article, dYdX has gone through several stages of product development: from launching on the Ethereum mainnet, transitioning to Layer 2, and eventually launching its own independent blockchain. For dYdX, the project only achieved true decentralization after launching its own blockchain, reflecting that Layer 2 Rollup is not the absolute solution.
Some have criticized dYdX's decision to launch its own chain as the "worst decision." While 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-chain, and continues to optimize its products, with very impressive data performance. In the current context dominated by the Rollup narrative, dYdX Chain, as a special case of transformation, has announced to many projects that Layer 2 and Rollup are not the only solutions. In fact, many researchers have been drawn to the powerful narrative of Rollup, but have overlooked the possibility that their products may be more suitable for operation on an independent Layer 1. Therefore, if dYdX Chain ultimately becomes an outstanding "success story," it will demonstrate the bright prospects of this path to many other projects.
However, such cases are difficult to replicate. As can be seen from the introduction to dYdX's development history, each transition of dYdX has faced significant external pressure. Progress through transformation also means giving up some favorable conditions, 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 the loss of a large amount of composability liquidity, which for some projects would be tantamount to seeking a dead end. The prudent approach is still to continuously optimize through stacking in Layer 1, Layer 2, Layer 3, and so on. However, it is worth remembering that there is indeed another option, and there are excellent cases to reference.
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