What is dYdX?

dYdX is a DEX focused on offering a unique and complete experience to traders looking for a decentralized space to carry out their operations quickly and safely, without giving up their crypto holdings at any time.

Ehe DeFi ecosystem continues to be one of the largest growing sectors within the crypto world, and one of the players within it is dYdX.

dYdX is a DeFi protocol designed within the Ethereum blockchain and that aims to create a powerful decentralized exchange that allows its users to use the full potential of the blockchain.

Origin of dYdX

dYdX is a project that was born in July 2017, thanks to the work of Antonio Julianno, who at the time was a developer for Uber and Coinbase. Julianno chose to deploy dYdX on the Ethereum network, and thus began the history of this protocol. A curiosity of dYdX is that, in the midst of the "ICO boom", this project decided to take a completely different route: to be developed from scratch solely with the work of its developers.

This is how the project began to improve and soon after it attracted the investment fund A16Z Crypto, which invested two million dollars in it. This first investment allowed Julianno to optimize the protocol and highlight his position within the ecosystem. Thanks to this, dYdX managed to accumulate an investment of more than 50 million dollars and evolve as a project.

However, the history of dYdX changed radically on August 18, 2020. On that date, dYdX began to move its operations to the second layer of StarkWare. The intention was to provide higher operating speed and lower commissions compared to the Ethereum network. This move gave dYdX a strong boost, allowing it to reach a TVL of $ 60 million in December 2020.

The arrival of 2021 and the DeFi boom also touched dYdX. The developers launched the dYdX token in August 2021, when it conducted its first airdrop. The listing of the token on exchanges began on September 8, 2021.

Along with the launch of the token, the creation of the dYdX Foundation was also announced, to help build an infrastructure towards truly open markets. The dYdX Foundation aims to serve as a bridge between decentralized governance (made possible by the launch of the dYdX token) and the development of the protocol.

At the time of writing this article dYdX has achieved a stable position, to the point of exceeding one billion dollars in locked value, demonstrating that after four years of work it has managed to position itself as one of the great DeFi protocols.

How does dYdX work?

As we mentioned at the beginning, dYdX is a DeFi protocol that is focused on building a powerful cryptocurrency exchange. In fact, the dYdX dApp interface is very reminiscent of centralized exchanges, as you can see in the following screenshot.

Thanks to this, the users of this dApp quickly get used to using it as their frequent trading center. But not only that, but because dYdX offers all the necessary tools in an exchange, for example:

1. A dashboard to review the status of your portfolio in a very summarized way.
2. A space where you can see the history of operations carried out.
3. The ability to view your open orders and close them if you wish.
4. Ability to review your open positions on the exchange.
5. A section to manage everything related to your commissions, including the different Tier levels for discounts in commissions if you have dYdX tokens.
6. An operation interface with all the trading tools for your session. You have a graphical chart for the market (using TradingView), including the ability to create advanced orders (Market, Limit, Take Profit, Trailing Stop)

StarkNet, the layer-2 of dYdX

The dYdX platform works thanks to the StarkNet, a layer-2 for Ethereum that uses the technology of ZK-Rollups. Thanks to StarkNet, dYdX allows its users to carry out operations without gas, quickly and practically instantaneously on the platform, all without giving up interoperability with Ethereum and its entire ecosystem. Additionally, by using StarkNet you can have access to the StarkEx trading engine, allowing dYdX to run on a mixed system.

This mixed system is possible because StarkEx uses a centralized order book, but nevertheless continues to function in a non-custodial manner. This means that the funds are always in your wallet, even if the trading engine is centralized. When a transaction is completed, what happens is that StarkEx liquidates the operation on StarkNet and releases a ZK-Rollups test that can be verified by everyone within the network. It is this test that registers the smart contracts of dYdX in Ethereum, and at the end they execute the operation on the chain, making the exchange of the tokens effective.

Another advantage of using StarkNet is that commissions are kept to a minimum. For example, thanks to this implementation, makers pay 0% commission for their operations, while takers pay 0.15-0.50%. Of course, these commissions can change if the user is in possession of DYDX tokens.

DYDX Token, the pillar of dYdX governance

The DYDX token is the governance token for the dYdX platform. It allows the protocol community to have decision-making capacity on the evolution of the protocol both in its smart contracts on Ethereum, and on the L2 deployed on StarkNet. Another function of the DYDX token is to allow its holders to enjoy discounts on trading fees based on the size of their current holdings, in a tier or tier system.

The token began its life on August 3, 2021, when 1.000.000.000 DYDX were minted, and which will be released over the next five years. The allocation of this supply follows the following scheme:

1. 50,00% or 500.000.000 to the community as follows:
   1. 25,00% or 250.000.000 to users who trade on StarkNet, based on a combination of fees paid and open interest.
   2. 7,50% or 75.000.000 to former users who complete certain trading milestones on StarkNet.
   3. 7,50% or 75.000.000 to liquidity providers, based on a formula that rewards a combination of uptime, two-band depth, bid-ask spreads, and the number of markets supported.
   4. 5,00% or 50.000.000 to a community treasury.
   5. 2,50% or 25.000.000 to users who bet on USDC in a liquidity fund for the guarantee system.
   6. 2,50% or 25.000.000 to users who stake DYDX to a security fund.
2. 27,73% or 277.295.070 to former dYdX Trading investors.
3. 15,27% or 152.704.930 to founders, employees, advisors and consultants of dYdX Trading or the dYdX Foundation.
4. 7,00% or 70.000.000 to future employees and consultants of dYdX Trading or the Foundation.

A maximum perpetual inflation rate of 2,00% per year will increase the supply of DYDX starting in the next five years, ensuring that the community continues to have the resources to continue contributing to the Protocol.

Of course, the token also has other uses thanks to the fact that it is an ERC-20 token. For example, we can go to Uniswap and participate in the Uniswap liquidity pool system through our DYDX tokens.

Or also use those tokens within the Bancor protocol pools. In any case, the usefulness of dYdX tokens is extensive, and you can find different DeFi protocols that accept this token to offer staking earnings in their pools.

Governance of the protocol

Through the dYdX governance forums, the different improvements to be applied to the protocol are discussed. These motions are presented in the dYdX Improvement Proposals (DIPs), which have their origin in the creation of dYdX Requests for Comments (DRCs).

DRCs are the beginning of any improvement proposal and users can take the template available on GitHub to develop their own DRCs. Once the DRC is published in the governance forum, the discussion begins and it is put to a vote. After its approval, the first draft (“Snapshot”) of this DIP would be born, which, after approval, would then be applied to the protocol in its Layer 1 (Ethereum) and Layer 2 (StarkNet) to finally activate the improvement.

Links of interest